PROTOCOL SYSTEMS INC/NEW, SC 14D9, 2000-06-07

PROTOCOL SYSTEMS INC/NEW
SC 14D9, 2000-06-07
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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SCHEDULE 14D-9

SOLICITATION/RECOMMENDATION STATEMENT UNDER
SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934

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PROTOCOL SYSTEMS, INC.
(Name of Subject Company)

PROTOCOL SYSTEMS, INC.
(Name of Person(s) Filing Statement)

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Common Stock, Par Value $0.01 Per Share
(Title of Class of Securities)

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74371R 10 6
(CUSIP Number of Class of Securities)

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ROBERT F. ADRION
President and Chief Executive Officer
Protocol Systems, Inc.
8500 S.W. Creekside Place
Beaverton, OR 97008
Telephone: (503) 526-8500
(Name, Address and Telephone Number of Person authorized to Receive Notice and
Communication on Behalf of the Person(s) Filing Statement).

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With a copy to:

GREGORY E. STRUXNESS, ESQ.
Ater Wynne LLP
222 S.W. Columbia, Suite 1800
Portland, OR 97201
(503) 226-1191

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[_] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.

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Item 1. Subject Company Information.

(a) Name and Address. The name of the subject company is Protocol Systems,
Inc., an Oregon corporation (the "Company"). The address of the principal
executive offices of the Company is 8500 S.W. Creekside Place, Beaverton,
Oregon 97008. The telephone number of the principal executive offices of the
Company is (503) 526-8500.

(b) Securities. The title of the class of equity securities to which this
Schedule 14D-9 relates is the common stock, par value $0.01 per share, of the
Company (the "Common Stock"), including the associated preferred share
purchase rights (the "Rights" and, together with the Common Stock, the
"Shares") issued pursuant to the Rights Agreement, dated March 20, 1992 (the
"Rights Agreement"), between the Company and ChaseMellon Shareholder Services,
L.L.C., as successor to First Interstate Bank of Oregon, N.A (the "Rights
Agent"). There were 8,192,300 Shares outstanding as of May 26, 2000.

Item 2. Identity and Background of Filing Person.

(a) Name and Address. The name, address and telephone number of the Company,
which is the person filing this Schedule 14D-9, are set forth in Item 1(a)
above.

(b) Tender Offer. This Schedule 14D-9 relates to the tender offer by Welch
Allyn Acquisition Corporation, an Oregon corporation (the "Purchaser") and a
wholly owned subsidiary of Welch Allyn, Inc., a New York corporation
("Parent"), disclosed in a Tender Offer Statement on Schedule TO (the
"Schedule TO"), filed with the Securities and Exchange Commission (the
"Commission") by Purchaser and Parent on June 7, 2000, relating to an offer to
purchase all the issued and outstanding Shares at a purchase price of $16.00
per Share, net to the seller in cash, without interest (the "Offer Price"),
upon the terms and subject to the conditions set forth in the Offer to
Purchase dated June 7, 2000 (the "Offer to Purchase") and the related Letter
of Transmittal (which, together with any amendments or supplements
collectively constitute the "Offer").

The Offer is being made pursuant to an Agreement and Plan of Merger, dated
as of May 24, 2000 (as such agreement may be amended and supplemented from
time to time, the "Merger Agreement"), by and among the Company, Parent and
the Purchaser. The Merger Agreement provides, among other things, that upon
the prior satisfaction or waiver of the conditions set forth in the Merger
Agreement, and in accordance with the relevant provisions of the Oregon
Business Corporation Act, as amended (the "OBCA"), the Purchaser will be
merged with and into the Company (the "Merger" and, together with the Offer,
the "Transaction"). Following consummation of the Merger, the Company will
continue as the surviving corporation (the "Surviving Entity") and will be a
wholly owned subsidiary of Parent. At the Effective Time, each Share issued
and outstanding immediately prior to the Effective Time (other than any Shares
held in the treasury of the Company, or held by the Purchaser, Parent or any
direct or indirect wholly owned subsidiary of Parent or the Company, and
Shares held by shareholders of the Company who will have properly perfected
their dissenters' rights, if any, under Oregon law) will be cancelled and
converted automatically into the right to receive an amount equal to the Offer
Price in cash, or any greater amount paid per Share in the Offer, without
interest (the "Merger Consideration"). Capitalized terms used in this Schedule
14D-9 and not defined in this Schedule 14D-9 have the meanings given such
terms in the Merger Agreement. A copy of the Merger Agreement is filed
herewith as Exhibit (e)(1) and is incorporated by reference herein.

The Schedule TO states that the principal executive offices of Parent and
the Purchaser are located at 4341 State Street Road, Skaneateles Falls, New
York 13153. The telephone number at the principal executive offices of
Purchaser is (315) 685-4100.

Item 3. Past Contacts, Transactions, Negotiations and Agreements.

(a) Except as set forth in the response to this Item 3 or in Annex B
attached hereto or as incorporated by reference herein, to the knowledge of
the Company, there are no material agreements, arrangements or

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understandings and no actual or potential conflicts of interest between the
Company or its affiliates and (i) the Company's executive officers, directors
or affiliates, or (ii) Parent or the Purchaser, or their respective executive
officers, directors or affiliates.

(b) Certain contracts, arrangements or understandings between the Company or
its affiliates and certain of the Company's directors, executive officers and
affiliates are described in the Information Statement of the Company attached
to this Schedule 14D-9 as Annex B (the "Information Statement"). The
Information Statement is being furnished to the Company's shareholders
pursuant to Section 14(f) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and Rule 14f-1 issued under the Exchange Act in
connection with the Purchaser's right (after acquiring Shares pursuant to the
Offer) to designate persons to the Board of Directors of the Company (the
"Company Board") other than at a meeting of the shareholders of the Company.
The Information Statement is incorporated herein by reference.

Merger Agreement

The summary of the Merger Agreement and the description of the conditions of
the Offer contained in Sections 12 and 13, respectively, of the Offer to
Purchase of the Purchaser, dated June 7, 2000 and filed as Exhibit (a)(1) to
the Schedule TO, which is being mailed to shareholders together with this
Schedule 14D-9, are incorporated herein by reference. Such summary and
description are qualified in their entirety by reference to the Merger
Agreement, a copy of which is filed as Exhibit (e)(1) to this Schedule 14D-9
and is incorporated by reference herein.

Confidentiality Agreement

On March 9, 2000, Parent and the Company entered into a customary mutual
nondisclosure agreement (the "Confidentiality Agreement"). The Confidentiality
Agreement provides that each party will not, and will cause its respective
officers, employees, counsel, accountants, agents and advisors to not,
disclose to any third party any Confidential Information and that both parties
will use the Confidential Information solely for the purpose of evaluating a
potential strategic relationship or transaction. "Confidential Information"
includes all information (whether communicated in written form, orally,
electronically or otherwise) that is or has been furnished to a party or its
representatives by the other party and which concerns the disclosing party or
its businesses (including, without limitation, technical, business, financial,
customer and product development plans, forecasts, strategies and other
information) and which is either confidential, proprietary or otherwise not
generally available to the public, subject to certain customary exceptions.

The Confidentiality Agreement provides for (i) the prompt notification to
the other party of any request of disclosure of any Confidential Information
by a party, in order to allow the other party to seek a protective order or
other appropriate remedy, or to waive the compliance with the provisions of
the Confidentiality Agreement, (ii) the acknowledgment by each party that it
is aware of the restrictions imposed by the federal securities laws on the
purchase or sale of securities by any person who has received material, non-
public information from the issuer of such securities and on the communication
of such information to any other person when it is reasonably foreseeable that
such other person is likely to purchase or sell such securities in reliance
upon such information, and (iii) the prompt return of the Confidential
Information to the other party upon the decision by either party not to enter
into a relationship or transaction or upon the request of the other party.

Additionally, each party agreed that for a period of two years from the date
of the Confidentiality Agreement, neither it nor any of its affiliates will
take certain actions regarding, among other things, the acquisition of the
other party's voting securities or assets, the solicitation of proxies to vote
or influence the voting of the other party's voting securities, and the
nomination of directors for election at any meeting of shareholders of the
other party, without the prior written consent of such other party. Each party
also agreed that for a period of two years from the date of the
Confidentiality Agreement, it will not, directly or indirectly, solicit for
employment any employee of the other party or any of its subsidiaries with
whom it had contact or who became known to it in connection with its
consideration of a relationship or transaction.

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The summary of the Confidentiality Agreement set forth above does not
purport to be complete and is qualified in its entirety by reference to the
complete text of the Confidentiality Agreement, a copy of which is filed as
Exhibit (e)(2) hereto and is incorporated herein by reference.

Other Agreements Between the Company and Parent

On April 4, 1997, Parent and the Company signed a distribution agreement
under which Parent's Vital Signs Monitor was branded with the Company's
QuikSigns trademark, and the Company was granted the exclusive right to
distribute and sell the QuikSign branded monitor in the U.S. hospital and
military markets. The communication and business activity carried out under
this agreement permitted the management of the two companies to become
familiar with each other. This distribution agreement was modified and
restated in May 1999, generally to permit Parent to sell the vital signs
monitor branded with Parent's trademark(s) in the U.S. hospital market. Under
this agreement, Parent received payments from the Company in the amount of
approximately $1.2 million and $1.8 million during the years ended December
31, 1998 and 1999, respectively.

In April 1998, Parent entered into an agreement with Pryon Corporation, a
wholly owned subsidiary of the Company. Under this agreement, Parent procures
from the Company a "sidestream capnography" module that is used as a component
in a Parent vital signs monitor. The sidestream capnography module is a system
for measuring the end-tidal carbon dioxide concentration in air exhaled by
monitored patients. This component supply agreement is in effect for an
initial term of three years, subject to extension for up to three additional
years. Under this agreement, Parent made payments to the Company in the amount
of approximately $6,000 and $172,000 during the years ended December 31, 1998
and 1999, respectively.

Board of Directors

Promptly upon the purchase by the Purchaser of Shares pursuant to the Offer,
and from time to time thereafter, the Purchaser shall be entitled to designate
up to such number of directors, rounded up to the next whole number, on the
Company Board as shall give the Purchaser representation on the Company Board
equal to the product of the total number of directors on the Company Board
(giving effect to the directors elected pursuant to this sentence) multiplied
by the percentage that the aggregate number of Shares beneficially owned by
the Purchaser or any Affiliate of the Purchaser at such time bears to the
total number of Shares then outstanding, and the Company shall, at such time,
promptly take all actions necessary to cause the Purchaser's designees to be
elected as directors of the Company, including increasing the size of the
Company Board. The Company has secured, or will secure prior to the Initial
Expiration Date, conditional resignations of incumbent directors in
furtherance thereof. At such times, the Company shall use its best efforts to
cause Persons designated by the Purchaser to constitute the same percentage as
Persons designated by the Purchaser shall constitute of the Company Board of
(i) each committee of the Company Board (some of whom may be required to be
independent as required by applicable law), (ii) each board of directors of
each domestic Subsidiary, and (iii) each committee of each such board, in each
case only to the extent permitted by applicable law.

Stock Options

The Merger Agreement provides that at the Effective Time, each unexpired and
unexercised outstanding option, whether or not then vested or exercisable in
accordance with its terms, to purchase shares of Company Common Stock (the
"Options") previously granted by the Company or its Subsidiaries under any
Company Stock Plan or otherwise shall be automatically converted into the
right to receive from the Surviving Entity, at the Effective Time, cash in an
amount equal to the product of (i) the Merger Consideration minus the exercise
price per share under such Option (or, in the case of options outstanding
under the Employee Stock Purchase Plan, the Merger Consideration), times (ii)
the number of shares of Common Stock which may be purchased upon exercise of
such Option (whether or not then exercisable or vested), less any required
withholding, and thereupon each Option shall terminate and each holder thereof
shall have no further rights to any Company Common Stock.

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Amended and Restated Executive Employment Agreements

In connection with the execution of the Merger Agreement, the Company, at
the request of Parent, entered into an Amended and Restated Executive
Employment Agreement (each, a "Restated Employment Agreement") with each of
its executive officers. The Restated Employment Agreements will become
effective only upon the purchase of Shares pursuant to the Offer (the
"Effective Date"), and will be null and void if Shares are not purchased
pursuant to the Offer. Each Restated Employment Agreement specifies the
executive officer's base salary and target bonus. The Restated Employment
Agreements are for a term ending two years after the Effective Date, provided
that if a "Change of Control" (as defined in the Restated Employment
Agreements and described below) occurs before that date, the Restated
Employment Agreements will continue in effect until one year after the Change
of Control. If a Restated Employment Agreement is terminated by the Company
without "Cause" (as defined in the Restated Employment Agreements and
described below) or is terminated by the executive officer for "Good Reason"
(as defined in the Restated Employment Agreements and described below) within
two years after the Effective Date, the executive officer is entitled to
receive a lump sum payment equal to one year's base salary plus an amount
equal to any annual bonus that the executive officer would have been entitled
to had he remained employed for the remainder of the fiscal year in which the
termination occurred, provided that the amount of such payment shall be pro
rated based on the portion of the period actually employed. If a Restated
Employment Agreement is terminated for Cause, all pay and benefits under the
Restated Employment Agreement will cease as of the effective date of the
termination. In the event of the death of an executive officer, the estate of
the executive officer would receive a lump sum payment equal to six months
base salary at the then current rate. In the event of the termination of a
Restated Employment Agreement due to an executive officer's disability, the
executive officer would continue to receive his base salary for five months
after he was no longer able to perform his duties. In the event of either
death or disability, the executive officer would also be entitled to receive a
payment equal to any incentive bonus the executive officer would have earned,
pro rated based on the portion of the period actually employed.

For a period of one year following a Change of Control, each executive
officer would have the right to terminate his employment for Good Reason and
to receive upon such termination or upon a termination by the Company other
than for Cause, a lump sum payment in an amount equal to 12 months base salary
(or, in the case of Messrs. Adrion, Fee and Welch, 24 months base salary),
plus an amount equal to the amount the executive officer would have received
in incentive plan bonuses for the year in which the termination occurred based
on the Company's actual performance for the year (or, in the case of Messrs.
Adrion, Fee and Welch, two times the amount). With respect to any termination
by the Company without Cause or any termination by an executive officer for
Good Reason, the executive officer would be entitled to the continuation of
health and insurance benefits for certain periods. Each Restated Employment
Agreement includes a covenant not to compete that prohibits the executive
officer from owning, operating or working for any business in the United
States that is selling or developing products that compete with those of the
Company for a period of twelve months after his employment with the Company is
terminated.

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in the target percentage of incentive compensation to which the executive is
entitled; (iii) a material reduction in the aggregate expenditures to provide
certain employee benefits to the executive other than reductions in cost
achieved without a material reduction in benefits to the executive; (iv) the
failure of the Company to implement a new management bonus plan and/or a new
long-term incentive plan; (v) a requirement that the executive be based
anywhere other than within twenty-five miles of the executive's job location
at the time of the Change of Control; or (vi) a material breach of the
Restated Employment Agreement by the Company.

The Restated Employment Agreements provide that the consummation of the
transactions contemplated by the Merger Agreement will not constitute a
"Change of Control" for purposes of the existing Employment Agreements and
include an unconditional waiver by the executive officer of all rights granted
to the executive officer under the existing Employment Agreements that might
result from the transaction contemplated by the Merger Agreement. Mr. Adrion's
Restated Employment Agreement also states that he waives all rights granted to
him by virtue of the Company's offer of employment letter dated June 16, 1999.
Such rights include his right to receive certain restricted stock awards in
the future. In consideration of this waiver of rights, Mr. Adrion and Parent
entered into an agreement dated May 24, 2000 pursuant to which Mr. Adrion will
receive certain additional grants under the long-term incentive plan to be
established by Parent. The summary of the Restated Employment Agreements set
forth above does not purport to be complete and is qualified in its entirety
by reference to the complete text of the Restated Employment Agreement, copies
of which are filed as Exhibits (e)(3) through (e)(11) to this Schedule 14D-9
and are incorporated herein by reference.

Retention Bonus Agreements

In connection with the execution of the Restated Employment Agreements, each
executive officer also entered into a Retention Bonus Agreement (each, a
"Retention Bonus Agreement") with the Company. The Retention Bonus Agreements
will become effective only upon the purchase of Shares pursuant to the Offer,
and will be null and void if Shares are not purchased pursuant to the Offer.
Each Retention Bonus Agreement provides for the payment of a bonus in an
amount equal to a specified percentage of the executive officer's base salary
on each of the first and second annual anniversaries of the effective date of
the Retention Bonus Agreement, provided that the executive officer is still
employed by the Company on the payment date. The Retention Bonus Agreements
permit the executive officers to elect an alternative payment methodology that
provides bonus payments on the sixth month and second annual anniversaries of
the effective date of the Retention Bonus Agreement under the same conditions
described above. The summary of the Retention Bonus Agreements set forth above
does not purport to be complete and is qualified in its entirety by reference
to the complete text of the Retention Bonus Agreements, copies of which are
filed as Exhibits (e)(12) through (e)(20) to this Schedule 14D-9 and are
incorporated herein by reference.

Employee Matters

The Merger Agreement provides that Parent will take all necessary action to
ensure that, during the period commencing at the Effective Time and ending on
the first anniversary thereof, the employees of the Company will continue to
be provided with (whether by Parent, the Surviving Entity or otherwise)
employee benefit plans (other than stock option or other plans involving the
potential issuance of securities or other equity-based instruments of the
Company) which in the aggregate are not materially less favorable than those
currently provided by the Company to such employees; provided that, subject to
compliance with this obligation, Parent reserves the right to review all
employee benefits after the Effective Time and to make such changes as it
deems appropriate, including the right to discharge or otherwise take actions
against any such employee. The Merger Agreement provides that Parent intends
to cause the Surviving Entity to provide or enter into new incentive and
performance based compensation plans or arrangements with management employees
of the Company, the purpose of which will be to provide such management
employees with incentive and performance based compensation.

For purposes of determining eligibility to participate, waiting periods,
vesting and accrual or entitlement to benefits where length of service is
relevant under any employee benefit plan or arrangement of Parent, the

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Surviving Entity or any of their respective Subsidiaries, employees of the
Company and its Subsidiaries as of the Effective Time shall receive service
credit for service with the Company and its Subsidiaries, provided, that
service with the Company or any of its Subsidiaries for any employee of the
Company or any of its Subsidiaries shall not be credited for benefit accrual
or entitlement to benefits under any employee benefit plan or arrangement of
Parent, the Surviving Entity or any of their respective Subsidiaries if such
service was credited for benefit accrual or entitlement to benefits under any
Company Plan.

The Merger Agreement also provides that Parent will and will cause the
Surviving Entity and its Subsidiaries to (i) cause any pre-existing condition
or limitation and any eligibility waiting periods under any group health plans
of Parent or any of its Subsidiaries to be waived with respect to employees of
the Company and its Subsidiaries and their eligible dependents, and (ii) give
each employee of the Company and its Subsidiaries credit for the plan year in
which the Effective Time occurs toward applicable deductibles and annual out-
of-pocket limits for expenses incurred prior to the Effective Time (or such
later date on which participation commences) during the applicable plan year,
in both instances subject to the consent (where required) of any insurance
company or other third party.

Parent has also agreed to cause the Surviving Entity to assume and honor in
accordance with their terms all written employment, severance and termination
plans and agreements (including change in control provisions) of employees of
the Company and its Subsidiaries as in effect on the Closing Date, subject to
all rights to amend or terminate as set forth therein.

Indemnification

The Merger Agreement requires that the articles of incorporation and by-laws
of the Surviving Entity contain provisions with respect to indemnification
substantially to the same effect as those set forth in the articles of
incorporation of the Company (the "Company Charter") and by-laws of the
Company (the "Company Bylaws") on the date of the Merger Agreement, which
provisions shall not be amended, modified or otherwise repealed for a period
of six years after the Effective Time in any manner that would adversely
affect the rights thereunder as of the Effective Time of individuals who at
the Effective Time were directors, officers, employees or agents of the
Company, unless such modification is required after the Effective Time by
applicable law.

Additionally, the Merger Agreement provides that the Parent shall cause the
Surviving Entity to the fullest extent permitted under applicable law or under
the Surviving Entity's articles of incorporation or bylaws, to indemnify and
hold harmless the present and former officers, directors and employees of the
Company and any of its Subsidiaries (each an "Indemnified Party" and
collectively the "Indemnified Parties"), against any costs or expenses
(including attorney's fees), judgments, fines, losses, claims, damages,
liabilities and amounts paid in settlement in connection with any claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, (i) arising out of or pertaining to the
transactions contemplated by the Merger Agreement or (ii) otherwise with
respect to any acts or omissions occurring at or prior to the Effective Time,
to the same extent as provided in the Company Charter or the Company Bylaws or
any applicable contract or agreement as in effect on the date of the Merger
Agreement, in each case for a period of six years after the date of the Merger
Agreement.

Further, under the Merger Agreement, Parent will provide, or cause the
Surviving Entity, to provide for a period of not less than six years after the
Effective Time, the Company's current directors and officers an insurance and
indemnification policy that provides coverage for events occurring at or prior
to the Effective Time that is no less favorable than the existing policy or,
if substantially equivalent insurance coverage is unavailable, the best
available coverage.

The foregoing description of the indemnification provided to the directors
and officers of the Company pursuant to the Merger Agreement is qualified by
reference to the complete text of Section 6.9 of the Merger Agreement, which
is incorporated by reference herein. The Merger Agreement has been filed as
Exhibit (e)(1) to this Schedule 14D-9.

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Item 4. The Solicitation or Recommendation.

(a) Recommendation of the Board of Directors. At a meeting held on May 24,
2000, the Company Board, (i) determined that the Merger Agreement and the
transactions contemplated thereby, including the Offer and the Merger, were
fair to, and in the best interests of, the Company's shareholders, (ii)
approved the Merger Agreement and the transactions contemplated by the Merger
Agreement, including the Offer and the Merger, and (iii) unanimously resolved
to recommend that the Company's shareholders accept the Offer and tender their
Shares thereunder and approve and adopt the Merger Agreement and the Merger.

A letter to the shareholders communicating the Company Board's
recommendation and a press release announcing the commencement of the Offer
are filed herewith as Exhibits(a)(1) and (a)(3), respectively, and are
incorporated by reference herein.

(b) Background of the Offer; Reasons for the Recommendation.

Background of the Transaction

The business relationship between Parent and the Company began in September
1996, when Parent initiated discussions with the Company regarding the
Company's distribution of Parent's Vital Signs Monitor product. On April 4,
1997, Parent and the Company signed a distribution agreement under which
Parent's Vital Signs Monitor was branded with the Company's QuikSigns
trademark, and the Company was granted the exclusive right to distribute and
sell the QuikSign branded monitor in the US hospital and military markets. The
communication and business activity carried out under this agreement permitted
the management of the two companies to become familiar with each other. This
distribution agreement was modified and restated in May 1999, generally to
permit Parent to sell the vital signs monitor branded with Parent's
trademark(s) in the U.S. hospital market. Under this agreement, Parent
received payments from the Company in the amount of approximately $1.2 million
and $1.8 million during the years ended December 31, 1998 and 1999,
respectively.

During 1997, the Company invited Parent representatives to its facilities in
Beaverton for discussions about potential strategic relationships between the
companies, including the concept of an acquisition of the Company by Parent.
No negotiations or further discussions regarding an acquisition of the Company
resulted from this meeting.

From time to time during 1998 and 1999, the Company discussed possible
strategic alliances with various companies. Beginning in the latter half of
1999, the Company, recognizing the need to expand its product offerings,
market reach and distribution capabilities, undertook a concerted effort to
identify larger companies that might have an interest in developing a
strategic alliance or partnership arrangement with the Company involving joint
product development, marketing or distribution arrangements. This effort
resulted in discussions with a number of companies during the remainder of
1999, including discussions with Companies A, B and C.

In November 1999, Invivo Corporation ("Invivo") approached the Company and
proposed a business combination in which Invivo would purchase 100% of the
issued and outstanding common stock of the Company for $10.00 per share,
consisting of $5.00 per share in cash and $5.00 per share in Invivo common
stock (the "Invivo Proposal").

The Company Board considered the Invivo Proposal at a regularly scheduled
meeting of the Board on November 16, 1999, and concluded that the transaction
proposed was not consistent with the Company's

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strategic plans and objectives and would not be in the best interests of the
Company's shareholders. Robert F. Adrion, the Company's President and Chief
Executive Officer informed James W. Hawkins, President and Chief Executive
Officer of Invivo, of the Board's decision by letter dated November 16, 1999.

By letter dated November 30, 1999 Mr. Hawkins requested that the Board
reconsider the Invivo Proposal.

On December 17, 1999, Invivo made a public announcement of the Invivo
Proposal. The Company responded to Invivo's public announcement with a press
release stating, among other things, the Company's intention to act in a
manner that would be in the long term best interests of the Company's
shareholders.

After the public announcement of the Invivo Proposal, Mr. Adrion received
telephone calls from the financial advisors or executive officers of two
companies, including Company A, each generally indicating interest in the
possibility of engaging in preliminary discussions of a potential business
combination transaction. Mr. Adrion generally advised these companies that the
Company was in the process of engaging a financial advisor to assist the
Company Board with respect to the Invivo Proposal and the assessment of the
Company's strategic plan and alternatives, and indicated that the Company
would prefer to move forward with that process before beginning discussions of
any potential business combination transaction.

On December 23, 1999, the Company engaged SG Cowen Securities Corporation
("SG Cowen") to advise the Company Board with respect to the Invivo Proposal
and related matters.

On January 31, 2000, Mr. Hawkins called Mr. Adrion and reiterated Invivo's
interest in meeting with the Company's management to discuss the Invivo
Proposal. Mr. Adrion indicated the Company's willingness to meet to discuss
the Invivo Proposal, provided that a customary mutual nondisclosure and
standstill agreement was executed by the parties before the meeting.

On February 2, 2000 Mr. Hawkins informed Mr. Adrion that Invivo would not
agree to sign the mutual nondisclosure and standstill agreement that the
Company had prepared and delivered to Invivo.

On February 7, 2000, Invivo made a public announcement that it had revised
the Invivo Proposal to $12.00 per share, consisting of $6.00 per share in cash
and $6.00 per share in Invivo common stock. The Company responded to this
announcement with a press release, reiterating its willingness to meet with
Invivo pursuant to the terms of a customary mutual nondisclosure and
standstill agreement.

At a regularly scheduled meeting of the Company Board on February 15, 2000,
the Company Board heard presentations from the Company's senior management
regarding (i) the highlights of the Company's operations in 1999, including
financial performance, new product introductions and new product development
efforts, (ii) the Company's three-year strategic plan for each business unit,
and (iii) the Company's financial projections for 2000 through 2002. The
Company Board also heard a presentation from representatives of SG Cowen that
included a review of selected comparative financial and market trading
information about companies in the medical technology industry, analysis of
the relative market valuations reflected by the data presented and
observations on the valuation implications for companies, such as the Company,
with relatively slow growth in revenue and earnings, a small market
capitalization and limited research analyst following. At the request of the
Company Board the representatives of SG Cowen also reviewed with the Company
Board several procedural alternatives available to a company seeking to
identify and evaluate strategic alternatives that may be available to it.
After discussion of the information presented by senior management and SG
Cowen, the Company Board concluded that it would be appropriate to authorize
the Company's financial advisors to develop and implement a process through
which the Company could identify and explore strategic alternatives that may
be available to it, including partnership or alliance arrangements, strategic
investment opportunities, strategic business combination transaction
opportunities or a sale of the Company. Accordingly, the Company Board
authorized Mr. Adrion to direct SG Cowen to undertake such efforts.
Thereafter, SG Cowen and the Company began to identify companies that could
reasonably be expected to have a possible interest in a potential partnership,
alliance, investment or business combination with the Company.

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In late February and early March 2000, SG Cowen contacted fifteen potential
strategic partners to determine the level of interest in a potential strategic
relationship or transaction with the Company. Of the fifteen parties
contacted, six parties, including Parent, requested additional information,
executed mutual nondisclosure and standstill agreements, and scheduled
meetings with the management of the Company.

On March 8, 2000, representatives of Company A met with representatives of
the Company and SG Cowen and discussed the business of the Company and
management's expectations about the future performance of the Company.
Representatives of Company A were also given access to the Company's data
room.

On March 9, 2000, representatives of Parent met with representatives of the
Company and SG Cowen and discussed the business of the Company and
management's expectations about the future performance of the Company.
Representatives of Parent were also given access to the Company's data room.

On March 15, 2000, representatives of Company B met with representatives of
the Company and SG Cowen and discussed the business of the Company and
management's expectations about the future performance of the Company.
Representatives of Company B were also given access to the Company's data
room.

On March 21, 2000, representatives of Company C met with representatives of
the Company and SG Cowen and discussed the business of the Company and
management's expectations about the future performance of the Company.
Representatives of Company C were also given access to the Company's data
room.

On March 22, 2000, representatives of Company D met with representatives of
the Company and SG Cowen and discussed the business of the Company and
management's expectations about the future performance of the Company.
Representatives of Company D were also given access to the Company's data
room.

On March 27, 2000, SG Cowen requested that each of the six interested
parties submit a preliminary, non-binding indication of interest for a
partnership, alliance, investment or business combination with the Company,
including a description of: (i) the proposed structure of the partnership,
alliance, investment or business combination; (ii) the proposed form and
amount of consideration offered, if any; (iii) a proposed time schedule and
summary of additional due diligence required; and (iv) any substantive
conditions that would be required as part of a definitive agreement.

On March 29, 2000, representatives of Company E met with representatives of
the Company and SG Cowen and discussed the business of the Company and
management's expectations about the future performance of the Company.
Representatives of Company E were also given access to the Company's data
room.

On March 31, 2000, representatives of Parent and the Company participated in
a telephone conference call pursuant to Parent's request for additional
information regarding the Company.

On or about April 10, 2000, five of the six interested parties submitted,
preliminary non-binding indications of interest to SG Cowen. All of the non-
binding indications of interest related to proposals to acquire all of the
outstanding capital stock of the Company.

On April 12 and 13, 2000, Peter Soderberg, President and Chief Executive
Officer of Parent, met with several members of the Company's management team
at the Company's offices. Discussion included Parent's vision for the Company
as its subsidiary, the Company's product development pipeline and key
personnel.

On April 17, 2000, a special meeting of the Company Board was held, which
was also attended by the Company's financial advisors, legal counsel and
certain members of the Company's senior management. Representatives of SG
Cowen reviewed with the Board the process employed in identifying the parties
with a potential interest in a strategic relationship or transaction with the
Company, the process through which the six interested parties had been
provided information about the Company and an opportunity to meet with
management to discuss the Company's business and future prospectus, and the
process employed in soliciting

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<PAGE>

from such parties preliminary non-binding indications of interest in a
strategic relationship or transaction. Representatives of SG Cowen then
reviewed with the Company Board each of the five indications of interest
received, including the form and amount of consideration offered and other
significant elements of each proposal. Representatives of SG Cowen also shared
with the Company Board their observations on the level of interest and
seriousness of each party based on informal communications between SG Cowen
and the parties or their financial advisors. The Company's legal counsel
reviewed with the Board its duties and obligations in connection with the
evaluation of the Company's strategic alternatives. The Company Board
discussed each of the preliminary proposals. Although no decision was reached
with respect to the proposed terms of any potential transaction, the Company
Board, based on the advice of SG Cowen as to the relative valuations reflected
by the indications of interest received, instructed Mr. Adrion and SG Cowen to
continue discussions with Parent and Company B, and to encourage the other
interested parties to continue their due diligence investigation with the
instruction that their indicated value range would need to be increased to be
competitive with other indications of interest received. None of the remaining
interested parties increased their initial value ranges.

On April 18, 2000, in connection with the announcement of the Company's
financial results for the quarter ended March 31, 2000, the Company publicly
announced that it had retained SG Cowen to assist the Company Board in
exploring the Company's strategic alternatives, including a possible strategic
business combination transaction or sale of the Company, and was actively
engaged in that process.

After the public announcement that the Company was engaged in the process of
exploring its strategic alternatives, SG Cowen was contacted by Companies F
and G, each of which indicated interest in participating in the process. Both
companies were advised that access to confidential information about the
Company was conditioned upon the execution of a mutual nondisclosure and
standstill agreement. Company F declined to sign a mutual nondisclosure and
standstill agreement and, accordingly was not given access to confidential
information, but was invited to submit an indication of interest based on
publicly available information.

On April 24 and 25, 2000, representatives of Parent met with the management
of the Company at the Company's offices for additional due diligence
discussions.

On April 25, 2000, a draft of an Agreement and Plan of Merger prepared by
the Company's legal counsel along with a final bid instruction letter prepared
by SG Cowen requesting final bids by May 12, 2000 were distributed to Parent
and Company B.

On April 25 and 26, 2000, representatives of Company B met with the
management of the Company at the Company's offices for additional due
diligence discussions.

On May 1 and 2, 2000, representatives of Parent met with representatives of
the Company at the Company's offices for additional diligence regarding key
technologies, legal matters and information systems.

On May 11, 2000, representatives of Parent and the Company had discussions
regarding the continuation of employment of key employees of the Company after
completion of the proposed acquisition.

On May 12, 2000, Parent delivered to SG Cowen a proposal to acquire all of
the issued and outstanding shares of the Company's Common Stock at an all-cash
purchase price of $16.00 per share, subject to certain contingencies,
including negotiation of the Agreement and Plan of Merger, the execution of
amended and restated employment agreements by a minimum number of key
employees and receipt by Parent of certain opinions of counsel regarding the
Company's intellectual property. None of the terms were negotiated nor agreed
upon by either the Company, the Company Board or SG Cowen. Parent also
submitted a mark-up of the draft Agreement and Plan of Merger showing Parent's
requested modifications to the document. Company B informed the Company that
it had concluded that it could not reach the valuation indicated in its
preliminary indication of interest and would not submit a final bid.

On May 13, 2000 and May 15, 2000, the Company's legal counsel and SG Cowen
discussed with Parent's legal counsel and financial advisors certain of the
terms of the mark-up of the Agreement and Plan of Merger delivered to the
Company's legal and financial advisors by Parent's legal and financial
advisors.

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<PAGE>

On May 15, 2000, Company G submitted a preliminary, non-binding indication
of interest with respect to an acquisition of all of the outstanding capital
stock of the Company. SG Cowen advised Company G that its indicated value
range would need to be increased to be competitive with other indications of
interest received.

On May 16, 2000, at a regular meeting of the Company Board, also attended by
the Company's legal and financial advisors, representatives of SG Cowen
reviewed with the Company Board the terms of the proposal presented by Parent.
The Company's legal counsel reviewed with the Company Board the terms and
conditions of the mark-up of the draft Agreement and Plan of Merger delivered
by Parent, and reviewed with the Company Board its duties and obligations in
connection with considering a sale of the Company. Representatives of SG Cowen
also reviewed with the Board its preliminary valuation analysis of the
Company. After discussion the Company Board authorized the Company's
management and advisors to begin negotiation of a definitive Agreement and
Plan of Merger with Parent.

From May 17, 2000 through May 24, 2000, representatives of the Company and
its financial and legal advisors negotiated the terms of the Merger Agreement
with representatives of Parent and its financial and legal advisors. During
this period, representatives of Parent met with key employees of the Company
to discuss and finalize the Amended and Restated Employment Agreements and the
Retention Bonus Agreements.

On the morning of May 24, 2000, the Company Board met to receive
presentations from the Company's legal and financial advisors and to consider
the Offer, the Merger and the Merger Agreement. At the meeting, SG Cowen
delivered its oral opinion to the Company Board that, as of such date, the
consideration to be received by the holders of shares of the Company's common
stock pursuant to the Offer and Merger as contemplated by the Merger Agreement
was fair, from a financial point of view, to such holders (and such oral
opinion was subsequently confirmed by delivery of the written opinion of SG
Cowen, dated May 24, 2000). The Company's legal counsel reviewed with the
Company Board the principal terms and conditions of the Merger Agreement,
including the nonsolicitation and termination fee provisions of the Merger
Agreement. Following such presentations, receipt of the SG Cowen fairness
opinion and further discussions by the Company Board, the Company Board
determined that the Merger Agreement and the transactions contemplated
thereby, including the Offer and the Merger, were fair to, and in the best
interests of, the Company's shareholders, approved the Merger Agreement and
the transactions contemplated by the Merger Agreement, including the Offer and
the Merger, and unanimously resolved to recommend that the Company's
shareholders accept the Offer and tender their Shares thereunder and approve
and adopt the Merger Agreement and the Merger.

On the evening of May 24, 2000, Parent, Merger Sub and the Company executed
the Merger Agreement.

Reasons for the Transaction; Factors Considered by the Company Board

In approving the Merger Agreement and the transactions contemplated thereby,
including the Offer and the Merger, and recommending that all holders of
Shares accept the Offer and tender their Shares pursuant to the Offer, the
Company Board considered a number of factors including those presented below:

1. The current and historical financial condition and results of
operations of the Company, as well as the prospects and strategic
objectives of the Company, including the risks involved in achieving those
prospects and objectives, and the current and expected conditions in the
business in which the Company operates.

2. The Company's prospects if it were to remain an independent, publicly
traded company, including the risks of competing against companies that
have far greater resources, distribution capacity, product offerings and
market reach than the Company.

3. Presentations from SG Cowen and the opinion of SG Cowen, dated May 24,
2000, to the effect that, as of such date and based upon and subject to
certain matters stated in such opinion, the proposed cash consideration to
be received by the holders of Shares pursuant to the Offer and the Merger
was fair to such holders from a financial point of view. A copy of the
opinion delivered by SG Cowen to the Company

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<PAGE>

Board, setting forth the procedures followed, the matters considered and
the assumptions made by SG Cowen in arriving at its opinion, is attached
hereto as Annex A and incorporated herein by reference. Shareholders are
urged to read the opinion in its entirety. The Company Board was aware that
SG Cowen becomes entitled to certain fees described in Item 5 upon
consummation of the Offer.

4. The historical market prices, price to earnings ratios, recent trading
activity and trading range of the Shares, including that the Offer Price
represents (i) a premium of approximately 22 percent over the $13.125
closing price of the Shares on the Nasdaq Stock Market on May 24, 2000, the
last full trading day before the announcement of the Merger Agreement, (ii)
a premium of approximately 47 percent over the $10.88 closing price of the
Shares on the Nasdaq Stock Market on April 17, 2000, the last full trading
day before the date of the public announcement of the retention of SG Cowen
to assist the Company in exploring its strategic alternatives, (iii) a
premium of approximately 167 percent to the lowest closing price of the
Shares on the Nasdaq Stock Market during the previous 52 weeks, and (iv) a
premium of approximately 14 percent to the highest closing price of the
Shares on the Nasdaq Stock Market during the previous 52 weeks.

5. Valuations based on premiums paid in comparable acquisition
transactions and discounted cash flow analysis.

6. The process employed by SG Cowen in assisting the Company Board in
exploring the Company's strategic alternatives as described under
"Background of the Transaction," the fact that public disclosure was made
that the Company was engaged in that process, and the fact that the Company
did not receive an indication of interest or proposal from any party other
than Parent that reflected a proposed price higher than the Offer Price.

7. The fact that the Merger Agreement provides for a prompt cash tender
offer for all Shares to be followed by a merger for the same consideration,
thereby enabling the Company's shareholders to obtain cash in exchange for
their Shares earlier than in an alternative form of transaction.

8. The likelihood that the Offer and the Merger would be consummated,
including the fact that the Offer and the Merger are not subject to any
financing condition and that Parent has represented that it has sufficient
funds available to it to consummate the Offer and the Merger.

9. The fact that, pursuant to the Merger Agreement, between the execution
of the Merger Agreement and the closing of the Offer, the Company is
required to obtain Parent's consent before it can take certain actions.

10. The limited conditions to the Offer and the Merger and the limited
ability of Parent and the Purchaser to terminate the Merger Agreement. The
Board also considered the likelihood of obtaining required regulatory
approval under the HSR Act, and the terms of the Merger Agreement regarding
the obligations of the parties to pursue such regulatory approvals.

11. The fact that, although the Merger Agreement prohibits the Company
and its representatives from soliciting acquisition proposals from third
parties, the Company and its representatives may furnish to a third party
who has submitted an unsolicited acquisition proposal information
concerning the Company's business, properties or assets, and participate in
discussions or negotiations with such third party concerning an unsolicited
proposal to acquire all or substantially all of the assets or outstanding
capital stock of the Company that a majority of the Company's disinterested
directors concludes in good faith, after consultation with its outside
legal counsel and financial advisor and taking into account all the terms
and conditions of such proposal, is more favorable to the Company's
shareholders than the Offer and the Merger (a "Superior Proposal").

12. The fact that the Merger Agreement permits the Company to terminate
the Merger Agreement prior to the purchase of Shares by Parent in the
Offer, to approve or recommend a Superior Proposal or enter into an
agreement with respect to a Superior Proposal, provided that the Company
pays Parent a termination fee of $5 million. The Company Board also
considered the other circumstances under which the Company would be
required to pay the $5 million termination fee to Parent. The Company Board
considered the possible effect of the termination fee provisions of the
Merger Agreement on third parties

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<PAGE>

that might be interested in exploring an acquisition of the Company. In
this regard, the Company Board recognized that Parent insisted on the
termination fee provision as a condition to entering into the Merger
Agreement.

13. The fact that, although the Offer gives the Company's shareholders
the opportunity to realize a premium over the price at which the Shares
traded immediately prior to the public announcement of the Offer and the
Merger, the consummation of the Offer and the Merger would eliminate the
opportunity for shareholders to participate in the future growth and
profits of the Company and would be a taxable transaction to shareholders.

The foregoing discussion of information and factors considered and given
weight by the Company Board is not intended to be exhaustive, but is believed
to include all of the material factors considered by the Company Board. In
view of the variety of factors considered in connection with its evaluation of
the Offer and the Merger, the Company Board did not find it practicable to,
and did not, quantify or otherwise assign relative weights to the specific
factors considered in reaching its determinations and recommendations. In
addition, individual members of the Company Board may have given different
weights to different factors.

(c) Intent to Tender. To the Company's knowledge after reasonable inquiry,
all of the Company's executive officers and directors currently intend to
tender all Shares held of record or beneficially (other than Shares held
directly or indirectly by other public companies, as to which the Company has
no knowledge) by them pursuant to the Offer or to vote in favor of the Merger.
The foregoing does not include any Shares over which, or with respect to
which, any such executive officer or director acts in a fiduciary or
representative capacity or is subject to the instructions of a third party
with respect to such tender.

Item 5. Person/Assets, Retained, Employed, Compensated or Used.

SG Cowen was retained pursuant to the terms of a letter agreement dated as
of December 23, 1999 (the "SG Cowen Engagement Letter") to serve as the
Company's exclusive financial advisor. Pursuant to the SG Cowen Engagement
Letter, the Company paid SG Cowen a non-refundable cash retainer fee of
$100,000 upon execution of the SG Cowen Engagement Letter, and agreed to pay
SG Cowen an additional cash retainer fee of $100,000 every three months
following the date of the such engagement letter, as well as a cash fee of
$250,000 upon delivery of the first fairness opinion and a cash fee of
$100,000 upon delivery of any subsequent fairness opinion. Upon the closing of
a transfer of control of or a twenty-five percent interest in the Company or
any of its businesses or assets, which would include the transactions
contemplated by the Merger Agreement, the Company has agreed to pay SG Cowen a
fee, payable in cash at closing, equal to one and one-quarter percent of the
aggregate consideration up to $100 million, plus two percent of the aggregate
consideration between $100 million and $120 million, plus three percent of the
aggregate consideration in excess of $120 million, subject to a minimum fee of
$1 million.

Under the SG Cowen Engagement Letter, the Company has also agreed to
reimburse SG Cowen for travel and all reasonable out-of-pocket expenses
(including reasonable fees and disbursements of counsel), and to indemnify SG
Cowen and certain related parties, and hold each of them harmless against any
and all losses, claims, damages, expenses or liabilities, joint or several, to
which such parties may become subject arising in any manner out of or in
connection with the SG Cowen Engagement Letter.

A copy of SG Cowen's fairness opinion is attached as Annex A to this
Schedule 14D-9 and is incorporated by reference herein. Except as described
above, neither the Company nor any person acting on its behalf has employed,
retained or agreed to compensate any other person to make solicitations or
recommendations in connection with the Offer.

Item 6. Interest in Securities of the Subject Company.

Other than as set forth below, no transactions in Shares have been effected
during the past 60 days by the Company or, to the best of the Company's
knowledge, by any executive officer, director, affiliate or subsidiary of the
Company.

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<PAGE>

Pursuant to the terms of the Company's 1993 Stock Option Plan for
Nonemployee Directors, each nonemployee member of the Company Board was
automatically granted an option to purchase 5,000 Shares at an exercise price
of $15.69 per share after the Company's 2000 Annual Meeting of Shareholders on
May 25, 2000.

Item 7. Purposes of the Transaction and Plans or Proposals.

(a)(i) Except as indicated in Items 3 and 4 above, no negotiations are being
undertaken or are underway by the Company in response to the Offer which
relate to a tender offer or other acquisition of the Company's securities by
the Company, any subsidiary of the Company or any other person.

(ii) Except as indicated in Items 3 and 4 above, no negotiations are being
undertaken or are underway by the Company in response to the Offer which
relate to, or would result in, (1) any extraordinary transaction, such as a
merger, reorganization or liquidation, involving the Company or any subsidiary
of the Company, (2) any purchase, sale or transfer of a material amount of
assets by the Company or any subsidiary of the Company, (3) any tender offer
for or other acquisition of securities by or of the Company, or (4) any
material change in the present dividend rate or policy, or indebtedness or
capitalization of the Company.

(b) Except as indicated in Items 3 and 4 above, there are no transactions,
Company Board resolutions, agreements in principle or signed contracts in
response to the Offer that relate to or would result in one or more of the
matters referred to in this Item 7.

Item 8. Additional Information.

Oregon Business Corporation Act Sections 60.801 to 60.816 and 60.825 to
60.845

Sections 60.801 through 60.816 of the OBCA (the "Control Share Act") provide
that "control shares" acquired in a "control share acquisition" have no voting
rights unless approved by the corporation's shareholders. Section 60.801 of
the Control Share Act defines "control shares" as voting shares of a public
corporation that are acquired in a "control share acquisition," and defines a
"control share acquisition" as an acquisition, whether direct or indirect of
the ownership of or the power to direct the voting of voting shares of a
public corporation in a transaction that causes the total voting power of the
acquiring person in the election of directors of such public corporation to
exceed one-fifth, one-third or one-half of the total voting power of all
voting shares. Section 60.804 of the Control Share Act provides that a public
corporation is subject to the provisions of the Control Share Act unless the
corporation's articles of incorporation or bylaws provide that the act does
not apply to acquisitions of its voting shares. At a meeting held May 24,
2000, the Company Board amended the Company Bylaws to provide that Sections
60.801 through 60.816 do not apply to acquisitions of the Company's voting
shares, and, therefore, the Control Share Act is inapplicable to the
Purchaser's acquisition of the Shares pursuant to the Offer.

Sections 60.825 through 60.845 of the OBCA (the "Oregon Business Combination
Act") regulate certain business combinations involving a corporation organized
under Oregon law, such as the Company, with a shareholder beneficially owning
fifteen percent or more of the outstanding voting stock of such corporation
(an "Interested Shareholder"). The Oregon Business Combination Act provides,
in relevant part, that the corporation shall not engage in any business
combination with any Interested Shareholder for a period of three years
following the date such shareholder became an Interested Shareholder unless
(i) prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
shareholder becoming an Interested Shareholder, (ii) upon consummation of the
transaction which resulted in the shareholder becoming an Interested
Shareholder, the Interested Shareholder owned at least eighty-five percent of
the voting stock of the corporation outstanding at the time the transaction
commenced, or (iii) the business combination is approved by the board of
directors and authorized at an annual or special meeting of shareholders by
the affirmative vote of at least sixty-six and two-thirds percent of the
outstanding voting stock which is not owned by the Interested Shareholder. The
Company Board approved the Merger Agreement and the Transaction

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<PAGE>

prior to the Purchaser becoming an Interested Shareholder; therefore, the
Oregon Business Combination Act is inapplicable to the Offer and the Merger.

Oregon Business Corporation Act Section 60.491

Under Section 60.491 of the OBCA, if the Purchaser acquires, pursuant to the
Offer or otherwise, at least ninety percent of the outstanding Shares, the
Purchaser will be able to effect the Merger after consummation of the Offer
without a vote by the Company's shareholders. However, if the Purchaser does
not acquire at least ninety percent of the outstanding Shares pursuant to the
Offer or otherwise, a vote by the Company's shareholders will be required
under the OBCA in order to effect the Merger.

Section 14(f) Information Statement

The Information Statement attached as Annex B hereto is being furnished in
connection with the possible designation by the Purchaser, pursuant to the
Merger Agreement, of certain persons to be appointed to the Company Board
other than at a meeting of the Company's shareholders.

Antitrust

Under the HSR Act, and the rules that have been promulgated thereunder by
the Federal Trade Commission (the "FTC"), certain acquisition transactions may
not be consummated unless certain information has been furnished to the
Antitrust Division of the United States Department of Justice (the "Antitrust
Division") and the FTC and certain waiting period requirements have been
satisfied. The acquisition of Shares by the Purchaser pursuant to the Offer is
subject to such requirements.

Under the provisions of the HSR Act applicable to the Offer, the purchase of
Shares under the Offer may not be consummated until the expiration of a
fifteen calendar day waiting period following the filing by Parent and the
Purchaser of a Notification and Report Form with respect to the Offer. Such
filing was made on June 5, 2000. The Antitrust Division or the FTC may extend
the waiting periods of such filing by requesting additional information and
documentary material relevant to the acquisition. If such a request is made,
the waiting period will be extended until 11:59 P.M., New York City time, on
the tenth day after Parent and the Purchaser have substantially complied with
such request. Thereafter, such waiting periods can be extended only by court
order or consent. Although the Company is required to file certain information
and documentary material with the Antitrust Division and the FTC in connection
with the Offer, neither the Company's failure to make such filings nor a
request to the Company from the Antitrust Division for additional information
or documentary material will extend the waiting period. However, if the
Antitrust Division or the FTC raises substantive issues in connection with the
Transaction, Parent, the Purchaser and the Company may engage in negotiations
with the relevant governmental agency concerning possible means of addressing
these issues and may agree to delay consummation of the Transaction while such
negotiations continue.

The Antitrust Division and the FTC frequently scrutinize the legality under
the antitrust laws of acquisition transactions. At any time before or after
the consummation of any such transactions, the Antitrust Division or the FTC
could, notwithstanding termination of the waiting period, take such action
under the antitrust laws as it deems necessary or desirable in the public
interest, including, in the case of the Transaction, seeking to enjoin the
purchase of Shares pursuant to the Offer or seeking divestiture of Shares so
acquired or divestiture of substantial assets of Parent, the Purchaser or the
Company or any of their respective subsidiaries. State attorneys general may
also bring legal actions under the antitrust laws, and private parties may
bring such actions under certain circumstances. While the Company does not
believe that the acquisition of Shares by the Purchaser will violate the
antitrust laws, there can be no assurance that a challenge to the Offer on
antitrust grounds will not be made, or if such a challenge is made, what the
result will be.

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<PAGE>

Dissenters' Rights

The holders of Shares do not have dissenters' rights as a result of the
Offer. However, if the Merger is consummated, holders of Shares at the
effective time of the Merger will have certain rights pursuant to the
provisions of Chapter 60 of the OCBA ("Chapter 60") to dissent and obtain
payment of the fair value for their Shares if the Shares are not quoted on the
Nasdaq National Market on the record date for the meeting of shareholders at
which the Merger is to be approved (if shareholder vote is required to approve
the Merger) or on the date a copy or summary of the plan of merger is mailed
to shareholders (if shareholder approval is not required to approve the
Merger). Under Chapter 60, dissenting shareholders who comply with the
applicable statutory procedures will be entitled to receive a judicial
appraisal of the fair value of their Shares (excluding any appreciation or
depreciation in anticipation of the Merger) and to receive payment of such
fair value in cash, together with accrued interest. Any such judicial
determination of the fair value of Shares could be based upon factors other
than, or in addition to, the price per Share to be paid in the Merger or the
market value of the Shares. The value so determined could be more or less than
the price per Share to be paid in the Merger.

Under the OBCA, no dissenters' rights would be available to holders of the
Shares if the Shares are quoted on the Nasdaq National Market on the record
date for the meeting of shareholders at which the Merger is to be approved (if
shareholder vote is required to approve the Merger) or on the date a copy or
summary of the plan of merger is mailed to shareholders (if shareholder
approval is not required to approve the Merger).

Failure to follow the steps required by Chapter 60 for perfecting
dissenters' rights may result in the loss of such rights.

Rights Agreement

On March 20, 1992, the Company entered into the Rights Agreement and the
Company Board authorized and declared a dividend of one preferred share
purchase right (a "Right") for each outstanding share of Common Stock. Each
Right entitles the registered holder thereof to purchase from the Company one
one-hundredth of a share of Series D Junior Participating Preferred Stock, par
value $.01 per share (the "Preferred Shares"), of the Company at a purchase
price of $40.00 per one one-hundredth of a Preferred Share (the "Purchase
Price"), subject to adjustment.

On the earlier to occur of (i) the close of business on the tenth day
following a public announcement that any person or group of affiliated or
associated persons has acquired beneficial ownership of twenty percent or more
of the outstanding Shares (such a person, an "Acquiring Person") or (ii) the
close of business on the tenth business day (or such later date as may be
determined by action of the Company Board prior to the time any person becomes
an Acquiring Person) following the commencement of, or announcement of an
intention to commence, a tender or exchange offer, the consummation of which
would result in that person becoming an Acquiring Person (the earlier of such
dates being the "Distribution Date"), the Rights will become exercisable and
trade separately from the Common Stock.

Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $1 per share, but will be entitled to an
aggregate dividend of one hundred times the dividend declared per Share since
the date of payment of the immediately preceding quarterly dividend. In the
event of liquidation, the holders of the Preferred Shares will be entitled to
a minimum preferential liquidation payment of $100 per share, but will be
entitled to an aggregate payment of one hundred times the payment made per
Share. Each Preferred Share will have one hundred votes, voting together with
the Shares. Finally, in the event of any merger, consolidation or other
transaction in which Shares are exchanged, each Preferred Share will be
entitled to receive one hundred times the amount received per Share. These
rights are protected by customary anti-dilution provisions. Because of the
nature of the Preferred Shares' dividend, liquidation and voting rights, the
value of the one one-hundredth interest in a Preferred Share purchasable upon
exercise of each Right should approximate the value of one Share.

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In the event that any person becomes an Acquiring Person, proper provision
shall be made so that each holder of a Right, other than Rights beneficially
owned by the Acquiring Person (which will thereafter be void), will thereafter
have the right to receive upon exercise that number of Shares having a market
value of two times the exercise price of the Right. In the event that the
Company is acquired in a merger or other business combination transaction or
fifty percent or more of its consolidated assets or earning power are sold
after a Person or group has become an Acquiring Person, proper provision will
be made so that each holder of a Right will thereafter have the right to
receive, upon the exercise thereof at the then current exercise price of the
Right, that number of shares of common stock of the acquiring company which at
the time of such transaction will have a market value of two times the
exercise price of the Right.

At any time after any person becomes an Acquiring Person and prior to the
acquisition by such person of fifty percent or more of the outstanding Shares,
the Company Board may exchange the Rights (other than Rights owned by such
Person or group of Persons which will have become void), in whole or in part,
at an exchange ratio of one Share, or one one-hundredth of a Preferred Share
(or of a share of a class or series of the Company's preferred stock having
equivalent rights, preferences and privileges), per Right (subject to
adjustment).

At any time before a person has become an Acquiring Person, the Company
Board may redeem the Rights, in whole but not in part, at a price of $.01 per
Right (the "Redemption Price"). The redemption of the Rights may be made
effective at such time, on such basis with such conditions as the Company
Board, in its sole discretion, may establish. Immediately upon any redemption
of the Rights, the right to exercise the Rights will terminate and the only
right of the holders of Rights will be to receive the Redemption Price.

The terms of the Rights may be amended by the Company Board without the
consent of the holders of the Rights, including an amendment to lower certain
thresholds described above to not less than the greater of (i) the sum of one-
one hundredth percent and the largest percentage of the outstanding Shares
then known to the Company to be beneficially owned by any person and (ii) ten
percent, except that from and after such time as any person becomes an
Acquiring Person, no such amendment may adversely affect the interests of the
holders of the Rights.

Until a Right is exercised, the holder thereof, as such, will have no rights
as a shareholder of the Company, including, without limitation, the right to
vote or to receive dividends.

In connection with the execution and delivery of the Merger Agreement, the
Company and the Rights Agent entered into an amendment to the Rights Agreement
effective as of May 24, 2000 (the "Amendment to the Rights Agreement"), in
order to, among other things, (i) prevent Parent or the Purchaser from
becoming or being deemed an Acquiring Person, and (ii) prevent a Distribution
Date from occurring, in each case, as a result of (a) the approval, execution
or delivery of the Merger Agreement or (b) announcement or commencement of the
Offer or any purchase of Shares pursuant to the terms of the Merger Agreement.
A copy of the Amendment to the Rights Agreement is filed herewith as Exhibit
(e)(22) and is incorporated herein by reference.

Certain Financial Projections

During the course of discussions between representatives of the Company and
the Parent, the Company provided the Parent with the Company's summary
forecasts of the Company's future financial performance during the years
ending December 31, 2000, 2001 and 2002. In its provisional budget for fiscal
years 2000, 2001 and 2002, the Company forecast that (i) during 2000 it would
have sales of $77.0 million, income before taxes of $9.2 million and net
income of $6.4 million; (ii) during 2001 it would have sales of $91.7 million,
income before taxes of $13.0 million and net income of $9.1 million; and (iii)
during 2002 it would have sales of $114.3 million, income before taxes of
$19.7 million and net income of $13.8 million.

The financial forecasts were prepared by the Company and were not prepared
with a view to public disclosure or compliance with the published guidelines
of the Commission or the guidelines established by the American Institute of
Certified Public Accountants regarding projections or forecasts and are
included herein

18
<PAGE>

only because such information was made available to Parent and the Purchaser.
Such forecasts are, in general, prepared solely for internal use and capital
budgeting and other management decisions and are subjective in many respects
and thus susceptible to various interpretations and periodic revision based on
actual experience
and business developments. Such forecasts are based on a number of assumptions
that are beyond the control of the Company or its financial advisors,
including economic forecasting (both general and specific to the Company's
business), which is inherently uncertain and subjective. Accordingly, there
can be no assurance that the assumptions made in preparing such forecasts will
prove accurate. It is expected that there will be differences between actual
and forecasted results, and actual results may be materially greater or less
than those contained in the forecasts. Neither the Purchaser, the Parent nor
the Company nor their respective financial advisors assumes any responsibility
for the validity, reasonableness, completeness or accuracy of any of such
forecasts. The inclusion of the foregoing information should not be regarded
as an indication that the Purchaser, the Parent, or the Company or any other
person who provided or received such information considers it an accurate
prediction of future events and the forecasts should not be relied upon as
such. None of the Purchaser, the Parent, or the Company intends to update,
revise or correct such information if it becomes inaccurate (even in the short
term).

Item 9. Exhibits.

<TABLE>
<CAPTION>
Exhibit Description
No. -----------
-------
<C> <S>
(a)(1) Letter to Shareholders dated June 7, 2000 from Robert F. Adrion*

(a)(2) Opinion of SG Cowen Securities Corporation dated May 24, 2000
(included as, and incorporated by reference to, Annex A attached
hereto)*

(a)(3) Joint Press Release issued by Protocol Systems, Inc. and Welch Allyn,
Inc. dated May 25, 2000 (incorporated by reference to the Schedule
14D-9 filed with the Commission by the Company on May 25, 2000)

(a)(4) The Offer to Purchase dated June 7, 2000 (incorporated by reference to
Exhibit (a)(1) to the Schedule TO of Welch Allyn, Inc. and Welch Allyn
Acquisition Corporation filed with the Commission on June 7, 2000)

(a)(5) Letter of Transmittal (incorporated by reference to Exhibit (a)(2) to
the Schedule TO of Welch Allyn, Inc. and Welch Allyn Acquisition
Corporation filed with the Commission on June 7, 2000)

(a)(6) The Information Statement of the Company dated June 7, 2000 (included
as, and incorporated by reference to, Annex B attached hereto)*

(e)(1) Agreement and Plan of Merger, dated as of May 24, 2000, by and among
Welch Allyn, Inc., Welch Allyn Acquisition Corporation and Protocol
Systems, Inc. (incorporated by reference to Exhibit 2.1 to the Current
Report on Form 8-K filed with the Commission by the Company on May 25,
2000)

(e)(2) Confidentiality Agreement, dated as of March 9, 2000, between Welch
Allyn, Inc. and Protocol Systems, Inc.

(e)(3) Amended and Restated Executive Employment Agreement between Protocol
Systems, Inc. and Edward M. Kolasinski dated May 23, 2000

(e)(4) Amended and Restated Executive Employment Agreement between Protocol
Systems, Inc. and Robert F. Adrion dated May 23, 2000

(e)(5) Executive Employment Agreement between Protocol Systems, Inc. and Ann
P. Demaree dated May 23, 2000

(e)(6) Amended and Restated Executive Employment Agreement between Protocol
Systems, Inc. and James P. Fee dated May 23, 2000

(e)(7) Amended and Restated Executive Employment Agreement between Protocol
Systems, Inc. and Donald M. Abbey dated May 23, 2000

</TABLE>

19
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
(e)(8) Amended and Restated Executive Employment Agreement between Protocol
Systems, Inc. and James P. Welch dated May 23, 2000

(e)(9) Amended and Restated Executive Employment Agreement between Protocol
Systems, Inc. and Richard L. Roa dated May 23, 2000

(e)(10) Amended and Restated Executive Employment Agreement between Protocol
Systems, Inc. and Chris E. Tew dated May 23, 2000

(e)(11) Amended and Restated Executive Employment Agreement between Protocol
Systems, Inc. and Allen L. Oyler dated May 23, 2000

(e)(12) Retention Bonus Agreement between Protocol Systems, Inc. and James P.
Welch dated May 23, 2000

(e)(13) Retention Bonus Agreement between Protocol Systems, Inc. and Robert F.
Adrion dated May 23, 2000

(e)(14) Retention Bonus Agreement between Protocol Systems, Inc. and Ann P.
Demaree dated May 23, 2000

(e)(15) Retention Bonus Agreement between Protocol Systems, Inc. and James P.
Fee dated May 23, 2000

(e)(16) Retention Bonus Agreement between Protocol Systems, Inc. and Edward M.
Kolasinski dated May 23, 2000

(e)(17) Retention Bonus Agreement between Protocol Systems, Inc. and Allen L.
Oyler dated May 23, 2000

(e)(18) Retention Bonus Agreement between Protocol Systems, Inc. and Richard
L. Roa dated May 23, 2000

(e)(19) Retention Bonus Agreement between Protocol Systems, Inc. and Chris E.
Tew dated May 23, 2000

(e)(20) Retention Bonus Agreement between Protocol Systems, Inc. and Donald M.
Abbey dated May 23, 2000

(e)(21) Supplement to Amended and Restated Executive Employment Agreement
between Protocol Systems, Inc. and Robert F. Adrion dated May 24, 2000

(e)(22) First Amendment to Rights Agreement, dated as of May 24, 2000, between
ChaseMellon Shareholder Services, L.L.C. and Protocol Systems, Inc.
</TABLE>
--------

* Copy attached to, or enclosed with, copies of this Schedule 14D-9 mailed to
shareholders.

20
<PAGE>

SIGNATURE

After due inquiry and to the best of my knowledge and belief, I certify that
the information set forth in this statement is true, complete and correct.

/s/ Robert F. Adrion
-------------------------------------
Name: Robert F. Adrion
Title: President and Chief Executive
Officer

Dated: June 7, 2000.

21
<PAGE>

[LOGO OF SG COWEN]

SG Cowen

SG Cowen Securities Corporation
1221 Avenue of the Americas
New York NY 10020
tel. 212 278 6000

ANNEX A

May 24, 2000

Board of Directors
Protocol Systems, Inc.
8500 SW Creekside Pl.
Beaverton, OR 97008

Ladies and Gentlemen:

You have requested our opinion as to the fairness, from a financial point of
view, to the stockholders of Protocol Systems, Inc. (the "Company") of the
Consideration (as defined below) to be received by the stockholders of the
Company pursuant to the terms of that certain Agreement and Plan of Merger,
dated as of May 24, 2000 (the "Agreement"), by and among the Company, Welch
Allyn, Inc. ("Parent") and a wholly owned subsidiary of Parent ("Merger Sub").

As more specifically set forth in the Agreement, and subject to the terms,
conditions and adjustments set forth in the Agreement, Merger Sub shall make a
cash tender offer (the "Offer") to acquire all the issued and outstanding
shares of Common Stock, par value $0.01 per share, of the Company and the
associated Rights ("Company Common Stock" or the "Shares") at a purchase price
of $16.00 per Share in cash (the "Consideration"). Following the consummation
of the Offer and upon the terms and subject to the conditions set forth in the
Agreement, Merger Sub shall merge with and into the Company, and all Shares
that remain outstanding after expiration of the Offer will be converted into
and be exchangeable for an amount equal to $16.00 in cash (together with the
Offer, the "Transaction").

SG Cowen Securities Corporation ("SG Cowen"), as part of its investment
banking business, is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.

We are acting as exclusive financial advisor to the Board of Directors of the
Company in connection with the Transaction and will receive a fee from the
Company for our services pursuant to the terms of our engagement letter with
the Company, dated as of December 23, 1999, a portion of which is contingent
upon the consummation of the Transaction. We will also receive a fee for
providing this Opinion. SG Cowen and its affiliates in the ordinary course of
business have from time to time provided commercial and investment banking
services to the Company and have received fees for the rendering of such
services.

In connection with our opinion, we have reviewed and considered such
financial and other matters as we have deemed relevant, including, among other
things:

. a draft of the Agreement dated May 21, 2000;

. certain publicly available information for the Company, including its
annual reports filed on Form 10-K for each of the years ended 1997,
1998 and 1999, and its quarterly reports filed on Form 10-Q for each
of the quarters ended March 31, 1999, June 30, 1999, September 30,
1999 and March 31, 2000, and certain other relevant financial and
operating data furnished to SG Cowen by the Company management;

A-1
<PAGE>

Board of Directors
Protocol Systems, Inc.
May 24, 2000
Page 2

[LOGO OF SG COWEN]

. certain internal financial analyses, financial forecasts, reports and
other information concerning the Company (the "Company Forecasts")
prepared by the Company management;

. discussions we have had with certain members of the management of the
Company concerning the historical and current business operations,
financial condition and prospects of the Company and such other matters
we deemed relevant;

. certain operating results, and the reported price and trading histories
of the shares of the common stock of the Company as compared to certain
operating results, and the reported price and trading histories of
certain publicly traded companies we deemed relevant;

. certain financial terms of the Transaction as compared to the financial
terms of certain selected business combinations we deemed relevant; and

. such other information, financial studies, analyses and investigations
and such other factors that we deemed relevant for the purposes of this
opinion.

In conducting our review and arriving at our opinion, we have, with your
consent, assumed and relied, without independent investigation, upon the
accuracy and completeness of all financial and other information provided to
us by the Company or which is publicly available. We have not undertaken any
responsibility for the accuracy, completeness or reasonableness of, or
independently to verify, such information. In addition, we have not conducted
any physical inspection of the properties or facilities of the Company or the
Parent. We have further relied upon the assurance of management of the Company
that they are unaware of any facts that would make the information provided to
us incomplete or misleading in any respect. We have, with your consent,
assumed that the financial forecasts which we examined were reasonably
prepared by the management of the Company on bases reflecting the best
currently available estimates and good faith judgments of such management as
to the future performance of the Company, and such projections provide a
reasonable basis for our opinion.

We have not made or obtained any independent evaluations, valuations or
appraisals of the assets or liabilities of the Company, nor have we been
furnished with such materials. With respect to all legal matters relating to
the Company, we have relied on the advice of legal counsel to the Company. Our
services to the Company in connection with the Transaction have been
comprised, in part, of rendering an opinion from a financial point of view
with respect to the Consideration. Our opinion is necessarily based upon
economic and market conditions and other circumstances as they exist and can
be evaluated by us on the date hereof. It should be understood that although
subsequent developments may affect our opinion, we do not have any obligation
to update, revise or reaffirm our opinion and we expressly disclaim any
responsibility to do so.

For purposes of rendering our opinion we have assumed in all respects
material to our analysis, that the representations and warranties of each
party contained in the Agreement are true and correct, that each party will
perform all of the covenants and agreements required to

A-2
<PAGE>

Board of Directors
Protocol Systems, Inc.
May 24, 2000
Page 3

[LOGO OF SG COWEN]

be performed by it under the Agreement and that all conditions to the
consummation of the Transaction will be satisfied without waiver thereof. We
have assumed that the final form of the Agreement will be substantially
similar to the last draft reviewed by us. We have also assumed that all
governmental, regulatory and other consents and approvals contemplated by the
Agreement will be obtained and that in the course of obtaining any of those
consents no restrictions will be imposed or waivers made that would have an
adverse effect on the contemplated benefits of the Transaction.

It is understood that this letter is intended for the benefit and use of the
Board of Directors of the Company in its consideration of the Transaction and
may not be used for any other purpose or reproduced, disseminated, quoted or
referred to at any time, in any manner or for any purpose without our prior
written consent. This letter does not constitute a recommendation to any
stockholder as to whether such stockholder should tender his or her Shares in
the Offer or to take any other action in connection with the Transaction or
otherwise. We have not been requested to opine as to, and our opinion does not
in any manner address, the Company's underlying business decision to effect
the Transaction.

Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that, as of the date
hereof, the Consideration to be received in the Transaction is fair, from a
financial point of view, to the stockholders of the Company.

Very truly yours,

/s/ SG Cowen Securities

A-3
<PAGE>

ANNEX B

PROTOCOL SYSTEMS, INC.
8500 S.W. CREEKSIDE PLACE
BEAVERTON, OR 97008

INFORMATION STATEMENT PURSUANT TO
SECTION 14(f) OF THE SECURITIES
EXCHANGE ACT OF 1934 AND RULE 14f-1 THEREUNDER

General

This information statement (the "Information Statement") is being mailed on
or about June 7, 2000, as part of the Solicitation/Recommendation Statement on
Schedule 14D-9 (the "Schedule 14D-9") to holders of record of shares of common
stock, par value $0.01 per share (the "Shares"), of Protocol Systems, Inc., an
Oregon corporation (the "Company"). You are receiving this Information
Statement in connection with the possible election of persons designated by
the Purchaser (as defined below) to seats on the Board of Directors of the
Company (the "Company Board").

On May 24, 2000, the Company, Welch Allyn, Inc., a New York corporation (the
"Parent"), and Welch Allyn Acquisition Corporation, an Oregon corporation and
a wholly owned subsidiary of Parent (the "Purchaser"), entered into an
Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which
(i) Parent will cause the Purchaser to commence a cash tender offer (the
"Offer") for all the outstanding Shares at a price of $16.00 per Share, and
(ii) the Purchaser will be merged with and into the Company (the "Merger"). As
a result of the Offer and the Merger, the Company will become a wholly owned
subsidiary of Parent.

As more fully described below, the Merger Agreement provides that, promptly
after the purchase of Shares pursuant to the Offer, the Purchaser will be
entitled to designate up to such number of directors (the "Purchaser
Designees") to the Company Board as will give the Purchaser representation
proportionate to its ownership interest of Shares. The Merger Agreement
requires the Company to promptly take such actions as necessary to cause the
Purchaser Designees to be elected to the Company Board. This Information
Statement is required by Section 14(f) of the Exchange Act and Rule 14f-1
thereunder.

The information contained in this Information Statement concerning Parent
and the Purchaser has been furnished to the Company by Parent. The Company
assumes no responsibility for the accuracy or completeness of such
information. Capitalized terms used and not otherwise defined shall have the
meaning set forth in the Schedule 14D-9.

You are urged to read this Information Statement carefully. You are not,
however, required to take any action.

Right to Designate Directors; Purchaser Designees

The Merger Agreement provides that, promptly upon the purchase by the
Purchaser of Shares pursuant to the Offer, and from time to time thereafter,
the Purchaser shall be entitled to designate up to such number of directors,
rounded up to the next whole number, on the Company Board as shall give the
Purchaser representation on the Company Board equal to the product of the
total number of directors on the Company Board (giving effect to the directors
elected pursuant to this right) multiplied by the percentage that the
aggregate number of Shares beneficially owned by the Purchaser or any
Affiliate of the Purchaser at such time bears to the total number of Shares
then outstanding. The Merger Agreement further provides that the Company
shall, at such time, promptly take all actions necessary to cause the
Purchaser's designees to be elected as directors of the Company, including
increasing the size of the Company Board or securing the resignations of
incumbent directors or both. At such times, the Company shall use its best
efforts to cause persons designated by the Purchaser to constitute the same
percentage as persons designated by the Purchaser shall constitute of the

B-1
<PAGE>

Company Board of (i) each committee of the Company Board (some of whom may be
required to be independent as required by applicable law), (ii) each board of
directors of each domestic Subsidiary, and (iii) each committee of each such
board, in each case only to the extent permitted by applicable law.

The Purchaser's right to appoint the Purchaser Designees to the Company
Board without a meeting of the shareholders of the Company shall be subject to
Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder. The
Company has agreed that it will promptly take all actions, as Section 14(f)
and Rule 14f-1 require, in order to fulfill its obligations under the Merger
Agreement. Parent or the Purchaser have supplied to the Company in writing
information with respect to either of them and their nominees, officers,
directors and affiliates required by Section 14(f) and Rule 14f-1.

Parent has informed the Company that it will select the Purchaser Designees
from among Peter H. Soderberg (age 54), M. Jack Rudnick (age 52), Bonita L.
Labosky (age 57), Daniel J. Fisher (age 46) and Douglas J. Linquest (age 39),
each of whom (other than Mr. Linquest) is a director or executive officer of
Parent. Information concerning those persons (other than Mr. Linquest) is
contained in Schedule I to the Offer to Purchase, a copy of which is being
mailed to the Company's shareholders together with the Schedule 14D-9. Such
information is incorporated herein by reference. Mr. Linquest has been the
Business Unit Manager--Thermometry and Monitoring of Parent since January
1999. From October 1995 to December 1998, Mr. Linquest served as Marketing
Manger--Vital Signs Business Group of Parent. Prior thereto, Mr. Linquest was
Senior Product Manager--Vital Signs Group of Parent.

In addition, Parent has informed the Company of its present intention to
keep Mr. Robert F. Adrion, Ph.D., President and Chief Executive Officer of the
Company, on the Company Board even if the Purchaser has the right to cause his
removal or resignation from the Company Board under the terms of the Merger
Agreement.

Parent has also informed the Company that each of such persons, including
Mr. Adrion, has consented to act as a director of the Company, if so
designated. It is expected that none of the Purchaser Designees will receive
any compensation for services performed in his or her capacity as a director
of the Company.

Based solely on the information set forth in the Offer to Purchase, none of
the Purchaser Designees (i) is currently a director of, or holds any position
with the Company, (ii) has a familial relationship with any directors or
executive officers of the Company, or (iii) to the best knowledge of Parent
and the Purchaser, beneficially owns any securities (or any rights to acquire
such securities) of the Company, except as otherwise set forth in Section 9 of
the Offer to Purchase and except for 100 Shares owned by Mr. Linquest (none of
which shares were acquired by Mr. Linquest in the last two years). The Company
has been advised by Parent and the Purchaser that, to the best of Parent's and
the Purchaser's knowledge, none of the Purchaser Designees has been involved
in any transactions with the Company or any of its directors, officers, or
affiliates which are required to be disclosed pursuant to the rules and
regulations of the Commission, except as may be disclosed herein or in the
Offer to Purchase.

Certain Information Concerning the Company

The Shares constitute the only class of voting securities of the Company.
The holders of Common Stock are entitled to one vote per Share. As of May 26,
2000, there were 8,192,300 shares issued and outstanding.

Directors of the Company

The Company Board currently consists of six directors divided into three
classes, of which one class is elected annually by the shareholders for terms
of three years or until their successors have been elected and qualified. In
accordance with Article VII of the Company's Articles of Incorporation,
directors are removable only for cause and at a meeting of shareholders called
expressly for that purpose, by the vote of seventy-five percent of the votes
then entitled to be cast for the election of directors.

B-2
<PAGE>

The following table sets forth certain information with respect to the
individuals who are currently serving as directors of the Company (including
age as of the date hereof, current principal occupation or employment and
employment history). Unless otherwise noted, each individual is a citizen of
the United States.

<TABLE>
<CAPTION>
Age Positions Held With the Company
--- -------------------------------
<C> <C> <S>
Robert F. Adrion, Ph.D. .... 58 President, Chief Executive Officer and
Director

Ronald S. Newbower, Ph.D. .. 56 Director

Frank E. Samuel, Jr. ....... 60 Director

Curtis M. Stevens........... 47 Director

David F. Bolender........... 68 Chairman of the Board of Directors

Steven E. Wynne............. 48 Director
</TABLE>

Robert F. Adrion, Ph.D. Dr. Adrion joined the Company in August 1999 as
President and at that time was named Chief Executive Officer and appointed to
the Company Board. With thirty years experience in the medical device
business, he had most recently served Becton Dickinson and Company as
Worldwide President, Infusion Therapy and Injection Systems from 1998 through
June 1999. Prior to that, Dr. Adrion was Worldwide President of Becton's
Infusion Therapy division, held the position of President of Vascular Access
division, and also had assignments in corporate planning and corporate
research and development. Dr. Adrion received bachelors and master's degrees
in Electrical Engineering and earned his doctorate in Physics from North
Carolina State University.

Ronald S. Newbower, Ph.D. Dr. Newbower was elected to the Company Board in
1994. Since 1997, Dr. Newbower has been Vice President for Research Management
of Partners Healthcare System, and, since 1994, has also served as Senior Vice
President, Research and Technology for Massachusetts General Hospital ("MGH").
Dr. Newbower was Vice President for Research and Technology Affairs of MGH and
Associate General Director for Research and Technology Affairs of MGH from
1990 to 1994. Dr. Newbower has held appointments at MGH since 1973, where he
has served as Deputy Director of the Division of Research Affairs, Director of
Technology Development of the Office of Technology Affairs, and Director of
the Department of Biomedical Engineering. He is currently also Associate
Professor of Anaesthesia, Harvard--MIT Division of Health Sciences and
Technology, Associate Professor of Anaesthesia, Harvard Medical School, and
Lecturer in Electrical Engineering, Massachusetts Institute of Technology.

Frank E. Samuel, Jr. Mr. Samuel was elected to the Company Board in 1994.
Mr. Samuel has been President of Edison BioTechnology Center, an economic
development organization for the biomedical technology field in the State of
Ohio since February 1995. Prior to that date, Mr. Samuel was an independent
consultant engaged in the business of advising senior management on
governmental policy and regulation of health care and medical technology since
1990. Mr. Samuel was President of the Health Industry Manufacturers
Association ("HIMA"), a national trade association representing medical
technology manufacturers, from 1984 to 1989. Mr. Samuel also serves on the
Board of Directors of STERIS Corporation.

Curtis M. Stevens. Mr. Stevens was elected to the Company Board in 1998. Mr.
Stevens is Vice President, Chief Financial Officer and Treasurer of Louisiana
Pacific Corporation. From 1991 to 1997, Mr. Stevens served as Executive Vice
President, Treasurer and Assistant Secretary of Planar Systems, Inc., a
manufacturer of commercial flat panel display components. Mr. Stevens joined
Planar Systems in 1983 and was elected Vice President and Chief Financial
Officer in 1986. From 1976 to 1983, Mr. Stevens served in various capacities
at Deloitte, Haskins & Sells (now Deloitte & Touche) in tax, audit and
management consulting. Mr. Stevens is a Certified Public Accountant. Mr.
Stevens received a BA in economics from the University of California,
Los Angeles ("UCLA") and an MBA in finance from the Graduate School of
Management at UCLA.

David F. Bolender. Mr. Bolender was elected to the Company Board in 1996. In
February 1998, Mr. Bolender was elected Chairman of the Company Board and
Chief Executive Officer of the Company.

B-3
<PAGE>

Mr. Bolender was named President of the Company in September 1998. Mr.
Bolender served as President and Chief Executive Officer of the Company until
August 1, 1999. From January 1989 to December 1991 Mr. Bolender served as
President of the Electric Operations Group of PacifiCorp. Mr. Bolender is
Chairman of the Board of Directors of Electro Scientific Industries, Inc. and
has served in that capacity since 1992. Mr. Bolender also serves on the Board
of Directors of Golden Northwest Aluminum, Inc.

Steven E. Wynne. Mr. Wynne was elected to the Company Board in 1996. Mr.
Wynne is currently the Chief Executive Officer of eteamz.com, Inc., an online
community serving amateur sports. Mr. Wynne served as President and Chief
Executive Officer of adidas America, Inc. from February 1995 to March 2000.
Mr. Wynne was a partner in the law firm of Ater Wynne LLP, the Company's legal
counsel, from 1984 to 1995. Mr. Wynne also serves on the Boards of Directors
of Planar Systems, Inc. and FLIR Systems, Inc.

Other Information Concerning Current Directors

Committees

The Company Board has appointed a standing Audit Committee which, during the
fiscal year ended December 31, 1999, conducted five meetings. The members of
the Audit Committee currently are Messrs. Samuel and Stevens. The Audit
Committee reviews the scope of the independent annual audit, the independent
public accountants' letter to the Company Board concerning the effectiveness
of the Company's internal financial and accounting controls and the Company
Board's response to that letter, if deemed necessary. The Company Board also
has appointed a Compensation Committee which reviews executive compensation
and makes recommendations to the full Board regarding changes in compensation,
and also administers the Company's stock option plans. During the fiscal year
ended December 31, 1999, the Compensation Committee held one meeting. The
members of the Compensation Committee currently are Messrs. Stevens and Wynne.

During 1999 the Company Board held seven meetings. Each incumbent director
attended more than seventy-five percent of the aggregate of the total number
of meetings held by the Company Board and the total number of meetings held by
all committees of the Company Board on which he served during the period that
he served.

Directors Compensation

The members of the Company's Board are reimbursed for out-of-pocket and
travel expenses incurred in attending Company Board meetings. In addition,
nonemployee members of the Company Board receive a $10,000 annual retainer,
$1,000 for each Board meeting attended in person, $500 for each Company Board
meeting attended by telephone and $500 for each meeting of a committee of the
Company Board attended, except the audit committee, for which $1,000 is paid
for each meeting attended. Nonemployee directors who do not reside in the
Portland, Oregon metropolitan area also receive a nonaccountable travel
allowance of $1,000 for each Company Board meeting attended. Under the
Company's 1993 Stock Option Plan for Nonemployee Directors (the "1993 Plan"),
each person who becomes a nonemployee director automatically receives an
initial option to purchase 20,000 shares of the Company's Common Stock
immediately following the annual meeting at which such director is first
elected to the Company Board. The initial option grant vests ratably on an
annual basis over three years. Each nonemployee director automatically
receives additional annual grants of options to purchase 5,000 shares after
each annual meeting of shareholders (provided the nonemployee director
continues to serve in that capacity) which are fully vested and exercisable on
the date of grant. Each option expires ten years from the date of its grant.
Outstanding options will expire earlier if an optionee terminates service as a
director before the end of the ten year term. The exercise price of options
granted under the 1993 Plan may not be less than the fair market value of a
share of Common Stock on the date of grant of the option.

Compensation Committee Interlocks and Insider Participation

During the fiscal year ended December 31, 1999, the members of the
Compensation Committee were Messrs. Stevens and Wynne.

B-4
<PAGE>

Executive Officers of the Company

The names of the executive officers who are not also directors of the
Company, their ages and certain information about them are set forth below:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Don M. Abbey............. 33 Vice President--Quality Systems

James P. Fee, Jr. ....... 54 Vice President and General Manager--Portable
Monitoring

Carl P. Hollstein, Jr. .. 60 Vice President--Manufacturing and Service

Edward M. Kolasinski..... 42 Vice President--Finance, Chief Financial Officer
and Treasurer

Allen L. Oyler........... 54 Vice President and General Manager--Medical
Device Technologies and Secretary

Richard L. Roa........... 54 Vice President--Engineering

Chris E. Tew............. 47 Vice President--Sales

James P. Welch........... 49 Vice President and General Manager--Flexible
Monitoring
</TABLE>

Information concerning the principal occupation during at least the last
five years of the executive officers of the Company who are not also directors
of the Company is set forth below.

Don M. Abbey. Mr. Abbey joined the Company in June 1998 as Vice President,
Quality Systems. Before joining the Company, Mr. Abbey was Director, Quality
Assurance at Heartstream, Inc., a manufacturer of medical defibrillators, from
May 1996 to June 1998, and Manager, Quality Engineering at Heart Technology, a
manufacturer of angioplasty devices, from August 1993 to May 1996.

James P. Fee, Jr. Mr. Fee joined the Company in 1988 as Vice President,
Marketing and Sales and in 1998 he became Vice President, Sales, Service and
Communication. In 1999, Mr. Fee became Vice President, Sales and Marketing and
was later named Vice President and General Manager--Portable Monitoring. Prior
to joining the Company, Mr. Fee spent the previous 14 years with Physio
Control Corporation, a manufacturer of cardiac defibrillators and subsidiary
of Eli Lilly and Company. From 1987 to November 1988, Mr. Fee was
Vice President of Marketing and from 1982 to 1987 Vice President of Sales and
Service of Physio Control Corporation.

Carl P. Hollstein, Jr. Mr. Hollstein joined the Company in 1993 as Vice
President, Manufacturing. In 1999 Mr. Hollstein was elected Senior Vice
President, Manufacturing and was later named Vice President--Manufacturing and
Service. Before joining the Company, Mr. Hollstein was a self-employed
management consultant from 1991 to 1993. From 1978 to 1991, Mr. Hollstein
worked for Intel Corporation, holding a variety of positions, including
Engineering Manager; General Manager, Development Systems Operation; and
Director of Quality Systems Group.

Edward M. Kolasinski. Mr. Kolasinski joined the Company in 1996 at the time
of the Company's acquisition of Pryon Corporation. Mr. Kolasinski was named
President of Pryon in 1996, after spending the previous six years as its Vice
President, Finance and Chief Financial Officer. In 1999 he was named
Vice President and General Manager of OEM Products and later became Vice
President, Finance, Chief Financial Officer and Treasurer. Previously, Mr.
Kolasinski spent seven years with Price Waterhouse, and was an officer and
corporate controller at Rexnord, Inc.

Allen L. Oyler. Mr. Oyler joined the Company in 1993 as Director, Human
Resources and in 1994 was elected Vice President, Human Resources and
Administration. In 1999 he became Vice President, Information Services, Human
Resources and Administration and Secretary, and was later named Vice President
and General Manager--Medical Device Technologies and Secretary. Prior to
joining the Company, Mr. Oyler was Director, Human Resources at SpaceLabs from
1984 to 1993.

B-5
<PAGE>

Richard L. Roa. Mr. Roa joined the Company in July 1998 as Vice President,
Engineering. Before joining the Company, Mr. Roa was Director, Biomedical
Engineering at Baylor University Medical Center from 1989 to July 1998.

Chris E. Tew. Mr. Tew joined the Company as Director of North American Sales
in 1989 and in 1999 was named Vice President--Sales. Before joining the
Company, he spent 7 years at CooperVision Cilco holding the director of sales
and regional sales management positions. In 1985 Mr. Tew co-founded Health-
Ware Management Company, Inc. and served on the board of directors until the
company was sold in 1996.

James P. Welch. Mr. Welch joined the Company in 1991 as Vice President,
Engineering, became Vice President, Quality Systems in July 1994 and Vice
President, Business and Market Development in December 1996 In 1998, he became
Vice President, Marketing and Business Development. In 1999 he was elected
Senior Vice President, Systems, Marketing and Service and was later named Vice
President and General Manager--Flexible Monitoring. Prior to joining the
Company, Mr. Welch served for ten years as Director of Hospital Clinical
Engineering, Special Assistant to the Office of Technology Affairs and
Associate Director of the Anesthesia Bioengineering Unit at Massachusetts
General Hospital, in Boston, Massachusetts.

B-6
<PAGE>

Common Stock Ownership of Management and Other Beneficial Holders

The following table sets forth certain information regarding the ownership
of the Common Stock as of May 26, 2000 with respect to: (i) each person known
by the Company to beneficially own more than five percent of the outstanding
shares of Common Stock, (ii) each of the Company's directors, (iii) each of
the Company's named executive officers, and (iv) all directors and executive
officers as a group.

<TABLE>
<CAPTION>
Shares of Percent of
Common Stock Common Stock
Name and Business Address Beneficially Owned(1) Outstanding
------------------------- --------------------- ------------
<S> <C> <C>
EQSF Advisers, Inc.(2)..................... 1,120,600 13.7%
M.J. Whitman Advisers, Inc.
Martin J. Whitman
767 Third Avenue
New York, NY 10017

Westport Asset Management, Inc.(3)......... 862,450 10.5
253 Riverside Avenue
Westport, CT 06880

Dimensional Fund Advisors, Inc.(4)......... 581,800 7.1
1299 Ocean Avenue
Santa Monica, CA 90401

Wellington Management Company, LLP(5)...... 536,200 6.5
75 State Street
Boston, MA 02109

Robert F. Adrion........................... -- --

David F. Bolender.......................... 188,166 2.3

Ronald S. Newbower......................... 20,000 *

Frank E. Samuel, Jr........................ 25,000 *

Curtis M. Stevens.......................... 18,067 *

Steven E. Wynne............................ 30,000 *

James P. Fee, Jr........................... 132,379 1.6

Carl P. Hollstein, Jr...................... 66,927 *

Allen L. Oyler............................. 48,452 *

James P. Welch............................. 64,927 *

Executive Officers and Directors as a group
(14 persons).............................. 678,024 7.8
</TABLE>
--------
* less than one percent

(1) Beneficial ownership is determined in accordance with rules of the
Commission, and includes voting power and investment power with respect to
shares. Shares issuable upon the exercise of outstanding stock options
that are currently exercisable or become exercisable within 60 days from
May 26, 2000 are considered outstanding for the purpose of calculating the
percentage of Common Stock owned by such person, but not for the purpose
of calculating the percentage of Common Stock owned by any other person.
The number of shares that are issuable upon the exercise of options that
are currently exercisable or exercisable within 60 days of May 26, 2000 is
as follows: Mr. Bolender--134,666; Mr. Newbower--20,000; Mr. Samuel--
25,000; Mr. Stevens--16,667; Mr. Wynne--26,000; Mr. Fee--83,250; Mr.
Hollstein--0; Mr. Oyler--44,250; Mr. Welch--60,134 and all directors and
officers as a group--545,134.

(2) This information as to beneficial ownership is based on a Schedule 13G
filed by EQSF Advisers, Inc. ("EQSF"), M.J. Whitman Advisers, Inc.
("MJWA") and Martin J. Whitman ("Whitman") with the

B-7
<PAGE>

Securities and Exchange Commission on February 14, 2000. The Schedule 13G
states that (i) EQSF is the beneficial owner of 1,120,600 shares of Common
Stock as to which it has sole voting and dispositive power; (ii) MJWA is
the beneficial owner of 6,700 shares of Common Stock as to which it has
sole voting and dispositive power; and (iii) Whitman is the controlling
person of EQSF and MJWA, but disclaims beneficial ownership of the shares
of Common Stock beneficially owned by such entities.

(3) This information as to beneficial ownership is based on a Schedule 13G
filed by Westport Asset Management, Inc. ("Westport") with the Securities
and Exchange Commission on February 16, 2000. The Schedule 13G states that
Westport has shared voting power as to 613,450 shares of Common Stock and
dispositive power as to 862,450 shares of Common Stock.

(4) This information as to beneficial ownership is based on a Schedule 13G
filed by Dimensional Fund Advisors, Inc. ("Dimensional") with the
Securities and Exchange Commission on February 3, 2000. The Schedule 13G
states that Dimensional, in its capacity as investment adviser or manager,
has sole voting and dispositive power as to 581,800 shares of Common
Stock. Dimensional disclaims beneficial ownership of such shares.

(5) This information as to beneficial ownership is based on a Schedule 13G
filed by Wellington Management Company, LLP ("WMC") with the Securities
and Exchange Commission on February 11, 2000. The Schedule 13G states that
WMC, in its capacity as investment advisor, may be deemed to be the
beneficial owner of 536,200 shares of Common Stock, which are owned by
numerous investment counseling clients. The Schedule 13G states that WMC
has shared voting power as to 263,200 shares and has shared dispositive
power as to 536,200 shares of Common Stock.

B-8
<PAGE>

Executive Compensation

The following table provides certain summary information concerning
compensation of each person who served as the Company's Chief Executive
Officer during 1999 and each of the four other most highly compensated
executive officers of the Company (the "named executive officers") for the
fiscal years ending December 31, 1997, 1998 and 1999.

<TABLE>
<CAPTION>
Long-term
Compensation
------------
Securities
Underlying
Annual Compensation Stock
------------------------ Options All Other
Name and Principal Position Year Salary Bonus Granted Compensation
--------------------------- ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert F. Adrion(1).......... 1999 $115,390 $70,000 200,000 $78,371(2)
President and Chief
Executive
Officer

David F. Bolender(3)......... 1999 78,750(4) -- 40,000 17,500(5)
Chairman of the Board 1998 144,375(6) -- 80,000 --

James P. Fee, Jr. ........... 1999 164,615 97,505 30,000 1,786(7)
Vice President and General 1998 153,846 54,763 -- 1,786(7)
Manager B Portable
Monitoring 1997 139,231 38,893 -- 1,842(7)

Carl P. Hollstein, Jr. ...... 1999 166,692 60,992 30,000 1,786(7)
Vice President--
Manufacturing 1998 150,969 30,546 -- 1,786(7)
and Service 1997 129,423 -- -- 1,696(7)

Allen L. Oyler............... 1999 164,615 70,569 30,000 2,000(7)
Vice President and General 1998 150,769 29,969 -- 1,931(7)
Manager--Medical Device 1997 129,115 -- -- 1,879(7)
Technologies and Secretary

James P. Welch............... 1999 168,077 82,260 30,000 1,389(7)
Vice President and General 1998 153,846 32,432 -- 1,389(7)
Manager--Flexible Monitoring 1997 139,039 -- -- 1,319(7)
</TABLE>
--------
(1) Mr. Adrion was elected as Chief Executive Officer on August 1, 1999.

(2) The amount represents payments made to Mr. Adrion in connection with his
relocation costs.

(3) Mr. Bolender served as Chief Executive Officer from February 20, 1998 to
August 1, 1999.

(4) This amount is the dollar value of 10,000 shares of Common Stock granted
to Mr. Bolender in lieu of cash compensation based on the market value of
the Common Stock on the date of grant.

(5) Includes $15,000 paid to Mr. Bolender for consulting services provided
from August 1, 1999 through December 31, 1999 and $2,500 paid to Mr.
Bolender for his services on the Board of Directors from August 1, 1999
through December 31, 1999.

(6) This amount is the dollar value of 20,000 shares of Common Stock granted
to Mr. Bolender in lieu of cash compensation based on the market value of
the Common Stock on the date of grant.

(7) Matching amounts contributed on behalf of the named executive officer to
the Company sponsored 401(k) employee savings plan covering all of the
Company's employees.

B-9
<PAGE>

Stock Options

The following table sets forth information concerning options granted to the
named executive officers during the year ended December 31, 1999.

Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
Percent of Potential Realizable Value
Number of Total at Assumed Annual Rates
Securities Options of Stock Price Appreciation
Underlying Granted to Exercise for Option Term(3)
Options Employees Price Per Expiration ---------------------------
Name Granted(1) in 1999 Share(2) Date 5% 10%
---- ---------- ---------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert F. Adrion........ 200,000 34% $8.50 8/6/2009 $ 1,069,121 $ 2,709,362
David F. Bolender....... 40,000 7% 7.875 8/20/2009 198,102 502,029
James P. Fee............ 30,000 5% 7.25 2/5/2009 136,785 346,639
Carl P. Hollstein,
Jr. ................... 30,000 5% 7.25 2/5/2009 136,785 346,639
Allen L. Oyler.......... 30,000 5% 7.25 2/5/2009 136,785 346,639
James P. Welch.......... 30,000 5% 7.25 2/5/2009 136,785 346,639
</TABLE>
--------
(1) Options granted in 1999 generally become exercisable one year from the
grant date, with 25% of the options becoming exercisable at that time and
with an additional 25% of the options becoming exercisable each year
thereafter. Options granted to Mr. Bolender in 1999 become exercisable
starting one month after the grant date, with 1/12 of the options becoming
exercisable at that time and with an additional 1/12 of the options
becoming exercisable each month thereafter.

(2) Exercise price per share is equal to the closing price of the Common Stock
on the date of grant.

(3) The amounts shown are hypothetical gains based on the indicated assumed
rates of appreciation of the Common Stock compounded annually for a ten-
year period. Actual gains, if any, on stock option exercises are dependent
on the future performance of the Common Stock and overall stock market
conditions. There can be no assurance that the Common Stock will
appreciate at any particular rate or at all in future years.

Option Exercises and Holdings

The following table provides information, with respect to the named
executive officers, concerning unexercised options held as of December 31,
1999. None of the named executive officers exercised any options during the
year ended December 31, 1999.

<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at FY-End Options at FY-End(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert F. Adrion........... -- 200,000 -- $100,000
David F. Bolender.......... 106,333 26,667 $ 18,000 30,000
James P. Fee, Jr. ......... 95,321 36,346 282,054 52,500
Carl P. Hollstein, Jr. .... 45,750 35,250 52,500 52,500
Allen L. Oyler............. 34,250 35,750 33,750 52,500
James P. Welch............. 48,884 38,250 112,713 52,500
</TABLE>
--------
(1) The value of unexercised in-the-money options is based on the difference
between $9.00, which was the closing price of the Common Stock on December
31, 1999, and the applicable exercise price.

B-10
<PAGE>

Long-Term Incentive Plan Awards

The following table provides information concerning long-term incentive plan
awards during the year ended December 31, 1999.

<TABLE>
<CAPTION>
Estimated Future
Payouts(1)
Performance or -------------------
Other Period Threshold Target Maximum
Number of Until Maturation Number of Number of Number of
Name Shares or Payout Shares Shares Shares
---- --------- ---------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Robert F. Adrion...... 20,000 8/31/99-1/31/02 0 20,000 20,000
20,000 8/31/99-1/31/03 0 20,000 20,000
20,000 8/31/99-1/31/04 0 20,000 20,000
</TABLE>
--------
(1) Payouts of awards are conditioned upon achievement of specified levels of
appreciation in the market price of the Common Stock during the specified
performance period and Mr. Adrion's continued employment with the Company
at the end of the performance period. No payout will be made if these
conditions are not satisfied as of the end of the specified performance
period. The full amount of the award will be paid if these conditions are
satisfied as of the end of the specified performance period.

Employment and Severance Arrangements

Employment Agreements

The Company has entered into employment agreements (the "Employment
Agreements") with each of its executive officers. The Employment Agreements
generally are for a term ending July 1, 2001, provided that if a "Change of
Control" (as defined in the Employment Agreements and described below) occurs
before that date, the Employment Agreements will continue in effect until two
years after the Change of Control. Mr. Adrion's Employment Agreement is for a
term ending December 31, 2001, provided that thereafter the term of the
Agreement will be automatically extended for successive one-year terms unless
six months notice of nonrenewal is given by either party. Each Employment
Agreement may be terminated by either party upon seventy-five days written
notice (thirty days in the case of Mr. Adrion). If an Employment Agreement is
terminated by the Company without "Cause" (as defined in the Employment
Agreements and described below), the executive officer is entitled to receive
a lump sum payment equal to one year's base salary (or in the case of Mr.
Adrion, an amount equal to his base salary for the remaining term of the
Agreement, and, in the case of Messrs. Abbey, Roa and Tew, six months base
salary) plus an amount equal to any quarterly bonus or incentive payment and
any annual bonus or incentive payment that the executive officer would have
been entitled to had he remained employed for the remainder of the period to
which the payment related, provided that the amount of such payment shall be
pro rated based on the portion of the period actually employed. If an
Employment Agreement is terminated for Cause, all pay and benefits under the
Employment Agreement will cease as of the effective date of the termination.
In the event of the death of an executive officer, the estate of the executive
officer would receive a lump sum payment equal to six months base salary at
the then current rate. In the event of the termination of an Employment
Agreement due to an executive officer's disability, the executive officer
would continue to receive his base salary for five months after he was no
longer able to perform his duties. In the event of either death or disability,
the executive officer would also be entitled to receive a payment equal to any
incentive bonus the executive officer would have earned, pro rated based on
the portion of the period actually employed.

For a period of two years following a Change of Control, each executive
officer would have the right to terminate his employment for "Good Reason" (as
defined in the Employment Agreements and described below), and to receive upon
such termination or upon a termination by the Company other than for Cause, a
lump sum payment in an amount equal to two times his then-current base salary
(or, in the case of Messrs. Abbey, Roa and Tew, one times base salary), plus
an amount equal to the greater of (i) two times the amount the executive
officer would have received in incentive plan bonuses for the year in which
the termination occurred if the target goals had been achieved for the year
(or, in the case of Messrs. Abbey, Roa and Tew, one times the amount), or
(ii) the

B-11
<PAGE>

actual amount of the incentive bonus the executive officer would have been
entitled to receive for the year based on the Company's actual performance. In
addition, the executive officers would be entitled to the continuation of
health and insurance benefits for certain periods. Each Employment Agreement
includes a covenant not to compete that prohibits the executive officer from
owning, operating or working for any business in the United States that is
selling or developing products that compete with those of the Company for a
period of twelve months after his employment with the Company is terminated,
unless such employment was terminated by the Company without Cause. The
Employment Agreements also provide that all outstanding unvested stock options
shall immediately become fully vested upon a termination of employment
following a Change of Control.

For purposes of the Employment Agreements, a "Change of Control" includes
(i) any merger or consolidation transaction that results in the shareholders
of the Company immediately before such transaction owning less than fifty
percent of the total combined voting power of the surviving corporation in the
transaction, (ii) the acquisition by any person of twenty percent or more of
the Company's total combined voting power, (iii) the liquidation of the
Company or the sale of substantially all of its assets, or (iv) a change in
the composition of the Board of Directors during any twenty-four month period
such that the directors in office at the beginning of the period and/or their
successors who were elected by or on the recommendation of the directors in
office at the beginning of the period do not constitute at least a seventy
percent majority of the Board. For purposes of the Employment Agreements,
"Cause" means the failure to satisfactorily perform the duties assigned to the
executive officer within a certain period after notice of such failure is
given or commission of certain illegal or wrongful acts. For purposes of the
Employment Agreements, "Good Reason" includes any of the following events that
have occurred after a Change of Control and have not been corrected within
thirty days after written notice by the executive of such event: (i) a change
in executive's reporting responsibilities, titles or offices as in effect
immediately prior to the Change of Control which has the effect of materially
diminishing the executive's responsibility or authority; (ii) a reduction in
the executive's base salary as in effect before the Change of Control; (iii) a
requirement that the executive be based anywhere other than within twenty-five
miles of the executive's job location at the time of the Change of Control;
(iv) a material diminishment in the benefit plans in which the executive was
participating immediately before the Change of Control; or (v) a material
breach of the Employment Agreement by the Company.

Amended and Restated Executive Employment Agreements

In connection with the execution of the Merger Agreement, the Company, at
the request of Parent, entered into an Amended and Restated Executive
Employment Agreement (each, a "Restated Employment Agreement") with each of
its executive officers. The Restated Employment Agreements amend and restate
the Employment Agreements described above and will become effective only upon
the purchase of Shares pursuant to the Offer (the "Effective Date"), and will
be null and void if Shares are not purchased pursuant to the Offer. Each
Restated Employment Agreement specifies the executive officer's base salary
and target bonus. The Restated Employment Agreements are for a term ending two
years after the Effective Date, provided that if a "Change of Control" (as
defined in the Restated Employment Agreements and described below) occurs
before that date, the Restated Employment Agreements will continue in effect
until one year after the Change of Control. If a Restated Employment Agreement
is terminated by the Company without "Cause" (as defined in the Restated
Employment Agreements and described below) or is terminated by the executive
officer for "Good Reason" (as defined in the Restated Employment Agreements
and described below) within two years after the Effective Date, the executive
officer is entitled to receive a lump sum payment equal to one year's base
salary plus an amount equal to any annual bonus that the executive officer
would have been entitled to had he remained employed for the remainder of the
fiscal year in which the termination occurred, provided that the amount of
such payment shall be pro rated based on the portion of the period actually
employed. If a Restated Employment Agreement is terminated for Cause, all pay
and benefits under the Employment Agreement will cease as of the effective
date of the termination. In the event of the death of an executive officer,
the estate of the executive officer would receive a lump sum payment equal to
six months base salary at the then current rate. In the event of the
termination of a Restated Employment Agreement due to an executive officer's
disability, the executive officer would continue to receive his base salary
for five months after he was no longer able to perform his duties. In

B-12
<PAGE>

the event of either death or disability, the executive officer would also be
entitled to receive a payment equal to any incentive bonus the executive
officer would have earned, pro rated based on the portion of the period
actually employed.

For purposes of the Restated Employment Agreements, a "Change of Control"
includes (i) any merger or consolidation transaction to which Parent or the
Company is a party that results in the shareholders of the Company or Parent
(as the case may be) immediately before such transaction owning less than
fifty percent of the total combined voting power of the surviving corporation
in the transaction, (ii) the sale of substantially all of the assets of Parent
or the Company to any person that is not an affiliate of Parent, or (iii)
shareholder approval of the liquidation of the Company. For purposes of the
Restated Employment Agreements, "Cause" means the failure to satisfactorily
perform the duties assigned to the executive officer within a certain period
after notice of such failure is given or commission of certain illegal or
wrongful acts. For purposes of the Restated Employment Agreements, "Good
Reason" includes any of the following events that have not been corrected
within thirty days after written notice by the executive of such event: (i) a
change in executive's reporting responsibilities, titles or offices which has
the effect of materially diminishing the executive's responsibility or
authority, other than a change in administrative responsibilities attributable
to conversion of the Company from a public company to a subsidiary of a
private company as a result of the Merger; (ii) a reduction in the executive's
base salary or in the target percentage of incentive compensation to which the
executive is entitled; (iii) a material reduction in the aggregate
expenditures to provide certain employee benefits to the executive other than
reductions in cost achieved without a material reduction in benefits to the
executive; (iv) the failure of the Company to implement a new management bonus
plan and/or a new long-term incentive plan; (v) a requirement that the
executive be based anywhere other than within twenty-five miles of the
executive's job location at the time of the Change of Control; or (vi) a
material breach of the Restated Employment Agreement by the Company.

The Restated Employment Agreements provide that the consummation of the
transactions contemplated by the Merger Agreement will not constitute a
"Change of Control" for purposes of the existing Employment Agreements and
include an unconditional waiver by the executive officer of all rights granted
to the executive officer under the existing Employment Agreements that might
result from the transaction contemplated by the Merger Agreement. Mr. Adrion's
Restated Employment Agreement also states that he waives all rights granted to
him by virtue of the Company's offer of employment letter dated June 16, 1999.
Such rights include his right to receive certain restricted stock awards in
the future. See "Long-Term Incentive Plan Awards" above. In consideration of
this waiver of rights, Mr. Adrion and Parent entered into an agreement dated
May 24, 2000 pursuant to which Mr. Adrion will receive certain additional
grants under the long-term incentive plan to be established by Parent. A copy
of each Restated Employment Agreement is filed as an exhibit to the
Schedule 14D-9 and is incorporated herein by reference.

Retention Bonus Agreements

B-13
<PAGE>

Retention Bonus Agreements will become effective only upon the purchase of
Shares pursuant to the Offer, and will be null and void if Shares are not
purchased pursuant to the Offer. Each Retention Bonus Agreement provides for
the payment of a bonus in an amount equal to a specified percentage of the
executive officer's base salary on each of the first and second annual
anniversaries of the effective date of the Retention Bonus Agreement, provided
that the executive officer is still employed by the Company on the payment
date. The Retention Bonus Agreements permit the executive officers to elect an
alternative payment methodology that provides bonus payments on the sixth
month and second annual anniversaries of the effective date of the Retention
Bonus Agreement under the same conditions described above. A copy of each
Retention Bonus Agreement is filed as an exhibit to the Schedule 14D-9 and is
incorporated herein by reference.

Compensation Committee Report on Executive Compensation

Under rules established by the Commission, the Company is required to
provide certain data and information in regard to the compensation and
benefits provided to the Company's Chief Executive Officer and the four other
most highly compensated executive officers. In fulfillment of this
requirement, the Compensation Committee has prepared the following report for
inclusion in its most recent Proxy Statement.

Compensation Philosophy. The Compensation Committee of the Company Board,
which is responsible for reviewing and evaluating the compensation of the
Company's executive officers, approves and recommends to the Company Board
compensation and award levels for executive officers of the Company. With
regard to compensation actions affecting the Chief Executive Officer, all of
the non-employee members of the Company Board act as the approving body.

The executive compensation program of the Company has been designed to:

. Support a pay for performance policy that is tied to corporate and
individual performance;

. Motivate executive officers to achieve strategic business initiatives
and reward them for their achievement;

. Provide compensation opportunities which are comparable to those offered
by similarly-sized medical and technology-based companies;

. Align the interest of executives with the long-term interest of
shareholders through award opportunities that can result in ownership of
Common Stock.

Currently, the executive compensation program is comprised of a base salary,
cash bonus opportunities and long-term incentive opportunities in the form of
stock options, along with benefits offered to all employees of the Company. As
an executive's level of responsibility increases, a greater portion of his or
her potential total compensation opportunity is based on performance
incentives and less on salary and employee benefits, causing greater
variability in the individual's total compensation level from year-to-year.

Base Salaries. The base salaries of the Company's executive officers for
1999 were generally established effective May 22, 1999. In establishing those
salaries, the Compensation Committee considered information about salaries
paid by companies of comparable size in the electronics and medical
electronics industry, individual performance, position, and internal
comparability considerations. While all of these factors were considered, the
Compensation Committee did not assign specific weights to any of these
factors.

Bonus Plan. The bonus program for officers is designed to recognize
significant individual contributions as well as Company performance. Actual
bonus payments to executive officers in 1999 ranged from twenty-eight percent
to sixty-one percent of base salary.

Stock Plans. The long-term, performance-based compensation of executive
officers takes the form of option awards under the Company's 1992 and 1998
stock incentive plans (the "Stock Option Plans"), which are designed to align
a significant portion of the executive compensation program with long-term
shareholder

B-14
<PAGE>

interests. The Stock Option Plans permit the granting of several different
types of stock-based awards. The Compensation Committee believes that equity-
based compensation ensures that the Company's executive officers have a
continuing stake in the long-term success of the Company. All options granted
by the Company have been granted with an exercise price equal to the market
price of the Common Stock on the date of grant and, accordingly, will only
have value if the Company's stock price increases. In granting options under
the Stock Option Plans, the Compensation Committee generally takes into
account each executive's responsibilities, relative position in the Company
and past grants.

Chief Executive Officer Compensation. Effective August 1, 1999 Robert F.
Adrion was hired as the Company's President and Chief Executive Officer. Mr.
Adrion's base annual salary was fixed at $300,000 with an annual cash
incentive opportunity of up to sixty percent of base salary based on
achievement of target goals established each year by the Compensation
Committee. Mr. Adrion was also awarded options to purchase 200,000 shares of
Common Stock at an exercise price equal to fair market value of the Common
Stock on the date of grant which vest annually over four years. Mr. Adrion was
also awarded the right to receive 20,000 shares of Common Stock on each of
January 31, 2002, 2003 and 2004 conditioned upon achievement of specified
levels of appreciation in the market price of the Common Stock during the
periods from August 1, 1999 to the specified dates and Mr. Adrion's continued
employment with the Company on the specified dates. Mr. Adrion's compensation
package was determined by the Compensation Committee based on Mr. Adrion's
previous experience, the results of surveys and analysis of the compensation
levels of other similar companies and negotiations with Mr. Adrion. Mr. Adrion
received a cash incentive payment of $70,000 for 1999 based on the achievement
of the target goals established by the Compensation Committee.

Mr. Bolender served as Chief Executive Officer through July 1999. In lieu of
cash compensation, Mr. Bolender received a grant of 10,000 shares of Common
Stock and was awarded an option to purchase 40,000 shares of Common Stock at
an exercise price equal to the fair market value of the Common Stock on the
date of grant vesting monthly over a twelve-month period.

Compensation Committee

Curtis M. Stevens
Steven E. Wynne

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company's directors and
officers, and persons who own more than ten percent of a registered class of
the Company's equity securities, to file initial reports of ownership and
reports of changes in ownership with the Commission. Such persons also are
required to furnish the Company with copies of all Section 16(a) reports they
file.

Based solely on its review of the copies of such reports received by it with
respect to fiscal 1999, or written representations from certain reporting
persons, the Company believes that all filing requirements applicable to its
directors, officers and persons who own more than ten percent of a registered
class of the Company's equity securities have been complied with for fiscal
1999.

B-15
<PAGE>

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit No. Description
------------ -----------
<C> <S>
(a)(1) Letter to Shareholders dated June 7, 2000 from Robert F.
Adrion*

(a)(2) Opinion of SG Cowen Securities Corporation dated May 24, 2000
(included as, and incorporated by reference to, Annex A
attached hereto)*

(a)(3) Joint Press Release issued by Protocol Systems, Inc. and Welch
Allyn, Inc. dated May 25, 2000 (incorporated by reference to
the Schedule 14D-9 filed with the Commission by the Company on
May 25, 2000)

(a)(4) The Offer to Purchase dated June 7, 2000 (incorporated by
reference to Exhibit (a)(1) to the Schedule TO of Welch Allyn,
Inc. and Welch Allyn Acquisition Corporation filed with the
Commission on June 7, 2000)

(a)(5) Letter of Transmittal (incorporated by reference to Exhibit
(a)(2) to the Schedule TO of Welch Allyn, Inc. and Welch Allyn
Acquisition Corporation filed with the Commission on June 7,
2000)

(a)(6) The Information Statement of the Company dated June 7, 2000
(included as, and incorporated by reference to, Annex B
attached hereto)*

(e)(1) Agreement and Plan of Merger, dated as of May 24, 2000, by and
among Welch Allyn, Inc., Welch Allyn Acquisition Corporation
and Protocol Systems, Inc. (incorporated by reference to
Exhibit 2.1 to the Current Report on Form 8-K filed with the
Commission by the Company on May 25, 2000)

(e)(2) Confidentiality Agreement, dated as of March 9, 2000, between
Welch Allyn, Inc. and Protocol Systems, Inc.

(e)(3) Amended and Restated Executive Employment Agreement between
Protocol Systems, Inc. and Edward M. Kolasinski dated May 23,
2000

(e)(4) Amended and Restated Executive Employment Agreement between
Protocol Systems, Inc. and Robert F. Adrion dated May 23, 2000

(e)(5) Executive Employment Agreement between Protocol Systems, Inc.
and Ann P. Demaree dated May 23, 2000

(e)(6) Amended and Restated Executive Employment Agreement between
Protocol Systems, Inc. and James P. Fee dated May 23, 2000

(e)(7) Amended and Restated Executive Employment Agreement between
Protocol Systems, Inc. and Donald M. Abbey dated May 23, 2000

(e)(8) Amended and Restated Executive Employment Agreement between
Protocol Systems, Inc. and James P. Welch dated May 23, 2000

(e)(9) Amended and Restated Executive Employment Agreement between
Protocol Systems, Inc. and Richard L. Roa dated May 23, 2000

(e)(10) Amended and Restated Executive Employment Agreement between
Protocol Systems, Inc. and Chris E. Tew dated May 23, 2000

(e)(11) Amended and Restated Executive Employment Agreement between
Protocol Systems, Inc. and Allen L. Oyler dated May 23, 2000

(e)(12) Retention Bonus Agreement between Protocol Systems, Inc. and
James P. Welch dated May 23, 2000

(e)(13) Retention Bonus Agreement between Protocol Systems, Inc. and
Robert F. Adrion dated May 23, 2000

</TABLE>

<PAGE>

<TABLE>
<C> <S>
(e)(14) Retention Bonus Agreement between Protocol Systems, Inc. and Ann P.
Demaree dated May 23, 2000

(e)(15) Retention Bonus Agreement between Protocol Systems, Inc. and James
P. Fee dated May 23, 2000

(e)(16) Retention Bonus Agreement between Protocol Systems, Inc. and Edward
M. Kolasinski dated May 23, 2000

(e)(17) Retention Bonus Agreement between Protocol Systems, Inc. and Allen
L. Oyler dated May 23, 2000

(e)(18) Retention Bonus Agreement between Protocol Systems, Inc. and Richard
L. Roa dated May 23, 2000

(e)(19) Retention Bonus Agreement between Protocol Systems, Inc. and Chris
E. Tew dated May 23, 2000

(e)(20) Retention Bonus Agreement between Protocol Systems, Inc. and Donald
M. Abbey dated May 23, 2000

(e)(21) Supplement to Amended and Restated Executive Employment Agreement
between Protocol Systems, Inc. and Robert F. Adrion dated May 24,
2000

(e)(22) First Amendment to Rights Agreement, dated as of May 24, 2000,
between ChaseMellon Shareholder Services, L.L.C. and Protocol
Systems, Inc.

</TABLE>
--------
*Copy attached to, or enclosed with, copies of this Schedule 14D-9 mailed to
shareholders.