AVECOR CARDIOVASCULAR INC, 10-Q, 1998-08-13

AVECOR CARDIOVASCULAR INC
10-Q, 1998-08-13
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended JUNE 30, 1998
-----------------------------------------------

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

For the transition period from to
-------------------- --------------------

Commission File Number: 0-21330
-------------------------------------------------------

AVECOR CARDIOVASCULAR INC.
----------------------------------
(Exact name of registrant as specified in its charter)

MINNESOTA 41-1695729
- ------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

7611 NORTHLAND DRIVE, MINNEAPOLIS, MINNESOTA 55428
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

(612) 391-9000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

[ X ] Yes [ ] No

As of August 3, 1998, there were 8,044,475 shares of the registrant's
$.01 par value Common Stock outstanding.

<PAGE>

INDEX

Part I. FINANCIAL INFORMATION Page(s)
-------
<S> <C> <C>

Item 1. Financial Statements

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

Consolidated Statements of Operations for the three and six months
ended June 30, 1998 and 1997 (Unaudited) 4

Consolidated Statements of Cash Flows for six months ended
June 30, 1998 and 1997 (Unaudited) 5

Notes to Consolidated Financial Statements (Unaudited) 6 - 8

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9 - 16

Item 3. Quantitative and Qualitative Disclosures About Market Risk 16

Part II. OTHER INFORMATION

Item 1. Legal Proceedings. 17

Item 2. Changes in Securities and Use of Proceeds. 17

Item 3. Defaults Upon Senior Securities. 17

Item 4. Submission of Matters to a Vote of Security Holders. 17 - 18

Item 5. Other Information. 18 - 19

Item 6. Exhibits and Reports on Form 8-K. 19

SIGNATURES 20

EXHIBIT INDEX 21

</TABLE>

<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AVECOR CARDIOVASCULAR INC.

CONSOLIDATED BALANCE SHEETS
------------------------

ASSETS June 30, December 31,
1998 1997
-------------------- -------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $3,837,000 $1,215,000
Short-term investments 1,966,000 3,727,000
Accounts receivable, net 9,443,000 8,277,000
Inventories 10,837,000 10,634,000
Deferred taxes 1,315,000 1,315,000
Other current assets 412,000 330,000
-------------------- -------------------
Total current assets 27,810,000 25,498,000

Property, plant and equipment, net 17,658,000 16,689,000
Other assets 581,000 572,000
-------------------- -------------------

Total assets $46,049,000 $42,759,000
-------------------- -------------------
-------------------- -------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $3,845,000 $1,978,000
Accrued expenses 3,733,000 3,058,000
Current portion of long-term debt 258,000 258,000
-------------------- -------------------
Total current liabilities 7,836,000 5,294,000

Deferred grant 136,000 153,000
Long-term debt 4,632,000 4,694,000

Shareholders' equity:
Serial preferred stock, par value $.01 per share;
authorized 2,000,000 shares; none
issued
Common stock, par value $.01 per
share; authorized 20,000,000 shares;
issued and outstanding shares 8,042,000
and 8,021,000 shares at June 30, 1998 and
December 31, 1997, respectively 80,000 80,000
Additional paid-in capital 30,622,000 30,482,000
Retained earnings 2,566,000 1,936,000
Cumulative translation adjustments 177,000 120,000
-------------------- -------------------
Total shareholders' equity 33,445,000 32,618,000
-------------------- -------------------

Total liabilities and shareholders' equity $46,049,000 $42,759,000
-------------------- -------------------
-------------------- -------------------
</TABLE>

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

<PAGE>

AVECOR CARDIOVASCULAR INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

Three months ended Six months ended
June 30, June 30,
--------------------------------------- --------------------------------------
1998 1997 1998 1997
------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>

Net sales $13,565,000 $11,961,000 $26,021,000 $24,004,000
Cost of sales 7,963,000 6,900,000 15,437,000 13,960,000
------------------ ------------------ ------------------ -----------------

Gross profit 5,602,000 5,061,000 10,584,000 10,044,000

Operating expenses:
Selling, general and
administrative 4,075,000 3,482,000 7,883,000 6,832,000
Research and development 895,000 974,000 1,726,000 2,076,000
------------------ ------------------ ------------------ -----------------

Operating income 632,000 605,000 975,000 1,136,000

Interest income 78,000 129,000 164,000 273,000
Interest expense (99,000) (105,000) (199,000) (176,000)
------------------ ------------------ ------------------ -----------------

Income before income taxes 611,000 629,000 940,000 1,233,000
Income tax provision 201,000 226,000 310,000 443,000
------------------ ------------------ ------------------ -----------------

Net income $410,000 $403,000 $630,000 $790,000
------------------ ------------------ ------------------ -----------------
------------------ ------------------ ------------------ -----------------

Earnings per share:
Basic $0.05 $0.05 $0.08 $0.10
------------------ ------------------ ------------------ -----------------
------------------ ------------------ ------------------ -----------------

Diluted $0.05 $0.05 $0.08 $0.10
------------------ ------------------ ------------------ -----------------
------------------ ------------------ ------------------ -----------------

Weighted average common shares
outstanding 8,032,000 7,914,000 8,027,000 7,880,000

Common equivalents:
Options 2,000 63,000 2,000 97,000
Warrants - 2,000 - 2,000
------------------ ------------------ ------------------ -----------------

Weighted average common and
common equivalents 8,034,000 7,979,000 8,029,000 7,979,000
------------------ ------------------ ------------------ -----------------
------------------ ------------------ ------------------ -----------------

</TABLE>

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

<PAGE>

AVECOR CARDIOVASCULAR INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
For the six months ended June 30,
------------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>

Cash flows from operating activities:
Net income $630,000 $790,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,191,000 737,000
Accretion of discount on investments (83,000) (170,000)
Changes in operating assets and liabilities:
Accounts receivable (1,118,000) (1,524,000)
Inventories (197,000) (782,000)
Other current assets (80,000) 277,000
Accounts payable 1,845,000 758,000
Accrued expenses 660,000 393,000
------------------- -------------------
Net cash provided by operating activities 2,848,000 479,000
------------------- -------------------

Cash flows from investing activities:
Purchase of property, plant and equipment (2,090,000) (9,911,000)
Purchase of investments - (8,768,000)
Proceeds upon sale or maturity of short-term investments 1,844,000 5,140,000
Cash and investments restricted as to use - 3,450,000
Increase in other assets (11,000) (154,000)
------------------- -------------------
Net cash used in investing activities (257,000) (10,243,000)
------------------- -------------------

Cash flows from financing activities:
Net proceeds from sales of common stock 140,000 130,000
Net proceeds from options exercised - 582,000
Borrowings on long-term debt - 5,167,000
Principal payments on long-term debt (129,000) (86,000)
------------------- -------------------
Net cash provided by financing activities 11,000 5,793,000
------------------- -------------------

Effect of exchange rates on cash 20,000 (35,000)
------------------- -------------------

Net increase (decrease) in cash and cash equivalents 2,622,000 (4,006,000)

Cash and cash equivalents at beginning of period 1,215,000 6,114,000
------------------- -------------------

Cash and cash equivalents at end of period $3,837,000 $2,108,000
------------------- -------------------
------------------- -------------------

Significant non-cash investing and financing transactions:
Acquistion of equipment through capital leases $67,000 -
------------------- -------------------
------------------- -------------------

Use of restricted funds for purchase of the U.S. facility - $1,000,000
------------------- -------------------
------------------- -------------------
</TABLE>

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

5
<PAGE>

AVECOR CARDIOVASCULAR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

--------------------

1. BASIS OF PRESENTATION

The consolidated financial statements included in this Form 10-Q have been
prepared by AVECOR Cardiovascular Inc. (the Company), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed, or omitted, pursuant to these rules and regulations. The
year-end balance sheet was derived from audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles. These unaudited consolidated interim financial statements should be
read in conjunction with the financial statements and related notes included in
the Company's 1997 Annual Report on Form 10-K as filed with the SEC.

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

2. ORGANIZATION

The Company was incorporated on December 13, 1990. The Company designs,
develops, manufactures and markets specialty medical devices for heart/lung
bypass surgery and long-term respiratory support.

The consolidated financial statements include the accounts of AVECOR
Cardiovascular Inc. and its wholly-owned subsidiaries, AVECOR Cardiovascular
Ltd. and AVECOR Foreign Sales Corporation after elimination of all significant
intercompany transactions and accounts.

<PAGE>

3. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------------- --------------------
(Unaudited)
<S> <C> <C>
Raw materials $3,735,000 $3,758,000
Work-in-process 2,121,000 2,189,000
Finished goods 4,981,000 4,687,000
-------------------- --------------------

$10,837,000 $10,634,000
-------------------- --------------------
-------------------- --------------------
</TABLE>

4. INDUSTRY SEGMENT INFORMATION

The Company distributes its products through its direct sales force and
independent sales representatives in the United States, Canada, the United
Kingdom and France. Additionally, the Company distributes its products through
foreign independent distributors who then market the products directly to
medical institutions. No one independent distributor or other customer accounted
for 10% or more of the Company's net sales for the six months ended June 30,
1998 or 1997.

Total export sales from the U.S. to unaffiliated entities (primarily to
Europe and payable in U.S. dollars) were $1,960,000 and $3,338,000 for the three
and six month periods ended June 30, 1998, respectively, compared to $1,248,000
and $2,563,000 for the three and six month periods ended June 30, 1997,
respectively. Sales to customers located outside of the United States were
approximately 41% and 40% of net sales for the three and six month periods ended
June 30, 1998, respectively, compared to 41% for the three and six month periods
ended June 30, 1997.

At June 30, 1998 and December 31, 1997, consolidated accounts receivable
included $4,943,000 and $4,366,000, respectively, due from customers located
outside of the U.S.

In June 1997, the Financial Accounting Standards Board issued Statement
131, "Disclosures About Segments of an Enterprise and Related Information," a
new standard of reporting information about operating or business segments in
financial statements. The new standard will be effective for the Company's
annual financial statements in 1998. Although the Company has not specifically
evaluated what impact, if any, this new standard will have on the Company's
current reporting of operating and business segments, the Company believes it
will continue reporting as one operating and business segment.

5. COMPREHENSIVE INCOME

In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." The standard
requires the display and reporting of comprehensive income, which includes all
changes in shareholders' equity with the

<PAGE>

exception of additional investments by shareholders or distributions to
shareholders. Comprehensive income for the Company includes net income and
foreign currency translation which is charged or credited to the cumulative
translation account within shareholders' equity. Comprehensive income for the
three and six months ended June 30, 1998 and 1997 and the year ended December
31, 1997, was as follows:

Three Months Ended Six Months Ended, Year Ended
June 30, June 30, December 31,
1998 1997 1998 1997 1997
------------- ------------ ------------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Net income $410,000 $403,000 $630,000 $790,000 $1,327,000

Changes in cumulative
translation (9,000) 74,000 58,000 (90,000) (107,000)
------------- ------------ ------------- ------------- ------------------

Comprehensive income $401,000 $477,000 $688,000 $700,000 $1,220,000
------------- ------------ ------------- ------------- ------------------
------------- ------------ ------------- ------------- ------------------

</TABLE>

6. PATENT MATTERS

In March 1997, the Company filed suit in U.S. District Court for the
District of Minnesota, seeking to invalidate a newly issued U.S. patent held by
a competing manufacturer of blood oxygenators and other medical devices, and
requesting a determination that the Company's Affinity oxygenator does not
infringe the competitor's patent. The Company filed suit in response to a
December 1996 letter from the competitor, alleging that the Affinity oxygenator
infringes certain claims under the competitor's patent, and requesting
discussion regarding a possible license agreement. The Company reviewed the
subject patent and concluded, based on an opinion from its patent counsel, that
none of the claims in the patent are infringed by the Affinity oxygenator, and
that the patent is, in any event, invalid. On October 6, 1997, the Magistrate
Judge of the U.S. District Court vacated a previous order and granted a stay in
the proceedings, including the suspension of discovery, pending the outcome of
the competitor's request for re-issuance of the aforementioned patent. The
expense and effort potentially required to bring this action, as well as the
outcome of any counterclaim successfully brought against the Company by the
competitor, could have a material adverse effect on the Company's business,
financial condition and results of operations. See Part II, Item 1, "Legal
Proceedings."

7. ACQUISITION OF THE COMPANY

On July 12, 1998, Medtronic, Inc. ("Medtronic") and the Company entered
into an agreement under which Medtronic will acquire the Company in a
transaction valued at approximately $91 million. The transaction calls for
the Company's shareholders to receive $11.125 in Medtronic stock for each
share of the Company's stock they hold at the transaction close date. In
addition to shareholder approval, the transaction is subject to customary
conditions including Hart-Scott-Rodino clearance. The companies expect
completion of the transaction in late 1998. See Part II, Item 5, "Other
Information."

<PAGE>

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

The following is a discussion of the results of operations and financial
condition for the three and six month periods ended June 30, 1998 compared with
the three and six month periods ended June 30, 1997 and should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto.

OVERVIEW

AVECOR Cardiovascular Inc. (the "Company") develops, manufactures and
markets specialty medical devices for heart/lung bypass surgery and long-term
respiratory support. The Company was incorporated on December 13, 1990, and in
June 1991, acquired the business and assets and assumed certain liabilities of
the surgical division of SCIMED Life Systems, Inc. (the "Predecessor Business").
On December 1, 1992, the Company acquired AVECOR Cardiovascular Ltd. (formerly
Cardio Med Ltd.), which previously had been a distributor for the Company in the
United Kingdom. In October 1995, the Company opened a sales office in France
which is organized as a wholly-owned subsidiary of AVECOR Cardiovascular Ltd.

The assets acquired by the Company from the Predecessor Business included
the Company's line of solid silicone membrane oxygenators. Since that time, the
Company has engaged in extensive product development, resulting in the
introduction and receipt of regulatory approval from the U.S. Food and Drug
Administration (the "FDA") for the following proprietary products:

<TABLE>
<CAPTION>
PRODUCT APPROVAL DATE
---------------------------------------------------------------------- ---------------------
<S> <C>
MYOtherm cardioplegia delivery system................................ October 1991

Signature custom tubing packs........................................ July 1993

Affinity oxygenator.................................................. November 1993

Affinity blood reservoirs............................................ July 1994

Affinity arterial filter............................................. October 1995

MYOtherm XP (improved cardioplegia delivery system).................. July 1997

Affinity blood pump.................................................. August 1997

Affinity oxygenator with Trillium bio-passive surface................ February 1998

</TABLE>

ACQUISITION OF THE COMPANY

<PAGE>

RESULTS OF OPERATIONS

NET SALES

THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997

Net sales increased 13% to $13,565,000 for the three months ended June 30,
1998 from $11,961,000 for the three months ended June 30, 1997. This increase
was primarily the result of a higher volume of product shipments of the
Company's Affinity line, Signature custom tubing pack line and the silicone
membrane oxygenator line. Sales growth in the Affinity line was positively
influenced by revenues from the Affinity blood pump. U.S. marketing approval for
the blood pump was received from the FDA in August 1997. Overall, average prices
of product shipments declined slightly when compared to the corresponding period
in 1997, principally due to competitive pressures.

Sales from the Affinity, Signature custom tubing pack and silicone membrane
oxygenator lines increased approximately $974,000 (14.5%), $319,000 (12.7%) and
$234,000 (13.6%), respectively, during the three months ended June 30, 1998 as
compared to the three months ended June 30, 1997.

During the third quarter of 1997, the Company terminated agreements with
its last remaining United States distributor and its only Canadian
distributor. These markets are now being served by the Company's direct sales
force. Sales in the territories formerly represented by these distributors
increased approximately $650,000 in the three month period ended June 30,
1998 as compared to the corresponding period in 1997. The Company cannot be
certain whether revenues in these territories will be maintained, improve or
decline.

Sales to customers located outside of the United States were approximately
41% of net sales for each of the three month periods ended June 30, 1998 and
1997.

The Company has continued to experience decreased sales to contract
perfusion groups controlled by certain of its competitors. Sales to contract
perfusion groups controlled by one of the Company's competitors decreased
$235,000 to $117,000 for the three months ended June 30, 1998 from $352,000 for
the three months ended June 30, 1997. The Company believes that control of
contract perfusion groups by its competitors will continue to have a negative
impact on the Company's ability to market its products to such groups or to
hospitals or other medical providers that contract with competitor-controlled
groups for perfusion services, and could have a material adverse effect on the
Company's business, financial condition and results of operation. This
forward-looking statement is subject to the degree of control exerted by the
Company's competitors with respect to purchasing decisions made by controlled
groups of perfusionists, the extent of future acquisitions of contract perfusion
groups by the Company's competitors, the breadth of the Company's product
offerings relative to those competitors controlling contract perfusion groups,
and the degree to which the Company's research and development and marketing
efforts result in the successful commercialization of products with enhanced or
superior performance characteristics.

<PAGE>

SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997

Net sales increased 8% to $26,021,000 for the six months ended June 30,
1998 from $24,004,000 for the six months ended June 30, 1997. This increase was
primarily the result of a higher volume of product shipments of the Company's
Signature custom tubing pack line, Affinity line and the Myotherm cardioplegia
line. The Company received FDA marketing approval for a new Affinity blood pump
in August 1997 and the Myotherm XP cardioplegia delivery system in July 1997.
These products positively influenced the comparative sales growth. Overall,
average prices of product shipments declined slightly when compared to the
corresponding period in 1997, principally due to competitive pressures.

Sales from the Signature custom tubing pack, Affinity and Myotherm
cardioplegia lines increased approximately $789,000 (16.5%), $784,000 (5.8%) and
$269,000 (13.8%), respectively, during the six months ended June 30, 1998 as
compared to the corresponding period in 1997.

As noted above, the Company terminated agreements with its last
remaining United States distributor and its only Canadian distributor during
the third quarter of 1997 and these markets are now being served by the
Company's direct sales force. Sales in the territories formerly represented
by these distributors increased approximately $1,200,000 in the six months
ended June 30, 1998 as compared to the six months ended June 30, 1997. The
Company cannot be certain whether revenues in these territories will be
maintained, improve or decline.

Sales to customers located outside of the United States were approximately
40% and 41% of net sales for the six month periods ended June 30, 1998 and 1997,
respectively.

Sales to contract perfusion groups controlled by one of the Company's
competitors decreased $458,000 to $258,000 for the six months ended June 30,
1998 from $716,000 for the six months ended June 30, 1997.

COST OF SALES / GROSS PROFIT

Gross profit as a percentage of net sales decreased 1.0% to 41.3% for
the three months ended June 30, 1998 from 42.3% for the three months ended
June 30, 1997. Similarly, gross profit as a percentage of net sales decreased
1.1% to 40.7% for the six months ended June 30, 1998 from 41.8% for the six
months ended June 30, 1997. The gross profit percentage for the three and six
month periods ended June 30, 1998 was unfavorably impacted by significant
increases in sales of the Company's lower-margin Signature custom tubing pack
line as well as competitive pricing pressures in the marketplace. Gross
margins during the six month period ended June 30, 1998 were also negatively
impacted by the lower production volumes experienced late in the fourth
quarter of 1997 which continued into the first quarter of 1998. The mix of
products sold in any period will influence the cost of sales and gross profit
for the period.

Affinity oxygenator product costs continued to decline due to efficiency
and material cost improvements, although these improvements were largely offset
by an ongoing decrease in average selling prices.

<PAGE>

The Company's future gross profit margin percentages will be influenced by
the ongoing pressures of the competitive pricing environment, changes in the
sales mix, the required levels of production, new product introductions and the
extent of further product cost improvements through increased manufacturing
efficiencies and reduced material costs, if any. Given the uncertainty
associated with new product introductions, the ultimate realization of any such
product cost improvements and the continuing price pressures characteristic of
the Company's markets, the Company cannot be certain if its gross profit margin
will be maintained, improve or decline.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses increased 17% to $4,075,000
for the three months ended June 30, 1998 from $3,482,000 for the three months
ended June 30, 1997. Selling, general and administrative expenses increased 15%
to $7,883,000 for the six months ended June 30, 1998 from $6,832,000 for the six
months ended June 30, 1997. These increases are primarily attributed to costs
associated with the continuing development of a direct sales force in certain of
the Company's territories formerly served by distributors and independent sales
representatives, marketing costs incurred for the introduction of new products,
including the Affinity blood pump, and increased seasonal trade show costs.
Various costs associated with the acquisition of the Company also contributed to
the incremental increase in selling, general and administrative expenses during
the three and six month periods ended June 30, 1998 as compared to the
corresponding periods in 1997. As a percent of sales, selling, general and
administrative expenses increased to 30.0% and 30.3% for the three and six month
periods ended June 30, 1998, respectively, from 29.1% and 28.5% for the three
and six month periods ended June 30, 1997, respectively.

Without considering the impact of the acquisition of the Company,
management anticipates that selling, general and administrative expenses for
1998 will be higher than 1997 and will approximate 1997 levels as a percentage
of sales. These forward-looking statements will be influenced by revenue
increases achieved by the Company, its ability to attract and retain qualified
sales personnel as the Company continues to develop its direct sales force, and
the timing and extent of promotional activities associated with the Affinity
oxygenator with Trillium bio-passive surface, the new oxygen saturation/hemocrit
monitor and other new product introductions, if any.

RESEARCH AND DEVELOPMENT

Research and development expenses decreased 8% to $895,000 from $974,000
for the three month period ended June 30, 1998 and decreased 17% to $1,726,000
from $2,076,000 for the six month periods ended June 30, 1997. This decreased
spending is a result of the transition from the completion or near completion of
major projects including the Affinity blood pump, Myotherm XP and the Affinity
oxygenator with Trillium bio-passive surface to a new generation of products
including the new oxygen saturation/hematocrit monitor.

Without considering the impact of the acquisition of the Company,
management anticipates that research and development expenses for 1998 will
approximate 1997 levels, as the Company continues to expand and improve its
proprietary line of disposable medical devices. This forward-looking projection
is dependent upon the extent and timing of new product

<PAGE>

development and the impact of the regulatory process in obtaining marketing
clearance for new products, including the new oxygen saturation/hematocrit
device which was submitted for approval to the FDA near the end of the second
quarter of 1998, and the extent of expenses related to research studies
commenced in an attempt to prove the clinical efficacy and, thus, market
advantage of the Trillium coating. The need or desire to modify the Company's
existing products could also influence the level of research and development
expenses. There can be no assurance, however, that the Company's research and
development efforts will result in any additional regulatory submissions to
the FDA or will result in any commercially successful products. The
forward-looking statements regarding anticipated regulatory submissions
contained in this paragraph will be impacted by the results of the Company's
development efforts, the availability of any required clinical data, any
changes in the regulatory scheme for such products, and the Company's
assessment of the cost and anticipated benefit of such submissions.

INTEREST INCOME AND EXPENSE

Interest income decreased to $78,000 for the three months ended June 30,
1998 from $129,000 for the three months ended June 30, 1997. Similarly, interest
income decreased to $164,000 for the six months ended June 30, 1998 from
$273,000 for the six months ended June 30, 1997. This decrease in interest
income is primarily due to the use of cash and cash equivalents and investments
for the purchase of manufacturing molds and equipment and additional inventories
needed to support the Company's new products and revenue growth. At June 30,
1998, the majority of the Company's cash and cash equivalents were invested with
two investment portfolio managers who invested in bank certificates of deposit,
U.S. government securities, agency paper, money markets, commercial paper and
corporate obligations.

Interest expense for the three and six month periods ended June 30, 1998
was $99,000 and $199,000, respectively, compared to $105,000 and $176,000 for
the three and six month periods ended June 30, 1997, respectively. The interest
expense was exclusively due to the mortgage on the Company's U.S. facility. The
closing on the facility purchase occurred in late January 1997.

INCOME TAX PROVISION

For the three and six month periods ended June 30, 1998 tax provisions of
$201,000 and $310,000 were recorded compared to tax provisions of $226,000 and
$443,000 for three and six month periods ended June 30, 1997. The tax provisions
recorded correspond to the pretax income for those respective periods. These
provisions vary from the statutory U.S. federal corporate rate primarily due to
losses incurred by the Company's French subsidiary for which no tax benefit has
been recognized because of uncertainty of realization, partially offset by the
generation of research and experimentation credits.

NET INCOME

Net income was $410,000 or $.05 per share, on a diluted basis, and $630,000
or $.08 per share, on a diluted basis, for the three and six month periods ended
June 30, 1998, respectively, compared to $403,000 or $.05 per share, on a
diluted basis, and $790,000 or $.10 per share, on a diluted basis, for the three
and six month periods ended June 30, 1997, respectively.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

For the six months ended June 30, 1998, the Company's operating activities
provided net cash of $2,848,000 compared to $479,000 provided by operating
activities for the same period in 1997. Net income after adjustments for
depreciation and amortization was $294,000 greater in the six months ended June
30, 1998 as compared to the same period in 1997. The net change of approximately
$2,369,000 is primarily the result of increased accounts payable balances
principally due to the timing of check runs and increased accrued expenses, and
smaller increases in inventories and accounts receivable when compared to the
six months ended June 30, 1997. These net sources of cash were partially offset
by the use of cash for increased other current assets during the six months
ended June 30, 1998.

Cash expenditures for capital additions totaled $2,090,000 for the six
months ended June 30, 1998 compared to $1,911,000 for six months ended June 30,
1997 when excluding the 1997 cash expenditures for the Company's U.S. facility
and related furniture, fixtures and equipment. These expenditures were primarily
related to equipment, molds and tooling necessary to further production,
increase production efficiencies, improve quality and reduce raw material costs
of the Affinity blood pump, Myotherm XP and the Affinity oxygenator and related
blood reservoirs. The investment in equipment for the six months ended June 30,
1998 includes $300,000 related to the Affinity blood pump. This pump equipment
is placed with customers in exchange for a long-term commitment to purchase
disposable products from the Company.

Without considering the impact of the acquisition of the Company,
management anticipates capital expenditures for 1998 will be approximately
$4,000,000. This estimate includes additional equipment, molds and tooling for
the new oxygen saturation/hematocrit device, Affinity blood pump, Myotherm XP,
and for furthering production and related efficiencies of the Affinity
oxygenator line.

The Company believes that its existing cash and cash equivalents and
investments as well as anticipated cash generated from operations will be
sufficient to satisfy the Company's cash requirements for the foreseeable
future.

The foregoing forward-looking statements relating to the amount of capital
expenditures and ultimate cash usage are dependent on the progress of the
Company's product development efforts, the outcome of certain patent matters
(see Note 6), the timing of the receipt of FDA marketing clearances for any
future products and the investment made in opportunities to further existing
products' production related to production efficiencies and quality, and reduced
cost.

FOREIGN CURRENCY TRANSACTIONS

Transactions by the Company's international subsidiaries are negotiated,
invoiced and paid in various foreign currencies, primarily pounds sterling, and
U.S. dollars. Accordingly, the Company is currently subject to risks associated
with fluctuations in exchange rates between the various currencies.

Substantially all of the Company's other international transactions are
denominated in U.S. dollars. Fluctuations in currency exchange rates in other
countries may therefore reduce the

<PAGE>

demand for the Company's products by increasing the price of the Company's
products in the currency of the countries in which the products are sold.

YEAR 2000 ISSUES

Computer programs have historically been written to abbreviate dates by
using two digits instead of four digits to identify a particular year. The
so-called "Year 2000" problem or "millennium bug" is the inability of computer
software or hardware to recognize or properly process dates ending in or after
"00." As the year 2000 approaches, significant attention is being focused on
updating or replacing such software and hardware in order to avoid system
failures, miscalculations or business interruptions that might otherwise result.

The Company has reviewed its internal information systems and believes that
the costs and effort to address the Year 2000 problem will not be material to
its business, financial condition or results of operations, and, to the extent
necessary, may be resolved through replacement and upgrades to the software it
licenses from third parties. The Company has also reviewed its OnCourse software
product, the software embedded in its Affinity blood pump console and the
software for its saturation/hematocrit monitor under development and believes
them to be Year 2000 compliant. However, the Year 2000 problem may also
adversely impact the Company by affecting the business and operations of parties
with which the Company transacts business. The Company expects to initiate
formal communication with such parties regarding the Year 2000 problem later in
1998. There can be no assurance that the Company will be able to effectively
address Year 2000 issues internally in a cost-efficient manner and without
interruption to its business, or that Year 2000 difficulties encountered by its
suppliers, customers or other parties will not have a material impact on the
Company's business, financial condition and results of operations.

NEW ACCOUNTING PRONOUNCEMENTS

CERTAIN IMPORTANT FACTORS

Except for the historical financial information contained herein, this Form
10-Q contains certain forward-looking statements. For this purpose, any
statements contained in this Form 10-Q that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"estimate" or "continue," the negative or other variations thereof, or
comparable terminology, are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially depending on a variety of factors,
including the progress of product development and clinical studies, the timing
of and ability to obtain regulatory approvals, the extent to which the

<PAGE>

Company's products gain market acceptance, the introduction of competitive
products by others, the pricing related to competitive products, litigation
regarding patent and other intellectual property rights, the availability of
third-party reimbursement and other factors. Additional information regarding
these factors is contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 under the heading "Important Factors".

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

<PAGE>

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

During the quarter ended June 30, 1998, there were no material
developments in the Company's suit seeking to invalidate a newly
issued U.S. patent held by a competing manufacturer of blood
oxygenators and other medical devices, and requesting a determination
that the Company's Affinity oxygenator does not infringe the
competitor's patent. Information regarding the suit was previously
reported in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

In approving the execution and delivery of an Agreement and Plan of
Merger between the Company and Medtronic, dated July 12, 1998 (the
"Merger Agreement"), on July 12, 1998 the Company's Board of Directors
also approved certain amendments to the Rights Agreement, dated June
26, 1996 and as first amended July 22, 1997, by and between the
Company and Norwest Bank Minnesota, N.A. (the "Rights Agreement").
These amendments are reflected in a second amendment to the Rights
Agreement also dated July 12, 1998 (the "Second Amendment to Rights
Agreement") and were adopted for the purpose of clarifying certain
provisions of the Rights Agreement with respect to the Company's
merger with Medtronic or any similar transaction.

The Second Amendment to Rights Agreement is attached hereto as
Exhibit 4.1 and is incorporated herein by reference.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

At the Annual Meeting of Shareholders of AVECOR Cardiovascular Inc.,
held May 7, 1998, the shareholders voted as follows on each matter
considered at the meeting:

1. The election of the following directors:

Affirmative Votes Withhold Authority
----------------- ------------------
<S> <C> <C>
Anthony Badolato 6,946,384 441,102
David W. Stassen 7,029,218 358,268
Edward E. Strickland 6,959,549 427,937
J. Gordon Wright 6,965,819 421,667
</TABLE>

<PAGE>

2. Proposal to amend the Company's 1991 Stock Incentive Plan
to increase the number of shares of the Company's common
stock reserved for issuance under such plan by 450,000
shares, from 1,050,000 shares to 1,500,000 shares:

<TABLE>
<CAPTION>
Affirmative Votes Withhold Authority Abstaining
----------------- ------------------ -----------
<S> <C> <C>
3,254,346 1,547,943 45,501
</TABLE>

The number of broker non-votes was 2,539,696.

3. Proposal to amend the Company's Employee Stock Purchase
Plan to increase the number of shares of the Company's
common stock reserved for issuance under such plan by
125,000 shares, from 100,000 shares to 225,000:

Affirmative Votes Withhold Authority Abstaining
----------------- ------------------ -----------
<S> <C> <C>

4,568,074 236,124 43,592
</TABLE>

The number of broker non-votes was 2,539,696.

ITEM 5. OTHER INFORMATION.

ACQUISITION OF THE COMPANY

On July 12, 1998, the Company and Medtronic entered into an Agreement
and Plan of Merger (the "Merger Agreement") pursuant to which a newly
formed subsidiary of Medtronic will be merged into the Company, with
the Company surviving as a wholly owned subsidiary of Medtronic (the
"Merger"). Under the Merger Agreement, each outstanding share of the
Company's common stock will be converted into $11.125 worth of
Medtronic common stock (based on the average closing sale price of
Medtronic common stock for 18 consecutive trading days ending two
trading days before the effective time of the Merger). The Merger is
intended to be tax free for federal income tax purposes to the
Company's shareholders who receive shares of Medtronic common stock.

In connection with the Merger Agreement, the Company and Medtronic
also entered into a Stock Option Agreement pursuant to which Medtronic
has the right to purchase, under certain conditions, 1,600,851 shares
of Company common stock (representing 19.9% of the Company's
currently outstanding shares) at a price of $11.125 per share. This
option is exercisable only upon the occurrence of certain events
resulting in a termination of the Merger Agreement or that would
otherwise jeopardize completion of the Merger, and, in certain
cases involving an alternative transaction proposed by a third party,
only if the Company, within 12 months, enters into such an alternative
transaction.

In approving the Merger Agreement, the Company's Board of Directors
approved the Second Amendment to Rights Agreement, as discussed above,
and a committee of the Company's Board of Directors also determined
that the Merger constitutes a "Permitted Offer" as defined in the
Rights Agreement.

<PAGE>

Completion of the Merger is subject to various conditions, including
approval of the Company's shareholders and receipt of all required
regulatory approvals.

The Merger Agreement and Stock Option Agreement are attached hereto as
Exhibits 2.1 and 2.2, respectively, and are incorporated herein by
reference.

SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING

The Securities and Exchange Commission (the "SEC") has amended
recently Rule 14a-4 under the Securities Exchange Act of 1934, as
amended, which governs the use by the Company of discretionary voting
authority with respect to certain shareholder proposals. SEC
Rule14a-4(c)(1) provides that, if the proponent of a shareholder
proposal fails to notify the Company at least 45 days prior to the
month and day of mailing the prior year's proxy statement, the proxies
of the Company's management would be permitted to use their
discretionary authority at the Company's next annual meeting of
shareholders if the proposal were raised at the meeting without
discussion of the matter in the proxy statement. In order to provide
shareholders with notice of the deadline for the submission of such
proposals for the Company's 1999 Annual Meeting of Shareholders, the
Company hereby notifies all shareholders of the Company that after
February 18, 1999, any shareholder proposal submitted outside the
process of SEC Rule 14a-8 will be considered untimely for purposes of
SEC Rules 14a-4 and 14a-5(e).

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits:

The exhibits to this Quarterly Report on Form 10-Q
are listed in the Exhibit Index beginning on page
18 of this Report.

(b) Reports on Form 8-K:

None

<PAGE>

SIGNATURES

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

AVECOR CARDIOVASCULAR INC.

August 11, 1998 By /s/ Anthony Badolato
- -------------------------------- --------------------------------------
Date Anthony Badolato
Chief Executive Officer

August 11, 1998 By /s/ Gregory J. Melsen
- -------------------------------- --------------------------------------
Date Gregory J. Melsen
Vice President-Finance, Treasurer and Chief
Financial Officer
(Principal Financial and Accounting Officer)

<PAGE>

AVECOR CARDIOVASCULAR INC.

EXHIBIT INDEX TO QUARTERLY REPORT
ON FORM 10-Q
For the Quarter Ended June 30, 1998

Item No. Description Method of Filing
- -------- ----------- ----------------
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated July 12, 1998, by and among
AVECOR Cardiovascular Inc., AC Merger Corp. and Medtronic, Inc.
(Omitted from this Exhibit, as filed, are the exhibits referenced in
such agreement. AVECOR will furnish supplementally a copy of any such
exhibits to the Commission upon request.) Filed herewith electronically

2.2 Stock Option Agreement, dated July 12, 1998, by and
between AVECOR Cardiovascular Inc. and Medtronic, Inc. Filed herewith electronically

4.1 Second Amendment to Rights Agreement, dated July 12, 1998,
by and between AVECOR Cardiovascular Inc. and Norwest Bank
Minnesota, N.A. Filed herewith electronically

27.1 Financial Data Schedule Filed herewith electronically
</TABLE>

<PAGE>

AGREEMENT AND PLAN OF MERGER

BY AND AMONG

MEDTRONIC, INC.,

AC MERGER CORP.,

AND

AVECOR CARDIOVASCULAR, INC.

July 12, 1998

<PAGE>

TABLE OF CONTENTS

<TABLE>

<S> <C>

ARTICLE 1 THE MERGER; CONVERSION OF SHARES . . . . . . . . . . . . . . . . . . 1

1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Conversion of Shares . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Dissenting Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.5 Exchange of Company Common Stock . . . . . . . . . . . . . . . . . . . 4
1.6 Exchange of Merger Subsidiary Common Stock . . . . . . . . . . . . . . 6
1.7 Stock Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.8 Capitalization Changes . . . . . . . . . . . . . . . . . . . . . . . . 7
1.9 Articles of Incorporation of the Surviving Corporation . . . . . . . . 8
1.10 Bylaws of the Surviving Corporation . . . . . . . . . . . . . . . . . 8
1.11 Directors and Officers of the Surviving Corporation . . . . . . . . . 8

ARTICLE 2 CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

2.1 Time and Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2 Filings at the Closing . . . . . . . . . . . . . . . . . . . . . . . . 8

ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. . . . . . . . . . . . 9

3.1 Disclosure Schedule. . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.2 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.3 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
3.4 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
3.5 Reports and Financial Statements . . . . . . . . . . . . . . . . . . .11
3.6 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . .12
3.7 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . .12
3.8 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . .13
3.9 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
3.10 Absence of Material Adverse Changes . . . . . . . . . . . . . . . . .14
3.11 Environmental Laws and Regulations. . . . . . . . . . . . . . . . . .14
3.12 Officers, Directors and Employees . . . . . . . . . . . . . . . . . .16
3.13 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
3.14 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
3.15 Title to Properties; Liens. . . . . . . . . . . . . . . . . . . . . .18
3.16 Permits, Licenses, Etc. . . . . . . . . . . . . . . . . . . . . . . .18
3.17 Intellectual Property Rights. . . . . . . . . . . . . . . . . . . . .19
3.18 Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
3.19 Minute Books. . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
3.20 Insurance Policies. . . . . . . . . . . . . . . . . . . . . . . . . .22
3.21 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
3.22 Powers of Attorney. . . . . . . . . . . . . . . . . . . . . . . . . .22
3.23 Product Liability Claims. . . . . . . . . . . . . . . . . . . . . . .22
3.24 Warranties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
3.25 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
3.26 Relations with Suppliers and Customers. . . . . . . . . . . . . . . .23
3.27 No Finders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
3.28 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . .24
3.29 Merger Filings. . . . . . . . . . . . . . . . . . . . . . . . . . . .24
3.30 Fairness Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . .24
3.31 State Takeover Laws . . . . . . . . . . . . . . . . . . . . . . . . .24
</TABLE>

<PAGE>

<TABLE>

<S> <C>

ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUBSIDIARY . . .25

4.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
4.2 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
4.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
4.4 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . .26
4.5 Reports; Financial Statements; Absence of Changes. . . . . . . . . . .27
4.6 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . .28
4.7 Merger Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
4.8 No Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28

ARTICLE 5 COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28

5.1 Conduct of Business of the Company . . . . . . . . . . . . . . . . . .28
5.2 No Solicitation. . . . . . . . . . . . . . . . . . . . . . . . . . . .32
5.3 Access and Information . . . . . . . . . . . . . . . . . . . . . . . .32
5.4 Approval of Shareholders; Proxy Statement; Registration Statement. . .33
5.5 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
5.6 Affiliates' Letters. . . . . . . . . . . . . . . . . . . . . . . . . .34
5.7 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
5.8 Further Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . .35
5.9 Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . .35
5.10 Certain Notifications . . . . . . . . . . . . . . . . . . . . . . . .36
5.11 Voting of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . .36
5.12 Noncompetition Agreements . . . . . . . . . . . . . . . . . . . . . .36
5.13 NYSE Listing Application. . . . . . . . . . . . . . . . . . . . . . .37
5.14 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . .37
5.15
5.16 Subsidiary Shares . . . . . . . . . . . . . . . . . . . . . . . . . .37
5.17 Stock Option Agreement. . . . . . . . . . . . . . . . . . . . . . . .37
5.18 Benefit Plans and Employee Matters. . . . . . . . . . . . . . . . . .38
5.19 Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38

ARTICLE 6 CLOSING CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . .38

6.1 Conditions to Obligations of Parent, Merger Subsidiary, and
the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
6.2 Conditions to Obligations of Parent and Merger Subsidiary. . . . . . .39
6.3 Conditions to Obligations of the Company . . . . . . . . . . . . . . .40

ARTICLE 7 TERMINATION AND ABANDONMENT. . . . . . . . . . . . . . . . . . . . .41

7.1 Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
7.2 Effect of Termination. . . . . . . . . . . . . . . . . . . . . . . . .42

ARTICLE 8 MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . .44

8.1 Amendment and Modification . . . . . . . . . . . . . . . . . . . . . .44
8.2 Waiver of Compliance; Consents . . . . . . . . . . . . . . . . . . . .44
8.3 Investigation; Survival of Representations and Warranties. . . . . . .44
8.4 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
8.5 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
8.6 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
8.7 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
8.8 Knowledge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
</TABLE>

<S> <C>

8.9 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
8.10 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
8.11 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . .46

EXHIBITS:

Exhibit A: Form of Plan of Merger
Exhibit B: Form of Affiliate's Letter
Exhibit C: Form of Agreement to Facilitate Merger
Exhibit D: Form of Noncompetition Agreement
Exhibit E: Form of Stock Option Agreement
Exhibit F: Form of Opinion of the Company's Counsel
Exhibit G: Form of Opinion of Parent's Counsel

</TABLE>

iii

<PAGE>

AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT is dated as of July 12, 1998, by and among MEDTRONIC, INC.,
a Minnesota corporation ("Parent"), AC MERGER CORP., a Minnesota corporation and
wholly-owned subsidiary of Parent ("Merger Subsidiary"), and AVECOR
CARDIOVASCULAR, INC., a Minnesota corporation (the "Company").

WHEREAS, the Boards of Directors of Parent, Merger Subsidiary, and the
Company have approved the merger of Merger Subsidiary with and into the Company
(the "Merger") upon the terms and subject to the conditions set forth herein;
and

WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a)(1)(A) and
(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code"); and

WHEREAS, prior to the execution of the Stock Option Agreement described in
Section 5.17, officers and directors of the Company have, to induce Parent to
execute this Agreement, executed and delivered to Parent the Agreements to
Facilitate Merger described in Section 5.11; and

WHEREAS, as a further and subsequent inducement to have Parent execute this
Agreement, Parent and the Company are entering into the Stock Option Agreement
described in Section 5.17 hereof after execution and delivery of the Agreements
to Facilitate Merger described in Section 5.11; and

WHEREAS, the parties hereto desire to make certain representations,
warranties, and agreements in connection with the Merger and also to prescribe
various conditions to the Merger;

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

ARTICLE 1
THE MERGER; CONVERSION OF SHARES

1.1 THE MERGER. Subject to the terms and conditions of this Agreement,
at the Effective Time (as defined in Section 1.2 hereof), Merger Subsidiary
shall be merged with and into the Company in accordance with the provisions of
the Minnesota Business Corporation Act (the "MBCA"), whereupon the separate
corporate existence of Merger Subsidiary shall cease, and the Company shall
continue as the surviving corporation (the "Surviving Corporation"). From and
after the Effective Time, the Surviving Corporation shall possess all the
rights, privileges, powers, and franchises and be subject to all the
restrictions, disabilities, and duties of the Company and Merger Subsidiary, all
as more fully described in the MBCA.

<PAGE>

1.2 EFFECTIVE TIME. As soon as practicable after each of the
conditions set forth in Article 6 has been satisfied or waived, the Company and
Merger Subsidiary will file, or cause to be filed, with the Secretary of State
of the State of Minnesota Articles of Merger for the Merger, which Articles
shall be in the form required by and executed in accordance with the applicable
provisions of the MBCA and shall include as a part thereof a plan of merger (the
"Plan of Merger") substantially in the form attached hereto as EXHIBIT A. The
Merger shall become effective at the time such filing is made or, if agreed to
by Parent and the Company, such later time or date set forth in the Articles of
Merger (the "Effective Time").

1.3 CONVERSION OF SHARES. At the Effective Time, by virtue of the
Merger and without any action on the part of any holder of any share of capital
stock of the Company or Merger Subsidiary:

(a) Each share of common stock of the Company, par value $.01
per share ("Company Common Stock"), issued and outstanding immediately
prior thereto (except for Dissenting Shares, as defined in Section 1.4
hereof, and except for shares referred to in Section 1.3(b) hereof) shall
be converted into the right to receive the fraction of a share (subject to
adjustment as provided below, the "Conversion Fraction") of common stock of
Parent, par value $.10 per share ("Parent Common Stock"), equal to $11.125
divided by the Parent Average Stock Price. The "Parent Average Stock
Price" shall mean the average (rounded to the nearest full cent, with the
cents rounded up if the third decimal place is 5 or more) of the daily
closing sale prices of a share of Parent Common Stock as reported on the
New York Stock Exchange ("NYSE") Composite Tape, as reported in The Wall
Street Journal, for the 18 consecutive NYSE trading days ending on and
including the second NYSE trading day immediately preceding the Effective
Time.

Notwithstanding the foregoing, if the sum of the number of shares
of Company Common Stock outstanding immediately prior to the Effective Time
plus the number of shares subject to then outstanding options, warrants, or
other rights to acquire shares of Company Common Stock (collectively,
"Company Stock Acquisition Rights") is greater than 8,879,725 shares plus
that number of shares issuable pursuant to the current offering period in
process as of the date of this Agreement under the Company's Employee Stock
Purchase Plan or if the aggregate exercise price of all such Company Stock
Acquisition Rights then outstanding is less than the aggregate exercise
price reflected in Section 3.4 hereof, then the $11.125 amount per share of
Company Common Stock, as described above, shall be reduced to an amount, if
lower, equal to (i) $11.125 times [8,879,725 shares plus that number of
shares issuable pursuant to the current offering period in process as of
the date of this Agreement under the Company's Employee Stock Purchase
Plan] minus the aggregate exercise price reflected in Section 3.4 hereof
plus the aggregate amount received by the Company as a result of any
issuance of Company Common Stock after the date of this Agreement and prior
to the Effective Time plus the aggregate exercise price of all Company
Stock Acquisition Rights outstanding immediately prior to the Effective
Time divided by (ii) the sum of (A) the number of shares of Company

<PAGE>

Common Stock outstanding immediately prior to the Effective Time plus
(B) the number of shares subject to Company Stock Acquisition Rights then
outstanding.

An appropriate adjustment shall similarly be made in the event
that, prior to the Effective Time, the outstanding shares of Company Common
Stock, without new consideration, are changed into or exchanged for a
different kind of shares or securities through a reorganization,
reclassification, stock dividend, stock combination, or other like change
in the Company's capitalization. Notwithstanding the foregoing, nothing in
this section shall be deemed to constitute authorization or permission for
or consent from Parent or Merger Subsidiary to any increase in the number
of shares of Company Common Stock outstanding or subject to outstanding
Company Stock Acquisition Rights, to any decrease in the exercise price of
such Rights, or to any reorganization, reclassification, stock dividend,
stock combination, or other like change in capitalization.

(b) Each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time that is then owned beneficially or
of record by Parent, Merger Subsidiary, or any direct or indirect
subsidiary of Parent or the Company shall be cancelled without payment of
any consideration therefor and without any conversion thereof.

(c) Each share of any other class of capital stock of the
Company (other than Company Common Stock) shall be cancelled without
payment of any consideration therefor and without any conversion thereof.

(d) Each share of common stock of Merger Subsidiary, par value
$.01 per share ("Merger Subsidiary Common Stock"), issued and outstanding
immediately prior to the Effective Time shall be converted into one share
of the common stock of the Surviving Corporation, par value $.01 per share
("Surviving Corporation Common Stock").

1.4 DISSENTING SHARES. Notwithstanding any provision of this Agreement
to the contrary, each outstanding share of Company Common Stock, the holder of
which has demanded and perfected such holder's right to dissent from the Merger
and to be paid the fair value of such shares in accordance with Sections
302A.471 and 302A.473 of the MBCA and, as of the Effective Time, has not
effectively withdrawn or lost such dissenters' rights ("Dissenting Shares"),
shall not be converted into or represent a right to receive the Parent Common
Stock into which shares of Company Common Stock are converted pursuant to
Section 1.3 hereof, but the holder thereof shall be entitled only to such rights
as are granted by the MBCA. Parent shall cause the Company to make all payments
to holders of shares of Company Common Stock with respect to such demands in
accordance with the MBCA. The Company shall give Parent (i) prompt written
notice of any notice of intent to demand fair value for any shares of Company
Common Stock, withdrawals of such notices, and any other instruments served
pursuant to the MBCA and received by the Company, and (ii) the opportunity to
conduct jointly all negotiations and proceedings with respect to demands for
fair value for shares of Company Common Stock

<PAGE>

under the MBCA. The Company shall not, except with the prior written
consent of Parent or as otherwise required by law, voluntarily make any
payment with respect to any demands for fair value for shares of Company
Common Stock or offer to settle or settle any such demands.

1.5 EXCHANGE OF COMPANY COMMON STOCK.

(a) Promptly after the Effective Time, Parent shall cause
Parent's stock transfer agent or such other person as Parent may appoint to
act as exchange agent (the "Exchange Agent") to mail to each holder of
record (other than Parent, Merger Subsidiary, or any other subsidiary of
Parent or the Company) of a certificate or certificates that immediately
prior to the Effective Time represented outstanding shares of Company
Common Stock ("Company Certificates") a form letter of transmittal (which
shall specify that delivery shall be effective, and risk of loss and title
to the Company Certificate(s) shall pass, only upon delivery of the Company
Certificate(s) to the Exchange Agent) and instructions for such holder's
use in effecting the surrender of the Company Certificates in exchange for
certificates representing shares of Parent Common Stock.

(b) As soon as practicable after the Effective Time, the
Exchange Agent shall distribute to holders of shares of Company Common
Stock, upon surrender to the Exchange Agent of one or more Company
Certificates for cancellation, together with a duly-executed letter of
transmittal, (i) one or more Parent certificates representing the number of
whole shares of Parent Common Stock into which the shares represented by
the Company Certificate(s) shall have been converted pursuant to Section
1.3(a), and (ii) a bank check in the amount of cash into which the shares
represented by the Company Certificate(s) shall have been converted
pursuant to Section 1.5(f) (relating to fractional shares), and the Company
Certificate(s) so surrendered shall be cancelled. In the event of a
transfer of ownership of Company Common Stock that is not registered in the
transfer records of the Company, it shall be a condition to the issuance of
shares of Parent Common Stock that the Company Certificate(s) so
surrendered shall be properly endorsed or be otherwise in proper form for
transfer and that such transferee shall (i) pay to the Exchange Agent any
transfer or other taxes required, or (ii) establish to the satisfaction of
the Exchange Agent that such tax has been paid or is not payable.

(c) Holders of Company Common Stock will be entitled to any
dividends or other distributions pertaining to the Parent Common Stock
received in exchange therefor that become payable to persons who are
holders of record of Parent Common Stock as of a record date on the same
date as or after the Effective Time, but only after they have surrendered
their Company Certificates for exchange. Subject to the effect, if any, of
applicable law, the Exchange Agent shall receive, hold, and remit any such
dividends or other distributions to each such record holder entitled
thereto, without interest, at the time that such Company Certificates are
surrendered to the Exchange Agent for exchange. Holders of Company Common
Stock will not be entitled, however, to dividends or other distributions
that become payable before or after the Effective Time to persons who were

<PAGE>

holders of record of Parent Common Stock as of a record date that is prior
to the Effective Time.

(d) All shares of Parent Common Stock issued upon the surrender
for exchange of Company Common Stock in accordance with the terms hereof
(including any cash paid for fractional shares pursuant to Section 1.5(f)
hereof) shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Company Common Stock.

(e) After the Effective Time, there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Company Common Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Company Certificates representing such shares are presented to the
Surviving Corporation, they shall be cancelled and exchanged as provided in
this Article 1. As of the Effective Time, the holders of Company
Certificates representing shares of Company Common Stock shall cease to
have any rights as shareholders of the Company, except such rights, if any,
as they may have pursuant to the MBCA. Except as provided above, until
such Company Certificates are surrendered for exchange, each such Company
Certificate shall, after the Effective Time, represent for all purposes
only the right to receive the number of whole shares of Parent Common Stock
into which the shares of Company Common Stock shall have been converted
pursuant to the Merger as provided in Section 1.3(a) hereof and the right
to receive the cash value of any fraction of a share of Parent Common Stock
as provided in Section 1.5(f) hereof.

(f) No fractional shares of Parent Common Stock and no
certificates or scrip therefor, or other evidence of ownership thereof,
shall be issued upon the surrender for exchange of Company Certificates, no
dividend or other distribution of Parent shall relate to any fractional
share, and such fractional share interests shall not entitle the owner
thereof to vote or to any rights of a shareholder of Parent. All
fractional shares of Parent Common Stock to which a holder of Company
Common Stock immediately prior to the Effective Time would otherwise be
entitled, at the Effective Time, shall be aggregated if and to the extent
multiple Company Certificates of such holder are submitted together to the
Exchange Agent. If a fractional share results from such aggregation, then
(in lieu of such fractional share) the Exchange Agent shall pay to each
holder of shares of Company Common Stock who otherwise would be entitled to
receive such fractional share of Parent Common Stock an amount of cash
(without interest) determined by multiplying (i) the Parent Average Stock
Price by (ii) the fractional share of Parent Common Stock to which such
holder would otherwise be entitled. Parent will make available to the
Exchange Agent any cash necessary for this purpose.

(g) In the event any Company Certificates shall have been lost,
stolen, or destroyed, the Exchange Agent shall issue in exchange for such
lost, stolen, or destroyed Company Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of Parent Common
Stock and cash for fractional shares, if any, as may be

<PAGE>

required pursuant to this Article 1; provided, however, that Parent may,
in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen, or destroyed Company Certificate
to deliver a bond in such sum as Parent may direct as indemnity against
any claim that may be made against Parent or the Exchange Agent with
respect to such Company Certificate alleged to have been lost, stolen,
or destroyed.

(h) Each person entitled to receive shares of Parent Common
Stock pursuant to this Article 1 shall receive together with such shares
the number of Parent preferred share purchase rights (pursuant to the
Rights Agreement dated as of June 27, 1991, between Parent and Norwest Bank
Minnesota, N.A., the "Parent Rights Plan") per share of Parent Common Stock
equal to the number of Parent preferred share purchase rights associated
with one share of Parent Common Stock at the Effective Time.

1.6 EXCHANGE OF MERGER SUBSIDIARY COMMON STOCK. From and after the
Effective Time, each outstanding certificate previously representing shares of
Merger Subsidiary Common Stock shall be deemed for all purposes to evidence
ownership of and to represent the number of shares of Surviving Corporation
Common Stock into which such shares of Merger Subsidiary Common Stock shall have
been converted. Promptly after the Effective Time, the Surviving Corporation
shall issue to Parent a stock certificate or certificates representing such
shares of Surviving Corporation Common Stock in exchange for the certificate or
certificates that formerly represented shares of Merger Subsidiary Common Stock,
which shall be cancelled.

1.7 STOCK OPTIONS.

(a) Except as provided below with respect to the Company's
Employee Stock Purchase Plan, each option to purchase shares of Company
Common Stock that is outstanding at the Effective Time (a "Company Option")
shall, by virtue of the Merger and without any action on the part of the
holder thereof, be assumed by Parent (and a registration statement on Form
S-8 therefor shall be filed promptly after the Effective Time) in such
manner that Parent (i) is a corporation "assuming a stock option in a
transaction to which Section 424(a) applies" within the meaning of Section
424 of the Code and the regulations thereunder or (ii) to the extent that
Section 424 of the Code does not apply to any such Company Option, would be
such a corporation were Section 424 of the Code applicable to such Company
Option. From and after the Effective Time, all references to the Company
in the Company Options shall be deemed to refer to Parent (other than for
purposes of determining whether there has been a change in control of the
Company). The Company Options assumed by Parent shall be exercisable upon
the same terms and conditions as under the Company Options (including
provisions thereof, if any, relating to the acceleration of vesting upon a
change in control of the Company) except that (i) such Company Options
shall entitle the holder to purchase from Parent the number of shares of
Parent Common Stock (rounded to the nearest whole number of such shares)
that equals the product of the Conversion Fraction multiplied by the number
of shares of Company Common Stock subject to such option immediately prior
to the

<PAGE>

Effective Time, and (ii) the option exercise price per share of Parent
Common Stock shall be an amount (rounded to the nearest full cent) equal
to the option exercise price per share of Company Common Stock in effect
immediately prior to the Effective Time divided by the Conversion
Fraction; provided, however, that in the case of any Company Option to
which Section 421 of the Code applies by reason of its qualification
under Section 422 of the Code ("incentive stock options"), the option
price, the number of shares purchasable pursuant to such option and the
terms and conditions of exercise of such options shall be determined in
order to comply with Section 424(a) of the Code. As promptly as
practicable after the Effective Time, Parent shall issue to each holder
of a Company Option a written instrument informing such holder of the
assumption by Parent of such Company Option.

(b) The current offering period in process as of the date of
this Agreement under the Company's Employee Stock Purchase Plan shall
continue and shares shall be issued to participants thereunder as provided
under, and subject to the terms and conditions of, such Plan; provided,
however, that if the Effective Time occurs prior to the originally
scheduled expiration of such current offering period on September 30, 1998,
then immediately prior to the Effective Time, such current offering period
under the Company's Employee Stock Purchase Plan shall be ended, and each
participant shall be deemed to have purchased immediately prior to the
Effective Time, to the extent of payroll deductions accumulated by such
participant as of such offering period end, the number of whole shares of
Company Common Stock at a per share price determined pursuant to the
provisions of the Company's Employee Stock Purchase Plan, and each
participant shall receive a cash payment equal to the balance, if any, of
such accumulated payroll deductions remaining after such purchase of such
shares. As of the Effective Time, all such shares shall be converted in
the manner provided in Section 1.3. No offering periods under the
Company's Employee Stock Purchase Plan that are subsequent to the current
offering period in process as of the date of this Agreement shall be
commenced, and the Company's Employee Stock Purchase Plan and all purchase
rights thereunder shall terminate effective as of the Effective Time.

1.8 CAPITALIZATION CHANGES. If, between the date of this Agreement and
the Effective Time, the outstanding shares of Parent Common Stock shall have
been changed into a different number of shares or a different class by reason of
any reclassification, recapitalization, split-up, combination, exchange of
shares, or stock dividend, the Conversion Fraction and all per-share price
amounts and calculations set forth in this Agreement shall be appropriately
adjusted.

1.9 ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION. The
Articles of Incorporation of Merger Subsidiary, as in effect immediately prior
to the Effective Time, shall be the Articles of Incorporation of the Surviving
Corporation until thereafter amended in accordance with applicable law;
provided, however, that upon the Effective Time, Article 1 of the Articles of
Incorporation of the Surviving Corporation shall be amended to read in its
entirety as follows: "The name of the corporation shall be Medtronic AVECOR
Cardiovascular, Inc."

<PAGE>

1.10 BYLAWS OF THE SURVIVING CORPORATION. The Bylaws of Merger
Subsidiary, as in effect immediately prior to the Effective Time, shall be the
Bylaws of the Surviving Corporation until thereafter amended in accordance with
applicable law.

1.11 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The directors
and officers of Merger Subsidiary immediately prior to the Effective Time shall
be the directors and officers, respectively, of the Surviving Corporation until
their respective successors shall be duly elected and qualified.

ARTICLE 2
CLOSING

2.1 TIME AND PLACE. Subject to the satisfaction or waiver of the
provisions of Article 6, the closing of the Merger (the "Closing") shall take
place at 10:00 a.m., local time, on the day the Merger is approved by the
shareholders of the Company at the Company Shareholders Meeting (as defined in
Section 5.4 hereof), or as soon thereafter as all conditions to Closing have
been satisfied or waived, or on such other date and/or at such other time as
Parent and the Company may mutually agree. The date on which the Closing
actually occurs is herein referred to as the "Closing Date." The Closing shall
take place at the corporate headquarters offices of Parent, or at such other
place or in such other manner (E.G., by telecopy exchange of signature pages
with originals to follow by overnight delivery) as the parties hereto may agree.

2.2 FILINGS AT THE CLOSING. At the Closing, subject to the provisions
of Article 6, Parent, Merger Subsidiary, and the Company shall cause Articles of
Merger to be filed in accordance with the provisions of Section 302A.615 of the
MBCA, and take any and all other lawful actions and do any and all other lawful
things necessary to cause the Merger to become effective.

ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to Parent and Merger Subsidiary as of
the date hereof as follows:

3.1 DISCLOSURE SCHEDULE. As of the date hereof, the Company has not
completed its internal investigation and review for purposes of confirming and
verifying the representations and warranties of the Company contained in this
Agreement. On or prior to the close of business on the tenth business day after
the date hereof, the Company shall deliver to Parent a disclosure schedule ( the
"Disclosure Schedule") with each disclosure therein set forth in the section or
subsection which corresponds by number for purposes of exceptions to a
representation or warranty to the applicable section or subsection of this
Article 3. In the event that Parent determines that the Disclosure Schedule
contains information which in Parent's good faith,

<PAGE>

reasonable business judgment adversely affects the value of the Company's
business or prospects, then Parent shall have the right, within 10 business
days of the receipt of the full and complete Disclosure Schedule, to
terminate this Agreement as set forth in Section 7.1(i) hereto.

3.2 ORGANIZATION. The Company and each subsidiary of the Company
(referred to herein as a "Subsidiary") is a corporation duly organized, validly
existing, and in good standing under the laws of its respective jurisdiction of
incorporation and has all requisite corporate power and authority to own, lease,
and operate its properties and to carry on its business as now being conducted.
The Company and each Subsidiary is duly qualified and in good standing to do
business in each jurisdiction in which the property owned, leased, or operated
by it or the nature of the business conducted by it makes such qualification
necessary and where the failure to qualify could reasonably be expected to have
a Company Material Adverse Effect (as defined below). "Company Material Adverse
Effect" means any effect, change or event that, individually or in the aggregate
with all similar effects, changes or events, is or would reasonably be expected
to be material and adverse: (i) either before or immediately after the
Effective Time, to the business, properties, liabilities, results of operation,
or financial condition of the Company and its Subsidiaries, considered as a
whole; or (ii) to the Company's ability to perform any of its obligations under
this Agreement or to consummate the Merger; provided, however, that Company
Material Adverse Effect shall not be deemed to include the impact of actions or
omissions of the Company taken with the prior written consent of Parent in
contemplation of the transactions contemplated hereby, or the effects of the
Merger (or any announcement with respect thereto) and compliance with the
provisions of this Agreement on the operating performance or prospects of the
Company and its subsidiaries, including without limitation, any such loss of
customer or distributor relationships or employees following the announcement of
the Merger. The jurisdictions in which the Company and each Subsidiary are
qualified are listed on the Disclosure Schedule. The Company has heretofore
delivered to Parent complete and accurate copies of the Articles of
Incorporation and Bylaws of the Company and each Subsidiary, as currently in
effect. Except to the extent specifically disclosed on the Disclosure Schedule,
or any entity in which the Company owns, directly or indirectly, an equity
interest of less than 1% of the fair market value of such entity's outstanding
equity securities, neither the Company nor any Subsidiary, directly or
indirectly, owns or controls or has any capital, equity, partnership,
participation, or other ownership interest in any corporation, partnership,
joint venture, or other business association or entity.

3.3 AUTHORIZATION. The Company has the requisite corporate power and
authority to execute and deliver this Agreement and, subject to obtaining the
necessary approval of its shareholders, the requisite corporate power and
authority to consummate the transactions contemplated hereby, and to file and
distribute the Proxy Statement/Prospectus (as defined in Section 5.4 hereof).
The execution and delivery of this Agreement by the Company and the consummation
of the transactions contemplated hereby have been duly and validly authorized
and approved by the Company's Board of Directors and, in accordance with Section
302A.673 of the MBCA, by the required committee of such Board of Directors, no
other corporate proceedings on the part of the Company or any Subsidiary are
necessary to authorize this Agreement, and, subject to obtaining the approval of
the Company's shareholders, no other

<PAGE>

corporate action on the part of the Company or any Subsidiary is necessary to
consummate the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by the Company and constitutes the
valid and binding obligation of the Company, enforceable against the Company
in accordance with its terms, subject to laws of general application relating
to bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and rules of law governing specific
performance, injunctive relief, or other equitable remedies. To the
Company's knowledge, each Agreement to Facilitate Merger and Affiliate's
Letter (as described in Sections 5.11 and 5.6) has been duly and validly
executed and delivered by the Company shareholder who is a party thereto and
constitutes the valid and binding obligation of such shareholder, enforceable
in accordance with its terms, subject to laws of general application relating
to bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and rules of law governing specific
performance, injunctive relief, or other equitable remedies.

3.4 CAPITALIZATION. The authorized capital stock of the Company
consists of (i) 20,000,000 shares of Company Common Stock, par value $.01 per
share, of which 8,044,475 shares are issued and outstanding, and (ii) 2,000,000
shares of Company Preferred Stock, par value $.01 per share, including 200,000
shares of Series A Junior Preferred Stock, none of which are issued or
outstanding. Except as set forth on the Disclosure Schedule, all issued and
outstanding shares of capital stock of each Subsidiary are owned, beneficially
and of record, by the Company, free and clear of any Liens (as defined in
Section 3.15). All issued and outstanding shares of Company Common Stock have
been validly issued, are fully paid and nonassessable, and have not been issued
in violation of and are not currently subject to any preemptive rights. Except
as set forth on the Disclosure Schedule and except for options to purchase an
aggregate 832,250 shares of Company Common Stock at an aggregate exercise price
of $8,005,782 granted pursuant to the Company's 1991 Stock Incentive Plan and
1995 Non-Employee Director Option Plan (collectively, the "Company Option
Plans") listed, together with their respective exercise prices, on the
Disclosure Schedule, and except for the rights to purchase under the Company's
Employee Stock Purchase Plan shares of Company Common Stock (estimated to be
approximately 10,000 shares, at a per share price of $7.44, based on the current
contribution rates of the participants, as listed on the Disclosure Schedule,
and assuming the current Plan offering period in process as of the date of this
Agreement is ended on September 30, 1998 for this purpose), there are not any
outstanding or authorized subscriptions, options, warrants, calls, rights,
convertible securities, commitments, restrictions, arrangements, or any other
agreements of any character to which the Company or any Subsidiary is a party
that, directly or indirectly, (i) obligate the Company or any Subsidiary to
issue any shares of capital stock or any securities convertible into, or
exercisable or exchangeable for, or evidencing the right to subscribe for, any
shares of capital stock, (ii) call for or relate to the sale, pledge, transfer,
or other disposition or encumbrance by the Company or any Subsidiary of any
shares of its capital stock, or (iii) to the knowledge of the Company, relate to
the voting or control of such capital stock. The Disclosure Schedule sets forth
a complete and accurate list of all stock options, warrants, and other rights to
acquire Company Common Stock, including the name of the holder, the date of
grant, acquisition price, expiration date, number of shares, exercisability
schedule, and, in the case of options, the type of option under the Code. The
Disclosure

<PAGE>

Schedule also sets forth the contractual restrictions to which any shares of
Company Common Stock issued pursuant to the Company Option Plans or otherwise
are currently subject and also sets forth the restrictions to which such
shares will be subject immediately after the Effective Time, other than as
set forth in the Company Option Plans or stock option agreements thereunder.
No consent of holders or participants under the Company Option Plans or
Employee Stock Purchase Plan is required to carry out the provisions of
Section 1.7. All actions, if any, required on the part of the Company under
the Company Option Plans or Employee Stock Purchase Plan to allow for the
treatment of Company Options and the Employee Stock Purchase Plan as is
provided in Section 1.7, has been, or prior to the Closing will be, validly
taken by the Company, and the Company will not from and after the date hereof
allow any increase in the rate of a participant's contributions to the
Employee Stock Purchase Plan, any new enrollments or re-enrollments in the
current offering period in process as of the date of this Agreement under
such Plan or the commencement of any offering periods under such Plan
subsequent to the current offering period in process as of the date of this
Agreement.

3.5 REPORTS AND FINANCIAL STATEMENTS. The Company has filed all forms,
reports, registration statements, and documents required to be filed by it with
the Securities and Exchange Commission ("SEC") since January 1, 1995 (such
forms, reports, registration statements, and documents, together with any
amendments thereto, are referred to as the "Company SEC Filings"). As of their
respective dates, the Company SEC Filings (i) complied as to form in all
material respects with the applicable requirements of the Securities Act of 1933
and the rules and regulations thereunder (the "1933 Act") and the Securities
Exchange Act of 1934 and the rules and regulations thereunder (the "1934 Act"),
as the case may be, and (ii) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements made therein, in light of the circumstances under which
they were made, not misleading. The audited financial statements and unaudited
interim financial statements included or incorporated by reference in the
Company SEC Filings, including but not limited to the Company's audited
financial statements at and for the year ended December 31, 1997 (the "Company
1997 Financials"), (i) were prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except as may be indicated therein or in the notes thereto), subject, in the
case of unaudited interim financial statements, to the absence of notes and to
year-end adjustments, (ii) complied as of their respective dates in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, and (iii) fairly presented the
consolidated financial position of the Company as of the dates thereof and the
income, cash flows, and changes in shareholders' equity for the periods
involved. The statements of earnings included in the audited or unaudited
interim financial statements in the Company SEC Filings do not contain any items
of special or nonrecurring income or any other income not earned in the ordinary
course of business, except as expressly specified in the applicable statement of
operations or notes thereto. Prior to the date hereof, the Company has
delivered to Parent complete and accurate copies of all Company SEC Filings
since January 1, 1995. The Company has also delivered to Parent complete and
accurate copies of all statements on Schedule 13D and Schedule 13G known to the
Company to have been filed with the SEC since January 1, 1997, with respect to
capital stock of the Company. Since January 1, 1997, the

<PAGE>

Company has filed in a timely manner all reports required to be filed by it
pursuant to Sections 13, 14, or 15(d) of the 1934 Act.

3.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except to the extent
specifically disclosed on the Disclosure Schedule, neither the Company nor any
Subsidiary has any liabilities or obligations of any nature (whether absolute,
accrued, contingent, or otherwise) which would have a Company Material Adverse
Effect except (a) liabilities or obligations that are accrued or reserved
against in the audited consolidated balance sheet of the Company as of December
31, 1997 contained in the Company 1997 Financials (the "Company Audited Balance
Sheet") or in the unaudited consolidated balance sheet of the Company as of
March 31, 1998 contained in the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1998 (the "Company Interim Balance Sheet"), and
(b) liabilities or obligations disclosed in this Agreement.

3.7 CONSENTS AND APPROVALS. Except for (i) any applicable
requirements of the 1933 Act, the 1934 Act, state securities laws, the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the regulations
thereunder (the "HSR Act"), and the antitrust, competition, foreign
investment, or similar laws of any foreign countries or supranational
commissions or boards that require pre-merger notifications or filings with
respect to the Merger (collectively, "Foreign Merger Laws"), (ii) approval by
the Company's shareholders, (iii) the filing and recordation of appropriate
merger documents as required by the MBCA, (iv) compliance with Sections
302A.471 and 302A.473 of the MBCA regarding dissenters' rights, or (v) any
items disclosed on the Disclosure Schedule, the execution and delivery of
this Agreement and the Stock Option Agreement by the Company, and, to the
Company's knowledge, the execution and delivery of the Agreements to
Facilitate Merger, and the consummation of the transactions contemplated
hereby and thereby will not: (a) violate any provision of the Articles of
Incorporation or Bylaws of the Company or any Subsidiary; (b) violate any
statute, rule, regulation, order, or decree of any federal, state, local, or
foreign body or authority (including, but not limited to, the Food and Drug
Administration (the "FDA") or any nongovernmental self-regulatory agency) by
which the Company or any Subsidiary or any of their respective properties or
assets may be bound; (c) require any filing with or permit, consent, or
approval of any federal, state, local, or foreign public body or authority
(including, but not limited to, the FDA or any nongovernmental
self-regulatory agency); or (d) result in any violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default
under, result in the loss of any material benefit under, or give rise to any
right of termination, cancellation, increased payments, or acceleration
under, or result in the creation of any Lien (as defined in Section 3.15) on
any of the properties or assets of the Company or any Subsidiary under, any
of the terms, conditions, or provisions of any note, bond, mortgage,
indenture, license, franchise, permit, authorization, agreement, or other
instrument or obligation to which the Company or any Subsidiary is a party,
or by which it or any of its properties or assets may be bound, except, (x)
in the cases of clauses (b) or (c), where such violation, failure to make any
such filing or failure to obtain such permit, consent or approval, would not
prevent or delay consummation of this Merger or otherwise prevent the Company
from performing its obligations under this Agreement and would not have a
Company Material Adverse Effect, and (y) in the case of clause (d), for any
such violations, breaches, defaults, or other occurrences that would not
prevent or delay consummation of any of the

<PAGE>

transactions contemplated hereby in any material respect, or otherwise
prevent the Company from performing its obligations under this Agreement in
any material respect, and would not have a Company Material Adverse Effect.

3.8 COMPLIANCE WITH LAWS. Except to the extent specifically disclosed
on the Disclosure Schedule, all activities of the Company and each Subsidiary
have been, and are currently being, conducted in compliance with all applicable
federal, state, local, and foreign laws, ordinances, regulations,
interpretations, judgments, decrees, injunctions, permits, licenses,
certificates, governmental requirements (including, but not limited to FDA Good
Manufacturing Practices), orders, and other similar items of any court or other
governmental entity (including, but not limited to, those of the FDA or any
nongovernmental self-regulatory agency), the failure to comply with which could
reasonably be expected to have a Company Material Adverse Effect. The Company
and each Subsidiary has timely filed or otherwise provided all registrations,
reports, data, and other information and applications with respect to its
medical device, pharmaceutical, consumer, health care, and other governmentally
regulated products (the "Regulated Products") required to be filed with or
otherwise provided to the FDA or any other federal, state, local, or foreign
governmental authorities with jurisdiction over the manufacture, use, or sale of
the Regulated Products, and all regulatory licenses or approvals in respect
thereof are in full force and effect, except where the failure to file timely
such registrations, reports, data, information, and applications or the failure
to have such licenses and approvals in full force and effect would not have a
Company Material Adverse Effect.

3.9 LITIGATION. Except to the extent specifically disclosed on the
Disclosure Schedule, to the Company's knowledge, no investigation or review by
any federal, state, local, or foreign body or authority (including, but not
limited to, the FDA or any nongovernmental self-regulatory agency) with respect
to the Company or any Subsidiary is pending or threatened, nor has any such body
or authority (including, but not limited to, the FDA or any nongovernmental
self-regulatory agency) indicated to the Company or any Subsidiary an intention
to conduct the same. Except to the extent specifically disclosed on the
Disclosure Schedule, there are no claims, actions, suits, or proceedings by any
private party that could reasonably be expected to involve individually an
amount in excess of $50,000 or collectively an aggregate amount in excess of
$200,000, or by any governmental body or authority (including, but not limited
to, the FDA or any nongovernmental self-regulatory agency), against or affecting
the Company or any Subsidiary, pending or, to the knowledge of the Company,
threatened at law or in equity, or before any federal, state, local, foreign, or
other governmental department, commission, board, bureau, agency, or
instrumentality (including, but not limited to, the FDA or any nongovernmental
self-regulatory agency).

3.10 ABSENCE OF MATERIAL ADVERSE CHANGES. Except to the extent
specifically disclosed in the Disclosure Schedule, since December 31, 1997 there
has not been any (a) change or circumstance that could reasonably be expected to
have a Company Material Adverse Effect; (b) action by the Company or any
Subsidiary that, if taken on or after the date of this Agreement, would require
the consent or approval of Parent pursuant to Section 5.1 hereof, except for
actions as to which consent or approval has been given as provided therein or
actions prior to March 31,

<PAGE>

1998; (c) damage, destruction, or loss, whether or not covered by insurance,
that could reasonably be expected to have a Company Material Adverse Effect;
(d) change by the Company or any Subsidiary in accounting methods or
principles used for financial reporting purposes, except as required by a
change in generally accepted accounting principles and concurred with by the
Company's independent public accountants; or (e) agreement, whether in
writing or otherwise, to take any action described or referenced in this
Section 3.10.

3.11 ENVIRONMENTAL LAWS AND REGULATIONS. The Disclosure Schedule
completely and accurately sets forth the following: (a) a list of all
above-ground storage tanks or underground storage tanks for Hazardous
Materials (as defined below) on real property now or at any time in the past
owned, leased, or occupied by the Company or any Subsidiary (such real
property referred to in this section as the "Real Property"); (b) the
identity of any Hazardous Materials (as defined below) used, generated,
transported or disposed of by the Company or any Subsidiary now or at any
time in the past, together with a brief description and location of each
activity using such Hazardous Materials; (c) a summary of the identity of, to
the Company's knowledge, any Hazardous Materials that have been disposed of
or found on, above or below any Real Property; and (d) a list of all reports,
studies, and tests in the possession of the Company or any Subsidiary or
initiated by the Company or any Subsidiary pertaining to the existence of
Hazardous Materials on, above, or below any Real Property or any property
adjoining or which could reasonably be expected to affect the Real Property,
or concerning compliance with or liability under the Regulations (as defined
below). The Company has heretofore delivered to Parent complete and accurate
copies of such reports, studies, and tests.

The Company and each Subsidiary have obtained, and maintained in full force
and effect, all required environmental permits and other governmental approvals
and are in compliance with all applicable Regulations (as defined below), except
where the failure to so obtain and maintain or to be in compliance would not
have a Company Material Adverse Effect. Neither the Company nor any Subsidiary
(i) has received a written notice or Claim (as defined below) alleging potential
liability under any of the Regulations or alleging a violation of the
Regulations or (ii) has any knowledge that such a notice or Claim may be issued
in the future. Neither the Company nor any Subsidiary has any knowledge of any
notices to or Claims against any persons, alleging potential liability under any
of the Regulations with respect to the Real Property or any adjoining properties
or which could reasonably be expected to affect the Real Property. Neither the
Company nor any Subsidiary (i) has been or is presently subject to or, to the
knowledge of the Company, threatened with any administrative or judicial
proceeding pursuant to the Regulations, or (ii) has any information that it may
be subject to or, to the knowledge of the Company, threatened with such a
proceeding in the future. Neither the Company nor any Subsidiary has knowledge
of any conditions or circumstances that could reasonably be expected to result
in the determination of liability against the Company or any Subsidiary relating
to environmental matters that would have a Company Material Adverse Effect,
including, but not limited to, any Claim arising from past or present
environmental practices with respect to Hazardous Materials, the Real Property,
or any disposal sites. To the knowledge of the Company, and except as allowed
under applicable Laws or Regulations, no Hazardous Materials

<PAGE>

have been or are threatened to be discharged, emitted, or released into the
air, water, soil, or subsurface at or from the Real Property by the Company.

For purposes of this Section 3.11, the following terms shall have the
following meanings: (i) "Hazardous Materials" means asbestos, urea
formaldehyde, polychlorinated biphenyls, nuclear fuel or materials, chemical
waste, radioactive materials, explosives, known human carcinogens, petroleum
products or other substances or materials listed, identified, or designated as
toxic or hazardous or as a pollutant or contaminant in, or the use, release or
disposal of which is regulated by, the Regulations; (ii) "Regulations" means the
Comprehensive Environmental Response Compensation and Liability Act ("CERCLA")
as amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"),
42 U.S.C. Sections 9601 ET SEQ.; the Federal Resource Conservation and Recovery
Act of 1976 ("RCRA"), 42 U.S.C. Sections 6901 ET SEQ.; the Clean Water Act, 33
U.S.C. Sections 1321 ET SEQ.; the Clean Air Act, 42 U.S.C. Sections 7401 ET
SEQ., and any other federal, state, county, local, foreign, or other
governmental statute, regulation, or ordinance, as adopted and in effect as of
the date hereof, that relates to or deals with employee safety and human health,
pollution, health, or the environment including, but not limited to, the use,
generation, discharge, transportation, disposal, recordkeeping, notification,
and reporting of Hazardous Materials; and (iii) "Claim" means any and all
claims, demands, causes of actions, suits, proceedings, administrative
proceedings, losses, judgments, decrees, debts, damages, liabilities, court
costs, penalties, attorneys' fees, and any other expenses incurred, assessed,
sustained or alleged by or against the Company or any Subsidiary.

3.12 OFFICERS, DIRECTORS AND EMPLOYEES. Prior to the date hereof, the
Company has provided to Parent a list that completely and accurately sets forth
the name and current annual salary rate of each officer or exempt employee of
the Company or any Subsidiary whose total remuneration for the last fiscal year
was, or for the current fiscal year has been set at, in excess of $50,000,
together with a summary of the bonuses, commissions and additional compensation,
if any, paid or payable to such persons for the last fiscal year and proposed
for the current fiscal year. The Disclosure Schedule completely and accurately
sets forth (i) the names of all former employees whose employment with the
Company or any Subsidiary has terminated either voluntarily or involuntarily
during the preceding 12-month period; and (ii) the names of the officers (with
all positions and titles indicated) and directors of the Company and each
Subsidiary. No unfair labor practice complaint against the Company or any
Subsidiary is pending before the National Labor Relations Board, and there is no
labor strike, slowdown or stoppage pending or, to the knowledge of the Company,
threatened against or involving the Company or any Subsidiary. Since January 1,
1995, no unionizing efforts have, to the knowledge of the Company, been made by
employees of the Company or any Subsidiary, neither the Company nor any
Subsidiary is a party to or subject to any collective bargaining agreement, and
no collective bargaining agreement is currently being negotiated by the Company
or any Subsidiary. There is no material labor dispute pending or, to the
knowledge of the Company, threatened between the Company or any Subsidiary and
its employees.

3.13 TAXES. The Company has previously furnished to Parent complete and
accurate copies of all tax or assessment reports and tax returns (including any
applicable information

<PAGE>

returns) required by any law or regulation (whether United States, foreign,
state, local, or other jurisdiction) and filed by the Company for each of the
three fiscal years ended December 31, 1995, 1996, and 1997 and of all such
returns filed separately by any Subsidiary for fiscal years ended during or
after 1995. The Company and each Subsidiary has filed, or has obtained
extensions to file (which extensions have not expired without filing), all
state, local, United States, foreign, or other tax reports and returns
required to be filed by any of them. The Company and each Subsidiary has
duly paid, or accrued on its books of account, all taxes (including estimated
taxes) shown as due on such reports and returns (or such extension requests),
or assessed against it, or that it is obligated to withhold from amounts owed
by it to any person. The liabilities and reserves for taxes reflected on the
Company Audited Balance Sheet or the Company Interim Balance Sheet are
adequate to cover all taxes payable by the Company and its Subsidiaries for
all taxable periods and portions thereof ending on or before the dates
thereof. There are no Liens (as defined in Section 3.14) for taxes upon any
property or asset of the Company or any Subsidiary. Neither the Company nor
any Subsidiary is delinquent in the payment of any tax assessment (including,
but not limited to, any applicable withholding taxes). None of the tax
returns or reports for the tax periods ended December 31, 1995, 1996, and
1997 have been audited by the Internal Revenue Service (the "IRS") or by any
other taxing authority. Further, to the knowledge of the Company, except as
set forth in the Disclosure Schedule, no state of facts exists or has existed
that could reasonably be expected to subject the Company or any Subsidiary to
an additional tax liability for any taxes assessable by either the IRS or any
separate state, local, foreign, or other taxing authority with respect to any
reports or returns filed on or before the date hereof (other than extension
requests for which returns have not been filed as of the date hereof) that
would have a Company Material Adverse Effect. Neither the Company nor any
Subsidiary has, with regard to any assets or property held, acquired or to be
acquired by any of them, filed a consent to the application of Section
341(f)(2) of the Code. Except to the extent specifically disclosed on the
Disclosure Schedule, neither the Company nor any Subsidiary has (i) received
notification of any pending or proposed examination by either the IRS or any
state, local, foreign, or other taxing authority, (ii) received notification
of any pending or proposed deficiency by either the IRS or any state, local,
foreign, or other taxing authority, or (iii) granted any extension of the
limitations period applicable to any claim for taxes.

For the purposes of this Section 3.12, "tax" shall mean and include taxes,
additions to tax, penalties, interest, fines, duties, withholdings, assessments,
and charges assessed or imposed by any governmental authority, including but not
limited to all federal, state, county, local, and foreign income, profits, gross
receipts, import, ad valorem, real and personal property, franchise, license,
sales, use, value added, stamp, transfer, withholding, payroll, employment,
excise, custom, duty, and any other taxes, obligations and assessments of any
kind whatsoever; "tax" shall also include any liability arising as a result of
being (or ceasing to be) a member of any affiliated, consolidated, combined, or
unitary group as well as any liability under any tax allocation, tax sharing,
tax indemnity, or similar agreement.

3.14 CONTRACTS. Except as set forth on the Disclosure Schedule, neither
the Company nor any Subsidiary (i) is a party to any collective bargaining
agreement or contract with any labor

<PAGE>

union, (ii) is a party to any written or oral contract for the employment of
any officer, individual employee or other person on a full-time or consulting
basis, or relating to severance pay for any such person, (iii) is a party to
any (A) written or oral agreement or understanding to repurchase assets
previously sold (or to indemnify or otherwise compensate the purchaser in
respect of such assets) or (B) agreement for the sale of any capital asset,
(iv) is a party to any contract, arrangement, commitment or understanding
(whether written or oral) which provides for future payments by the Company
in excess of $50,000 and is not terminable by the Company nor any Subsidiary
within 60 days without payment of a penalty or premium, other than employment
contracts, benefit plans and leases otherwise disclosed in the Disclosure
Schedule or listed as an exhibit in the Company SEC Filings, (v) is a party
to any independent sales representative, OEM, supply, distribution,
manufacturers' representative, dealer, licensing (except for immaterial
licenses, which include without limitation, licenses for off-the-shelf
software) joint development, joint venture, research and development, or
similar contract, (vi) is a party to any contract, arrangement, commitment or
understanding which is a material contract (as defined in Item 601(b)(10) of
Regulation S-K of the SEC) to be performed after the date of this Agreement
that has not been filed or incorporated by reference in the Company SEC
Filings, (vii) is a party to any confidentiality agreement or any agreement
which prohibits the Company or the Subsidiary from freely engaging in any
business anywhere in the world, (viii) is a party to any agreement or
indenture relating to the borrowing of money, (ix) has guaranteed any
obligation for borrowed money, or (x) is a party to any agreement or contract
that obligates the Company to pay consequential damages. The Company and
each Subsidiary has performed all obligations required to be performed by it
under any listed or material contract, plan, agreement, understanding, or
arrangement made or obligation owed by or to the Company or any Subsidiary,
except where the failure would not have a Company Material Adverse Effect;
there has not been any event of default (or any event or condition which with
notice or the lapse of time, both or otherwise, would constitute an event of
default) thereunder on the part of the Company, any Subsidiary, or, to the
Company's knowledge, any other party to any thereof that would have a Company
Material Adverse Effect; the same are in full force and effect and valid and
enforceable by the Company or its Subsidiaries in accordance with their
respective terms subject to laws of general application relating to
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and rules or law governing specific
performance, injunctive relief, and other equitable remedies; and the
performance of any such contracts, plans, agreements, understandings,
arrangements, or obligations would not have a Company Material Adverse Effect.

3.15 TITLE TO PROPERTIES; LIENS. The Company and/or its Subsidiaries
have good and marketable title to all properties and assets reflected on the
Company Audited Balance Sheet or the Company Interim Balance Sheet or acquired
after the dates thereof (except for properties and assets sold or otherwise
disposed of in the ordinary course of business since the dates thereof), which
includes each asset the absence or unavailability of which would have a Company
Material Adverse Effect, subject only to (a) statutory Liens arising or incurred
in the ordinary course of business with respect to which the underlying
obligations are not delinquent, (b) with respect to personal property, the
rights of customers of the Company or any Subsidiary with respect to inventory
or work in progress under orders or contracts entered into by the Company

<PAGE>

or any Subsidiary in the ordinary course of business, (c) Liens reflected on
the Company Audited Balance Sheet or the Company Interim Balance Sheet, (d)
Liens for taxes not yet delinquent, and (e) and defects in title that would
not have a Company Material Adverse Effect. The term "Lien" as used in this
Agreement means any mortgage, pledge, security interest, encumbrance, lien,
claim, or charge of any kind. All properties and assets purported to be
leased by the Company or any Subsidiary are subject to valid and effective
leases that are in full force and effect, and there does not exist, and the
Merger will not result in, any default or event that with notice or lapse of
time, or both or otherwise, would constitute a default under any such leases
which would have a Company Material Adverse Effect. The properties and
assets of the Company and each Subsidiary are in good working condition.

3.16 PERMITS, LICENSES, ETC. Except as specifically disclosed on the
Disclosure Schedule, the Company and each Subsidiary has all rights, permits,
certificates, licenses, consents, franchises, approvals, registrations, and
other authorizations necessary to sell its products and services and otherwise
carry on and conduct its business and to own, lease, use, and operate its
properties and assets at the places and in the manner now conducted and
operated, except those the absence of which would not have a Company Material
Adverse Effect. Neither the Company nor any Subsidiary has received any notice
or claim pertaining to the failure to obtain any permit, certificate, license,
franchise, approval, registration, or other authorization required by any
federal, state, local, or foreign body or authority (including, but not limited
to, any nongovernmental self-regulatory agency) except for any such notice or
claim regarding any such failure that would not have a Company Material Adverse
Effect, nor has the Company or any Subsidiary received any notice or claim
pertaining to the failure to obtain any permit, certificate, license, franchise,
approval, registration, or other authorization from the FDA or any similar
foreign regulatory agency.

3.17 INTELLECTUAL PROPERTY RIGHTS. The Disclosure Schedule contains a
complete and accurate list of all patents, trademarks, trade names, service
marks, and all applications for or registrations of any of the foregoing that
the Company uses in its business (other than generally available computer
software) as to which the Company or any Subsidiary is the owner or a licensee
(indicating whether such license is exclusive or nonexclusive). To the
knowledge of the Company and except as disclosed on the Disclosure Schedule, the
Company and each Subsidiary exclusively owns, free and clear of any Lien (as
defined in Section 3.14), or is exclusively (unless otherwise indicated in the
Disclosure Schedule) licensed to use, all patents, trademarks, trade names,
service marks, applications for or registrations of any of the foregoing,
processes, inventions, designs, technology, formulas, computer software
programs, know-how, and trade secrets used in or necessary for the conduct of
its respective business as currently conducted or proposed to be conducted and
where the lack of ownership or such license would have a Company Material
Adverse Effect (the "Company Intellectual Property"). Except to the extent
specifically disclosed on the Disclosure Schedule, no claim has been asserted
or, to the knowledge of the Company, threatened by any person, and, to the
Company's knowledge, its patent counsel has not concluded that any claim exists,
with respect to the Company's ownership of the Company Intellectual Property or
challenging or questioning the validity or effectiveness of any license or
agreement to which the Company is a party with respect thereto. To the

<PAGE>

knowledge of the Company, neither the use of the Company Intellectual Property
by the Company or any Subsidiary in the present or planned conduct of its
business nor any product or service of the Company or any Subsidiary infringes
on the intellectual property rights of any person. No current or former
shareholder, employee, or consultant of the Company or any Subsidiary has any
material rights in or to any of the Company Intellectual Property. All Company
Intellectual Property listed on the Disclosure Schedule has the status indicated
therein and all applications are still pending in good standing and have not
been abandoned. Except to the extent disclosed on the Disclosure Schedule:
(i) to the Company's knowledge, patents included within the Company Intellectual
Property are valid and have not been challenged in any judicial or
administrative proceeding; (ii) the Company and each Subsidiary have made all
statutorily required filings, if any, to record their interests, and taken
reasonable actions to protect their rights, in the Company Intellectual
Property, where the failure to make any such filing, record such interest or
take such other actions could reasonably be expected to have a Company Material
Adverse Effect; (iii) to the knowledge of the Company, no person or entity nor
such person's or entity's business or products has infringed or misappropriated
any Company Intellectual Property or currently is infringing or misappropriating
any Company Intellectual Property; and (iv) no other person or entity has any
right to receive or any obligation to pay a royalty with respect to any Company
Intellectual Property or any product or service of the Company or any
Subsidiary.

3.18 BENEFIT PLANS.

(a) Except to the extent specifically disclosed on the
Disclosure Schedule, neither the Company nor any Subsidiary sponsors,
maintains, contributes to, or has sponsored, maintained, or contributed to
or been required to contribute to, any "employee pension benefit plan"
("Pension Plan"), as such term is defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), including,
solely for the purpose of this subsection, a plan excluded from coverage by
Section 4(b)(5) of ERISA. No failure to comply with applicable provisions
of ERISA, the Code and other applicable law in connection with any Pension
Plan presently maintained by the Company or any Subsidiary could reasonably
be expected to have a Company Material Adverse Effect.

(b) Neither the Company nor any Subsidiary sponsors, maintains,
contributes to, or has sponsored, maintained, or contributed to or been
required to contribute to, any Pension Plan that is a "Multiemployer Plan"
within the meaning of Section 4001(a)(3) of ERISA.

(c) Except to the extent specifically disclosed on the
Disclosure Schedule, neither the Company nor any Subsidiary sponsors,
maintains, contributes to, or has sponsored, maintained, contributed to, or
been required to contribute to, any "employee welfare benefit plan"
("Welfare Plan"), as such term is defined in Section 3(1) of ERISA, whether
insured or otherwise. No failure to comply with applicable provisions of
ERISA, the Code and other applicable law, including, but not limited to,
Section 4980B of the

<PAGE>

Code and Part 6 of Subtitle B of Title I of ERISA, in connection with
any Welfare Plan presently maintained by the Company or any Subsidiary
could reasonably be expected to have a Company Material Adverse Effect.
Neither the Company nor any Subsidiary has established or contributed to
any "voluntary employees' beneficiary association" within the meaning of
Section 501(c)(9) of the Code.

(d) Except to the extent specifically disclosed on the
Disclosure Schedule, neither the Company nor any Subsidiary sponsors,
maintains, or contributes to, or has sponsored, maintained, or contributed
to, a "self-insured medical reimbursement plan" within the meaning of
Section 105(h) of the Code and the regulations thereunder.

(e) Except to the extent specifically disclosed on the
Disclosure Schedule, neither the Company nor any Subsidiary currently
maintains or contributes to any oral or written bonus, profit-sharing,
compensation (incentive or otherwise), commission, stock option, or other
stock-based compensation, retirement, severance, change of control,
vacation, sick or parental leave, dependent care, deferred compensation,
cafeteria, disability, hospitalization, medical, death, retiree, insurance,
or other benefit or welfare or other similar plan, policy, agreement,
trust, fund, or arrangement providing for the remuneration or benefit of
all or any employees or shareholders or any other person, that is neither a
Pension Plan nor a Welfare Plan (collectively, the "Compensation Plans").

(f) To the knowledge of the Company, neither any Pension Plans
or Welfare Plans nor any trust created or insurance contract issued
thereunder nor any trustee, fiduciary, custodian, or administrator thereof,
nor any officer, director, or employee of the Company or any Subsidiary,
custodian, or any other "disqualified person" within the meaning of Section
4975(e)(2) of the Code, or "party in interest" within the meaning of
Section 3(14) of ERISA, with respect to any such plan has engaged in any
act or omission that could reasonably be expected to result in a Company
Material Adverse Effect in connection with a liability for breach of
fiduciary duties under ERISA or a tax or penalty imposed by Section 502 of
ERISA.

(g) Except to the extent specifically disclosed on the
Disclosure Schedule, (i) full and timely payment has been made of all
amounts that the Company or any Subsidiary is required, under applicable
law, with respect to any Pension Plan, Welfare Plan, or Compensation Plan,
or any agreement relating to any Pension Plan, Welfare Plan, or
Compensation Plan, to have paid as a contribution to each Pension Plan,
Welfare Plan, or Compensation Plan, (ii) to the extent required by
generally accepted accounting principles, the Company has made adequate
provisions for reserves to meet contributions that have not been made
because they are not yet due under the terms of any Pension Plan, Welfare
Plan, or Compensation Plan or related agreements, (iii) there will be no
change on or before the Closing Date in the operation of any Pension Plan,
Welfare Plan, or Compensation Plan or documents under which any such plan
is maintained that will result in an increase in the benefit liabilities
under such plan, except as may be required by law or as provided by the
terms of the Pension Plan, Welfare Plan, Compensation Plan

<PAGE>

or document in effect on the date of this Agreement, to the extent
disclosed in or attached to the Disclosure Schedule, (iv) the IRS has
issued favorable determination letters with respect to all Company and
Subsidiary Pension Plans that are intended to be qualified under Section
401(a) of the Code, and (v) the Company has made available to Parent
complete and accurate copies of all Pension Plans, Welfare Plans,
Compensation Plans, and related agreements, annual reports (Form 5500),
favorable determination letters, current summary plan descriptions, and
all employee handbooks or manuals.

(h) Except to the extent specifically disclosed on the
Disclosure Schedule, the execution of, and performance of the transactions
contemplated in, this Agreement will not (either alone or upon the
occurrence of any additional or subsequent events) result in forgiveness of
indebtedness or an increase in benefits or result in the acceleration of
vesting, funding, benefit accruals or benefit payments under any Pension
Plan, Welfare Plan or Compensation Plan. Except to the extent specifically
disclosed on the Disclosure Schedule, no amount that could reasonably be
expected to be received (whether in cash or property or the vesting of
property) by any employee, officer, or director of the Company or any of
its affiliates who is a "disqualified individual" (as such term is defined
in proposed Treasury Regulation Section 1.280G-1) under any Pension Plan,
Welfare Plan, or Compensation Plan currently in effect as a result of any
of the transactions contemplated by this Agreement would be an "excess
parachute payment" (as such term is defined in Section 280G(b)(1) of the
Code).

3.19 MINUTE BOOKS. The minute books of the Company and the
Subsidiaries, as previously made available to Parent and its representatives,
contain records of all actions taken at all meetings of and corporate actions or
written consents by the shareholders, Boards of Directors, and committees of the
Boards of Directors of the Company and the Subsidiaries, except for the absence
of such records as would not have a Company Material Adverse Effect.

3.20 INSURANCE POLICIES. The Disclosure Schedule sets forth a complete
and accurate list of all policies of insurance (with copies attached) maintained
by the Company or any Subsidiary with respect to any of its officers, directors,
employees, shareholders, agents, properties, buildings, machinery, equipment,
furniture, fixtures or operations and a description of each claim made in excess
of $5,000 by the Company or any Subsidiary during the three-year period
preceding the date hereof under any such policy of insurance. All such policies
of insurance are in full force and effect.

3.21 BANK ACCOUNTS. The Disclosure Schedule sets forth a list of each
bank, broker, or other depository with which the Company or any Subsidiary has
an account or safe deposit box, the names and numbers of such accounts or boxes
and the names of all persons authorized to draw thereon or execute transactions.

3.22 POWERS OF ATTORNEY. The Disclosure Schedule sets forth the names
of all persons, if any, holding powers of attorney from the Company or any
Subsidiary and a description of the

<PAGE>

scope of each such power of attorney. The Company has delivered to Parent
prior to the date hereof complete and accurate copies of all such powers of
attorney.

3.23 PRODUCT LIABILITY CLAIMS. Except to the extent specifically
disclosed on the Disclosure Schedule, during the three-year period preceding the
date hereof neither the Company nor any Subsidiary has received a claim for or
based upon breach of product warranty (other than warranty service and repair
claims in the ordinary course of business not material in amount or
significance), strict liability in tort, negligent manufacture of product,
negligent provision of services or any other allegation of liability, including
or resulting in, but not limited to, product recalls, arising from the
materials, design, testing, manufacture, packaging, labeling (including
instructions for use), or sale of its products or from the provision of services
(hereafter collectively referred to as "Product Liability").

3.24 WARRANTIES. The terms of all product and service warranties and
product return, sales credit, discount, warehouse allowance, advertising
allowance, demo sales, and credit policies of the Company and each Subsidiary
are specifically set forth on the Disclosure Schedule. The Company has attached
to the Disclosure Schedule complete and accurate copies of all such warranties
and policies.

3.25 INVENTORIES. Except as specifically set forth on the Disclosure
Schedule, all inventories of the Company and its Subsidiaries consist of items
of merchantable quality and quantity usable or salable in the ordinary course of
business, are salable at prevailing market prices that are not less than the
book value amounts thereof or the price customarily charged by the Company or
the applicable Subsidiary therefor, conform to the specifications established
therefor, and have been manufactured in accordance with applicable regulatory
requirements, except to the extent that the failure of such inventories so to
consist, be saleable, conform, or be manufactured would not have a Company
Material Adverse Effect. Except as specifically set forth on the Disclosure
Schedule, the quantities of all inventories, materials, and supplies of the
Company and each Subsidiary (net of the obsolescence reserve therefor shown on
the Company Interim Balance Sheet and determined in the ordinary course of
business consistent with past practice) are not obsolete, damaged, slow-moving,
defective, or excessive, and are reasonable and balanced in the circumstances of
the Company and its Subsidiaries, except to the extent that the failure of such
inventories to be in such conditions would not have a Company Material Adverse
Effect. The Disclosure Schedule sets forth a true and complete list of the
addresses of all warehouses or other facilities in which inventories of the
Company or any Subsidiary are located.

3.26 RELATIONS WITH SUPPLIERS AND CUSTOMERS. Since January 1, 1995, no
current supplier of the Company or any Subsidiary has cancelled any contract or
order for provision of, and, to the knowledge of the Company, there has been no
threat by any such supplier not to provide, raw materials, products, supplies,
or services to the businesses of the Company and its Subsidiaries either prior
to or following the Merger except for any cancellation or threat which would not
have a Company Material Adverse Effect. Except as specifically set forth on the
Disclosure Schedule, neither the Company nor any Subsidiary has, to the
knowledge of the

<PAGE>

Company, received any information from any customer that accounted for more
than 5% of the revenues of the Company and its Subsidiaries during the last
full fiscal year reasonably to the effect that such customer intends to
materially decrease the amount of business it does with the businesses of the
Company and its Subsidiaries either prior to or following the Merger. The
Disclosure Schedule lists each supplier to the Company or any Subsidiary that
is the sole source of a particular raw material, product, supply, or service.

3.27 NO FINDERS. No act of the Company or any Subsidiary has given or
will give rise to any claim against any of the parties hereto for a brokerage
commission, finder's fee, or other like payment in connection with the
transactions contemplated herein, except payments in the amounts specified on
the Disclosure Schedule to those parties identified thereon who have acted as a
finder for the Company or have been retained by the Company as financial
advisors pursuant to the agreements or other documents described in the
Disclosure Schedule, copies of which have been provided to Parent prior to the
date of this Agreement.

3.28 PROXY STATEMENT. The Proxy Statement/Prospectus (as defined in
Section 5.4 hereof) and any amendments or supplements thereto will comply as to
form in all material respects with the provisions of the 1934 Act as amended,
and the rules and regulations promulgated thereunder, and none of the
information relating to the Company or its affiliates included or incorporated
therein or in any amendments or supplements thereto, or any schedules required
to be filed with the SEC in connection therewith, will, as of the date mailed to
the Company's shareholders and at the time of the Company Shareholders Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that no representation or warranty is made by the
Company with respect to information relating to Parent or any affiliate of
Parent.

3.29 MERGER FILINGS. The information as to the Company and the
Subsidiaries or any of their affiliates or shareholders included in the
Company's filing, or submitted to Parent for inclusion in its filing, if any,
required to be submitted under the HSR Act or under any Foreign Merger Laws
shall be true, correct, and complete in all material respects and shall comply
in all material respects with the applicable requirements of the HSR Act, the
rules and regulations issued by the Federal Trade Commission pursuant thereto,
and the Foreign Merger Laws.

3.30 FAIRNESS OPINION. The Company has received a written opinion from
Piper Jaffray, Inc. to the effect that, as of the date hereof, the consideration
to be received by the holders of Company Common Stock in the Merger is fair to
such holders from a financial point of view, and the Company will promptly
deliver a copy of such opinion to Parent.

3.31 STATE TAKEOVER LAWS; RIGHTS AGREEMENT.

(a) The Board of Directors of the Company and, in accordance
with Section 302A.673 of the MBCA, the required committee of such Board of
Directors have approved the transactions contemplated by this Agreement,
the Agreements to Facilitate

<PAGE>

Merger described in Section 5.11 hereof, and the Stock Option Agreement
described in Section 5.17 hereof such that the provisions of Sections
302A.671 and 302A.673 of the MBCA will not apply to this Agreement or
the Agreements to Facilitate Merger or the Stock Option Agreement or any
of the transactions contemplated hereby or thereby.

(b) The Company has taken all action and completed all
amendments, if any, necessary or appropriate so that (i) the Rights
Agreement dated as of June 26, 1996, as amended, between the Company and
Northwest Bank Minnesota, N.A. (the "Company Rights Agreement"), is
inapplicable to the transactions contemplated by the Agreements to
Facilitate Merger, the Stock Option Agreement and this Agreement, (ii) the
execution of this Agreement, the Stock Option Agreement, and the Agreements
to Facilitate Merger, and the consummation of the transactions contemplated
hereby and thereby, do not and will not result in the ability of any person
to exercise any Rights under the Company Rights Agreement or enable or
require the Rights to separate from the shares of Company Common Stock to
which they are attached or to be triggered or become exercisable, or
otherwise result in the occurrence of a "Distribution Date" or "Stock
Acquisition Date" (as such terms are defined in the Company Rights
Agreement), and (iii) immediately prior to the Effective Time, the Rights
under the Company Rights Agreement shall, without any payment by the
Company or Parent, expire with neither the Company nor Parent having any
obligations under, and no holder of Rights having any rights under, the
Rights or the Company Rights Agreement.

ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF PARENT AND MERGER SUBSIDIARY

Parent and Merger Subsidiary hereby jointly and severally represent and
warrant to the Company as of the date hereof as follows:

4.1 ORGANIZATION. Each of Parent and Merger Subsidiary is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Minnesota and has all requisite corporate power and
authority to own, lease, and operate its properties and to carry on its business
as now being conducted. Each of Parent and Merger Subsidiary is duly qualified
and in good standing to do business in each jurisdiction in which the property
owned, leased, or operated by it or the nature of the business conducted by it
makes such qualification necessary and where the failure to qualify could
reasonably be expected to have a Parent Material Adverse Effect (as defined
below). "Parent Material Adverse Effect" means any effect, change or event
that, individually or in the aggregate with all similar effects, changes or
events, is or would reasonably be expected to be material and adverse: (i) to
the business, properties, liabilities, results of operation, or financial
condition of Parent and its subsidiaries, considered as a whole, or (ii) to
Parent's ability to perform any of its obligations under this Agreement or to
consummate the Merger.

<PAGE>

4.2 AUTHORIZATION. Each of Parent and Merger Subsidiary has the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby, and Parent has full
corporate power and authority to prepare, file, and distribute the Registration
Statement (as defined in Section 5.4 hereof). The execution and delivery of
this Agreement by Parent and Merger Subsidiary and the consummation of the
transactions contemplated hereby have been duly and validly authorized and
approved by the Boards of Directors of Parent and Merger Subsidiary and by
Parent as the sole shareholder of Merger Subsidiary, and no other corporate
proceedings on the part of Parent and Merger Subsidiary are necessary to
authorize this Agreement or to consummate the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by each of
Parent and Merger Subsidiary and constitutes the valid and binding obligation of
Parent and Merger Subsidiary, enforceable against each of them in accordance
with its terms, subject to laws of general application relating to bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally and rules of law governing specific performance,
injunctive relief, or other equitable remedies.

4.3 CAPITALIZATION. As of July 2, 1998, the authorized capital stock
of Parent consisted of (a) 800,000,000 shares of Common Stock with a par value
of $.10 per share, of which there were 469,350,541 shares issued and outstanding
and no shares held in Parent's treasury, and (b) 2,500,000 shares of Preferred
Stock with a par value of $1.00 per share, of which there were no shares issued
and outstanding. The authorized capital stock of Merger Subsidiary consists of
2,500 shares of Merger Subsidiary Common Stock, 100 of which are issued and
outstanding and owned by Parent. All issued and outstanding shares of Parent
Common Stock and Merger Subsidiary Common Stock are, and the shares of Parent
Common Stock to be issued and delivered in the Merger pursuant to Article 1
hereof shall be, at the time of issuance and delivery, validly issued, fully
paid, nonassessable, and free of preemptive rights. The shares of Parent Common
Stock to be issued and delivered in the Merger pursuant to Article 1 hereof
shall be registered under the 1933 Act and duly listed for trading on the NYSE,
subject to official notice of issuance.

4.4 CONSENTS AND APPROVALS. Except for (i) any applicable
requirements of the 1933 Act, the 1934 Act, state securities laws, the NYSE,
the HSR Act, and Foreign Merger Laws, (ii) the filing and recordation of
appropriate merger documents as required by the MBCA, and (iii) compliance
with Sections 302A.471 and 302A.473 of the MBCA regarding dissenters' rights
of the Company's shareholders, the execution and delivery of this Agreement
by Parent and Merger Subsidiary and the consummation of the transactions
contemplated hereby will not: (a) violate any provision of the Articles of
Incorporation or Bylaws of Parent or Merger Subsidiary; (b) violate any
statute, rule, regulation, order, or decree of any public body or authority
(including, but not limited to, the FDA or any nongovernmental
self-regulatory agency) by which Parent or any of its subsidiaries or any of
their respective properties or assets may be bound; (c) require any filing
with or permit, consent, or approval of any public body or authority
(including, but not limited to, the FDA or any nongovernmental
self-regulatory agency); or (d) result in any violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default
under, result in the loss of any material benefit under, or give rise to any
right of

<PAGE>

termination, cancellation, increased payments, or acceleration under, or
result in the creation of any Lien on any of the properties or assets of
Parent or its subsidiaries under, any of the terms, conditions, or provisions
of any note, bond, mortgage, indenture, license, franchise, permit,
agreement, or other instrument or obligation to which Parent or any of its
subsidiaries is a party, or by which any of them or any of their respective
properties or assets may be bound, except (x) in the cases of clauses (b) or
(c), where such violation, failure to make any such filing or failure to
obtain such permit, consent or approval, would not prevent or delay
consummation of this Merger or otherwise prevent Parent from performing its
obligations under the Agreement and would not have a Parent Material Adverse
Effect, and (y) in the case of clause (d), for any such violations, breaches,
defaults, or other occurrences that would not prevent or delay consummation
of any of the transaction contemplated hereby in any material respect, or
otherwise prevent Parent from performing its obligations under this Agreement
in any material respect, and would not have a Parent Material Adverse Effect.

4.5 REPORTS; FINANCIAL STATEMENTS; ABSENCE OF CHANGES. Parent has
filed all forms, reports, registration statements, and documents required to be
filed by it with the SEC since January 1, 1995 (such forms, reports,
registration statements and documents, together with any amendments thereto, are
referred to as the "Parent SEC Filings"). As of their respective dates, the
Parent SEC Filings (i) complied as to form in all material respects with the
applicable requirements of the 1933 Act and the 1934 Act, as the case may be,
and (ii) did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading. The audited financial statements and unaudited interim
financial statements included or incorporated by reference in the Parent SEC
Filings (i) were prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved (except as
may be indicated therein or in the notes thereto), (ii) complied as of their
respective dates in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, and (iii) fairly present the consolidated financial position of Parent
as of the dates thereof and the income, cash flows, and changes in shareholders'
equity for the periods involved. Except to the extent disclosed in Parent's
subsequent filings with the SEC or specifically disclosed on SCHEDULE 4.5, since
April 30, 1997, there has not been any change or circumstance that would have a
Parent Material Adverse Effect or as of the date hereof any liabilities or
obligations of any nature (whether absolute, accrued, contingent or otherwise)
that would have a Parent Material Adverse Effect. Except to the extent
disclosed in the Parent SEC Filings or on SCHEDULE 4.5, (i) to Parent's
knowledge, there is no investigation, review, claim, action, suit or proceeding
by any federal, state, local or foreign body or authority (including, but not
limited to, the FDA or any nongovernmental self-regulatory agency) or private
party with respect to Parent that could reasonably be expected to have a Parent
Material Adverse Effect, (ii) all activities of Parent and its subsidiaries have
been, and are currently being, conducted in compliance with all applicable
federal, state, local, and foreign laws, ordinances, regulations,
interpretations, judgments, decrees, injunctions, permits, licenses,
certificates, governmental requirements, orders and other similar items of any
court or other governmental entity (including, but not limited to, those of the
FDA or any nongovernmental self-regulatory agency), the failure to comply with
which could
26

<PAGE>

reasonably be expected to have a Parent Material Adverse Effect, (iii) Parent
and each of its subsidiaries has timely filed or otherwise provided all
registrations, reports, data, and other information and applications with
respect to its Regulated Products required to be filed with or otherwise
provided to the FDA or any other federal, state, local, or foreign
governmental authorities with jurisdiction over the manufacture, use or sale
of the Regulated Products, and all regulatory licenses or approvals in
respect thereof are in full force and effect, except for the failure to file
timely such registrations, reports, data, information, and applications or
the failure to have such licenses and approvals in full force and effect
would not have a Parent Material Adverse Effect.

4.6 REGISTRATION STATEMENT. The Registration Statement (as defined in
Section 5.4 hereof) and any amendments or supplements thereto will comply in all
material respects as to form with the 1933 Act, and none of the information
relating to Parent or its affiliates included or incorporated therein or in any
amendments or supplements thereto, or any schedules required to be filed with
the SEC in connection therewith, will, at the time the Registration Statement
becomes effective or as of the date of the Company Shareholders Meeting, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that no representation or warranty is made by
Parent with respect to information relating to the Company or any affiliate of
the Company.

4.7 MERGER FILINGS. The information as to Parent and Merger Subsidiary
or any of their affiliates or shareholders included in Parent's filing, or
submitted to the Company for inclusion in its filing, if any, required to be
submitted under the HSR Act or under any Foreign Merger Laws shall be true,
correct, and complete in all material respects and shall comply in all material
respects with the applicable requirements of the HSR Act, the rules and
regulations issued by the Federal Trade Commission pursuant thereto, and Foreign
Merger Laws.

4.8 NO FINDERS. No act of Parent or Merger Subsidiary has given or
will give rise to any claim against any of the parties hereto for a brokerage
commission, finder's fee, or other like payment in connection with the
transactions contemplated herein.

ARTICLE 5
COVENANTS

5.1 CONDUCT OF BUSINESS OF THE COMPANY. Except as contemplated by this
Agreement or to the extent that Parent otherwise consents in writing, during the
period from the date of this Agreement to the Effective Time, the Company and
each Subsidiary will conduct its respective operations according to its ordinary
and usual course of business and consistent with past practice, and the Company
and each Subsidiary will use all reasonable efforts to preserve intact in all
material respects its respective business organizations, to maintain its present
and planned business, to keep available the services of its respective officers
and employees and to maintain satisfactory relationships with licensors,
licensees, suppliers, contractors, distributors, physicians,

<PAGE>

consultants, customers, and others having business relationships with it;
provided, however, that the Company will not be required to make any payments
or enter into or amend any contractual arrangements or understandings to
satisfy the foregoing obligations. Without limiting the generality of the
foregoing, and except as otherwise expressly provided in or contemplated by
this Agreement, prior to the Effective Time, neither the Company nor any
Subsidiary will, without the prior written consent of Parent:

(a) amend its Articles of Incorporation or Bylaws;

(b) authorize for issuance, issue, sell, pledge, or deliver
(whether through the issuance or granting of additional options, warrants,
commitments, subscriptions, rights to purchase, or otherwise) any stock of
any class or any securities convertible into shares of stock of any class
(other than the issuance of the number of shares of Company Common Stock
indicated in Section 3.4 hereof upon the exercise in accordance with the
current terms of the stock options and other rights listed in the
Disclosure Schedule hereof as outstanding on the date of this Agreement,
and the actual number of shares issued for the final offering period under
the Company's Employee Stock Purchase Plan in accordance with the Section
3.3 hereof);

(c) split, combine, or reclassify any shares of its capital
stock, declare, set aside, or pay any dividend or other distribution
(whether in cash, stock, or property or any combination thereof) in respect
of its capital stock; or redeem or otherwise acquire any shares of its
capital stock or other securities; or amend or alter any material term of
any of its outstanding securities;

(d) other than in the ordinary course of business and consistent
with past practice, create, incur, or assume any indebtedness for borrowed
money, or assume, guarantee, endorse, or otherwise become liable or
responsible (whether directly, contingently, or otherwise) for the
obligations of any other person, or make any loans, advances or capital
contributions to, or investments in, any other person; or create, incur or
assume any Lien on any material asset;

(e) knowingly take any action that would have the effect of
jeopardizing the qualification of the Merger as a reorganization within the
meaning of Section 368(a)(2)(E) of the Code;

(f) (i) increase in any manner the compensation of any of its
directors, officers, employees, shareholders, or consultants, except in the
ordinary course of business and consistent with past practice or consistent
with existing contractual commitments, in each case to the extent disclosed
in the Disclosure Schedule or accelerate the payment of any such
compensation (whether or not any such acceleration is consistent with past
practice) other than as required by existing contractual commitments to the
extent disclosed in the Disclosure Schedule; (ii) pay or accelerate or
otherwise

<PAGE>

modify the payment, vesting, exercisability, Company matching amount, or
other feature or requirement of any pension, retirement allowance,
severance, change of control, stock option, or other employee benefit
not required by any existing plan, agreement, or arrangement or by
applicable law to any such director, officer, employee, shareholder, or
consultant, whether past or present, except as determined by the Company
to be necessary to comply with applicable law or maintain tax-favored
status (and any nonmaterial changes incidental thereto); or (iii) except
for normal increases in the ordinary course of business in accordance
with its customary past practices or consistent with existing
contractual commitments, in each case to the extent disclosed in the
Disclosure Schedule, commit itself to any additional or increased
pension, profit-sharing, bonus, incentive, deferred compensation, stock
purchase, stock option, stock appreciation right, group insurance,
severance, change of control, retirement or other benefit, plan,
agreement, or arrangement, or to any employment or consulting agreement,
with or for the benefit of any person, or amend any of such plans or any
of such agreements in existence on the date hereof;

(g) except in the ordinary course of business and consistent
with past practice or pursuant to contractual obligations existing on the
date hereof, (i) sell, transfer, mortgage, or otherwise dispose of or
encumber any real or personal property, (ii) pay, discharge, or satisfy any
material claim, liability, or obligation (absolute, accrued, contingent, or
otherwise), or (iii) cancel any debts or waive any claims or rights, which
involve payments or commitments to make payments that individually exceed
$50,000 or, in the aggregate, exceed $100,000;

(h) acquire or agree to acquire (i) by merging or consolidating
with, or by purchasing a substantial portion of the assets of, or by any
other manner, any portion of the assets of, or by any other manner, any
business of any corporation, partnership, joint venture, association, or
other business organization or division thereof or (ii) any assets that are
material, individually or in the aggregate, to the Company, except as
provided in subsection (i) below and except purchases of inventory in the
ordinary course of business consistent with past practice;

(i) make or agree to make any new capital expenditure or
expenditures that, individually, is in excess of $50,000 or, in the
aggregate, are in excess of $100,000;

(j) enter into, amend, or terminate any joint ventures or any
other agreements, commitments, or contracts that, individually or in the
aggregate, are material to the Company or any Subsidiary (except
agreements, commitments, or contracts expressly provided for or
contemplated by this Agreement or for the purchase, sale, or lease of
goods, services, or properties in the ordinary course of business,
consistent with past practice), or otherwise make any material change in
the conduct of the business or operations of the Company or any Subsidiary;

<PAGE>

(k) enter into or terminate, or amend, extend, renew, or
otherwise modify (including, but not limited to, by default or by failure
to act) any distribution, OEM, independent sales representative,
noncompetition, licensing, franchise, research and development, supply, or
similar contract, agreement, or understanding (except agreements,
commitments, or contracts expressly provided for or contemplated by this
Agreement or for the purchase, sale, or lease of goods, services, or
properties in the ordinary course of business, consistent with past
practice);

(l) change in any material respect its credit policy as to sales
of inventories or collection of receivables or its inventory consignment
practices;

(m) remove or permit to be removed from any building, facility,
or real property any machinery, equipment, fixture, vehicle, or other
personal property or parts thereof, except in the ordinary course of
business;

(n) alter or revise its accounting principles, procedures,
methods, or practices, except as required by a change in generally accepted
accounting principles and concurred with by the Company's independent
public accountants;

(o) institute, settle, or compromise any claim, action, suit, or
proceeding pending or threatened by or against it involving amounts in
excess of $100,000, at law or in equity or before any federal, state,
local, foreign, or other governmental department, commission, board,
bureau, agency, or instrumentality (including, but not limited to, the FDA
or any nongovernmental self-regulatory agency);

(p) distribute or otherwise circulate any notices, directives,
or other communications directed to all or groups of customers, vendors,
employees, distributors, or others associated with its business relating to
the transactions contemplated hereby or to the operation of business after
completion of the Merger without consulting with Parent, giving Parent
reasonable opportunity to comment thereon, and obtaining prior to
distribution Parent's approval thereof, which shall not unreasonably be
withheld;

(q) knowingly take any action that would cause the condition set
forth in Section 6.2(a) not to be met; or

(r) agree, whether in writing or otherwise, to do any of the
foregoing.

provided, however, that in the event that the Company or any of its Subsidiaries
would be prohibited from taking any action by reason of this Section 5.1 without
the prior written consent of Parent, such action may nevertheless be taken if
the Company or any of its Subsidiaries is expressly required to do so by law and
the Company prior to taking such action informs Parent in writing of such
requirement.

<PAGE>

5.2 NO SOLICITATION. From the date hereof until the termination of
this Agreement, the Company will not and will cause its Subsidiaries and its and
their respective officers, directors, employees, representatives, agents, or
affiliates (including, but not limited to any investment banker, attorney, or
accountant retained by the Company or any Subsidiary), to not, directly or
indirectly, solicit, encourage, initiate, or participate in any way in
discussions or negotiations with, or knowingly provide any information to, any
corporation, partnership, person, or other entity or group (other than Parent or
any affiliate or agent of Parent) concerning any merger, sale or licensing of
any significant portion of the assets, sale of shares of capital stock
(including without limitation any proposal or offer to the Company's
shareholders), or similar transactions involving the Company or any Subsidiary
(an "Alternative Proposal"), or otherwise facilitate any effort or attempt to
make or implement an Alternative Proposal. The Company will promptly
communicate to Parent the terms of any proposal or inquiry that it has received
or may receive in respect of any such transaction or of any such information
requested from it or of any such negotiations or discussions being sought to be
initiated with the Company and may inform any third party who contacts the
Company on an unsolicited basis concerning an Alternative Proposal that the
Company is obligated hereunder to disclose such to Parent. Notwithstanding the
foregoing, this section shall not prohibit the Board of Directors of the Company
from (i) furnishing information to or entering into discussions or negotiations
with, any person or entity that makes an unsolicited bona fide Alternative
Proposal, if, and only to the extent that, (a) the Board of Directors of the
Company determines in good faith, after receipt of advice to such effect from
outside legal counsel, that such action is so required for the board of
Directors to comply with its fiduciary duties to shareholders imposed by law,
(b) prior to furnishing information to, or entering into discussions and
negotiations with, such person or entity, the Company promptly provides written
notice to Parent to the effect that it is furnishing information to, or entering
into discussions or negotiations with, such person or entity, and (c) the
Company keeps Parent informed of the status and all material terms and events
with respect to any such Alternative Proposal; and (ii) to the extent
applicable, complying with Rules 14d-9 and 14e-2 promulgated under the 1934 Act,
as amended, with regard to an Alternative Proposal. Nothing in this section
shall (x) permit the Company to terminate this Agreement (except as specifically
provided in Article 7 hereof), (y) permit the Company to enter into any
agreement with respect to an Alternative Proposal for as long as this Agreement
remains in effect (it being agreed that for as long as this Agreement remains in
effect, the Company shall not enter into any agreement with any person that
provides for, or in any way facilitates, an Alternative Proposal), or (z) affect
any other obligation of the Company under this Agreement while this Agreement
remains in effect.

5.3 ACCESS AND INFORMATION. The Company shall afford to Parent, and
to Parent's accountants, officers, directors, employees, counsel, and other
representatives, reasonable access during normal business hours, from the
date hereof through the Effective Time, to all of its properties, books,
contracts, commitments, and records, and, during such period, the Company
shall furnish promptly to Parent all information concerning the Company's and
its Subsidiaries' businesses, prospects, properties, liabilities, results of
operations, financial condition, testing, clinicals, officers, employees,
investigators, distributors, customers, suppliers, and others having dealings
with the Company as Parent may reasonably request and reasonable opportunity
to contact and obtain information from such officers, employees,
investigators, distributors,

<PAGE>

customers, suppliers, and others having dealings with the Company as Parent
may reasonably request, subject, however, to limitations under existing
confidentiality agreements with other bidders with respect to prior offers.
During the period from the date hereof to the Effective Time, the parties
shall in good faith meet and correspond on a regular basis for mutual
consultation concerning the conduct of the Company's and the Subsidiaries'
businesses and, in connection therewith, Parent shall be entitled to have
employees or other representatives present at the offices of the Company and
its Subsidiaries to observe, and be kept informed concerning, the Company's
and the Subsidiaries' operations and business planning. Parent shall hold in
confidence all such nonpublic information as required and in accordance with
the confidentiality letter agreement dated June 2, 1998, between Parent and
the Company, as amended by the amendment to confidentiality letter agreement
dated the same date (the "Confidentiality Agreement").

5.4 APPROVAL OF SHAREHOLDERS; PROXY STATEMENT; REGISTRATION STATEMENT.

(a) The Company shall take all action necessary in accordance
with Minnesota law and the Company's Articles of Incorporation and
Bylaws to cause a special meeting of the Company's shareholders (the
"Company Shareholders Meeting") to be duly called and held as soon as
reasonably practicable following the date upon which the Registration
Statement (as defined below) becomes effective for the purpose of voting
upon the Merger. The shareholder vote or consent required for approval
of the Plan of Merger and the Merger shall be no greater than that set
forth in the MBCA and the Company's Articles of Incorporation as
previously provided to Parent. Accordingly, the Company represents and
warrants that the affirmative vote of the holders of record of a
majority of the outstanding shares of Company Common Stock is all that
is necessary to obtain shareholder approval of the Plan of Merger and
the Merger. The Company shall use all reasonable efforts to obtain the
approval by the Company's shareholders of this Agreement, the Plan of
Merger, and the Merger. In accordance therewith, the Company shall,
with the cooperation of Parent, prepare and file, as soon as reasonably
practicable, a proxy statement/prospectus included as part of the
Registration Statement (such proxy statement/prospectus, together with
notice of meeting, form of proxy, and any letter or other materials to
the Company's shareholders included therein are referred to in this
Agreement as the "Proxy Statement/Prospectus"). The Company shall use
all reasonable efforts to cause the definitive Proxy Statement/Prospectus
to be mailed to the shareholders of the Company, as soon as reasonably
practicable following its effectiveness, with the date of mailing as
mutually determined by the Company and Parent. The Company will, through
its Board of Directors, recommend to its shareholders approval of the
Merger in the definitive Proxy Statement/Prospectus.

(b) Parent shall, with the cooperation of the Company, prepare
and file, as soon as reasonably practicable, a registration statement under
the 1933 Act registering the shares of Parent Common Stock to be issued in
the Merger (the "Registration Statement"), which Registration Statement
shall include the Proxy Statement/Prospectus. Parent will use all
reasonable efforts to have the Registration Statement declared effective

<PAGE>

by the SEC as promptly thereafter as practicable. Parent shall also take
any action required to be taken under state blue sky or securities laws in
connection with the issuance of Parent Common Stock pursuant to the Merger.
The Company shall furnish to Parent all information concerning the Company
and its Subsidiaries and the holders of its capital stock, and shall take
such other action and otherwise cooperate, as Parent may reasonably request
in connection with any such action.

(c) Parent shall notify the Company promptly of the receipt of
the comments of the SEC and of any request by the SEC for amendments or
supplements to the Registration Statement and shall supply the Company with
copies of all correspondence with the SEC with respect to the Registration
Statement.

(d) If at any time prior to the Company Shareholders Meeting,
any event should occur relating to the Company, any Subsidiary, or the
Company's officers or directors that is required to be described in an
amendment or supplement to the definitive Proxy Statement/Prospectus or the
Registration Statement, the Company shall promptly inform Parent. If at
any time prior to the Company Shareholders Meeting, any event shall occur
relating to Parent or Merger Subsidiary or their respective officers or
directors that is required to be described in an amendment or supplement to
the definitive Proxy Statement/Prospectus or the Registration Statement,
Parent shall promptly inform the Company. Whenever any event occurs that
should be described in an amendment of, or supplement to, the definitive
Proxy Statement/Prospectus or the Registration Statement, the Company or
Parent, as the case may be, shall, upon learning of such event, promptly
notify the other and consult and cooperate with the other in connection
with the preparation of a mutually acceptable amendment or supplement. The
parties shall promptly file such amendment or supplement with the SEC and
mail such amendment or supplement as soon as practicable after it is
cleared by the SEC.

5.5 CONSENTS. The Company will, at its cost and expense, use all
reasonable efforts to obtain all approvals and consents of all third parties
necessary on the part of the Company or its Subsidiaries to consummate the
transactions contemplated hereby. Parent agrees to cooperate with the Company
in connection with obtaining such approvals and consents. Parent will, at its
cost and expense, use all reasonable efforts to obtain all approvals and
consents of all third parties necessary on the part of Parent to consummate the
transactions contemplated hereby. The Company agrees to cooperate with Parent
in connection with obtaining such approvals and consents.

5.6 AFFILIATES' LETTERS.

(a) The Company has delivered to Parent a list of names and
addresses of those persons, in the Company's reasonable judgment after
consultation with outside legal counsel, who, as of the date hereof, are
affiliates within the meaning of Rule 145 of the rules and regulations
promulgated under the Securities Act (each

<PAGE>

such person, an "Affiliate") of the Company. The Company shall provide
Parent such information and documents as Parent shall reasonably request
for purposes of reviewing such list and shall promptly update such list
to reflect any changes thereto. The Company has caused to be delivered
to Parent an affiliate's letter in the form attached hereto as EXHIBIT
B, executed by each of the Affiliates of the Company identified in the
foregoing list who were available, and shall use all reasonable efforts
to deliver or cause to be delivered to Parent as soon as practicable
prior to the Effective Time such an affiliate's letter executed by any
Affiliate who was not available to sign and deliver such letter on or
prior to the date hereof and by any additional persons who become
Affiliates after the date hereof. Parent shall be entitled to place
legends as specified in such affiliates' letters on the certificates
evidencing any of the Parent Common Stock to be received by such
Affiliates pursuant to the terms of this Agreement, and to issue
appropriate stop transfer instructions to the transfer agent for the
Parent Common Stock, consistent with the terms of such letters.

(b) For so long as resales of shares of Parent Common Stock
issued pursuant to the Merger are subject to the resale restrictions set
forth in Rule 145 under the Securities Act, Parent will use all reasonable
efforts to comply with Rule 144(c)(1) under the Securities Act.

5.7 EXPENSES. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement, the transactions
contemplated hereby, the Proxy Statement/Prospectus, and the Registration
Statement will be paid by the party incurring such costs and expenses, except
that the Company and Parent will share equally the cost of printing and filing
with the SEC the Proxy Statement/Prospectus and the Registration Statement, the
filing fees required under the HSR Act or any Foreign Merger Laws, and the fees
charged by PricewaterhouseCoopers LLP for the letters described in Section 5.15
(the "Shared Expenses").

5.8 FURTHER ACTIONS. Subject to the terms and conditions herein
provided and without being required to waive any conditions herein (whether
absolute, discretionary, or otherwise), each of the parties hereto agrees to use
all commercially reasonable efforts to take, or cause to be taken, all action,
and to do, or cause to be done, all things necessary, proper, or advisable to
consummate and make effective the transactions contemplated by this Agreement.
In case at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement, the proper officers and
directors of each party to this Agreement shall take all such necessary action.

5.9 REGULATORY APPROVALS. The Company and Parent will take all
reasonable action as may be necessary under federal or state securities laws or
the HSR Act or Foreign Merger Laws applicable to or necessary for, and will file
as soon as reasonably practicable and, if appropriate, use all reasonable
efforts to have declared effective or approved all documents and notifications
with the SEC and other governmental or regulatory bodies (including, without
limitation, the FDA and equivalent foreign regulatory bodies, and other foreign
regulatory bodies that administer Foreign Merger Laws, and any foreign labor
councils or bodies as may be

<PAGE>

required) that they deem necessary or appropriate for, the consummation of
the Merger and the transactions contemplated hereby, and each party shall
give the other information reasonably requested by such other party
pertaining to it and its subsidiaries and affiliates to enable such other
party to take such actions. Notwithstanding the foregoing or anything herein
to the contrary, neither Parent nor Merger Subsidiary shall be required to
make arrangements for or to effect the cessation, sale, or other disposition
of particular assets or categories of assets or businesses of Parent, Merger
Subsidiary, the Company, or any of their affiliates.

5.10 CERTAIN NOTIFICATIONS. From time to time prior to the Effective
Time within 5 days of the end of each calendar month, the Company will provide
written notice to the Parent of any matter which, if existing, occurring or
known at the date of this Agreement, would have been required to be set forth or
described in the Disclosure Schedule or which is necessary to correct any
information in the Disclosure Schedule which has been rendered inaccurate
thereby, or (b) would constitute a breach of any covenant contained in this
Agreement. For purposes of determining the accuracy of the representations and
warranties of the Company contained in Article 3 of this Agreement in order to
determine the fulfillment of the conditions set forth in Section 6.2(a) and to
determine whether a breach has occurred for purposes of Section 6.2(b) or
pursuant to Section 7.1(g) hereof, the Disclosure Schedule delivered by Company
in accordance with Section 3.1 shall be deemed to include only the information
contained therein when delivered in accordance with Section 3.1 and shall be
deemed to exclude any information contained in any subsequent notifications
hereunder.

5.11 VOTING OF SHARES. To induce Parent to execute this Agreement,
certain officers and directors of the Company have executed and delivered as of
the date hereof (and prior to the Company's execution and delivery of the Stock
Option Agreement described in Section 5.17 below) Agreements to Facilitate
Merger in the form attached hereto as EXHIBIT C, pursuant to which each such
person has agreed to vote his or her shares of Company Common Stock in favor of
the Merger at the Company Shareholders Meeting. At the request of Parent, after
the execution of this Agreement the Company will use all reasonable efforts to
have other officers and directors of the Company also execute Agreements to
Facilitate Merger.

5.12 NONCOMPETITION AGREEMENTS. To induce Parent to execute this
Agreement, the Company has caused Anthony Badolato and Allan Seck to execute and
deliver to Parent as of the date hereof (but expressly contingent upon the
Closing of the Merger), noncompetition agreements substantially in the form of
EXHIBIT D hereto each with a term of 42 months from the Effective Time, and the
Company shall use all reasonable efforts to cause Gregory Melsen, William
Haworth and Bradley Goskowicz to execute and deliver to Parent within 30 days of
the date hereof (but expressly contingent upon the Closing of the Merger)
noncompetition agreements substantially in the form of EXHIBIT D hereto each
with a term of 24 months from the Effective Time.

5.13 NYSE LISTING APPLICATION. Parent shall prepare and submit to the
NYSE a listing application for the Parent Common Stock to be issued in the
Merger pursuant to Article 1 of this Agreement. The Company shall cooperate
with Parent in such listing application.

<PAGE>

5.14 INDEMNIFICATION. Parent agrees that it will, after the Effective
Time, provide to those individuals who have served as directors or officers of
the Company or its Subsidiaries indemnification equivalent to that provided by
the Articles of Incorporation and Bylaws of the Company with respect to matters
occurring prior to the Effective Time, including without limitation the
authorization of this Agreement and the transactions contemplated hereby, for a
period of six years from the Effective Time (or, in the case of matters
occurring prior to the Effective Time which, have not been resolved prior to the
sixth anniversary, until such matters are finally resolved). To the extent
permitted by law, Parent will advance expenses in connection with the foregoing
indemnification. In the event the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other person and
the Surviving Corporation shall not be the continuing or surviving corporation
or entity of such consolidation or merger or (ii) transfers all or substantially
all of its properties and assets to any person, then, and in each such case,
proper provision shall be made so that the successors and assigns of the
Surviving Corporation shall assume the obligations set forth in this Section
5.14. For a period of six years after the Effective Time, Parent will provide
that portion of directors' and officers' liability insurance that serves to
reimburse officers and directors of the Company and its Subsidiaries with
respect to claims against such officers and directors arising from facts or
events that occurred before the Effective Time of at least the same coverage and
amounts, and containing terms and conditions no less advantageous, as that
coverage currently provided by the Company and its Subsidiaries.

5.15 [Intentionally omitted]

5.16 SUBSIDIARY SHARES. At or prior to the Closing, the Company shall
cause all issued and outstanding Subsidiary shares owned by any person other
than the Company to be transferred for no or nominal consideration to such
person or persons designated by Parent.

5.17 STOCK OPTION AGREEMENT. To induce Parent to execute this
Agreement, the Company has executed and delivered to Parent as of the date
hereof (and after the execution and delivery of certain Agreements to Facilitate
Merger described in Section 5.11 above) a Stock Option Agreement in the form
attached hereto as EXHIBIT E, pursuant to which the Company has granted to
Parent an option to acquire from the Company such number of shares of Company
Common Stock as equals 19.9% of the aggregate number of outstanding shares of
Company Common Stock, at an exercise price equal to $11.125 per share or such
lesser amount as is described in the second paragraph of Section 1.3(a) hereof.
Such option shall become exercisable only in the events described in the Stock
Option Agreement.

5.18 BENEFIT PLANS AND EMPLOYEE MATTERS. From and after the Effective
Time, Parent shall to the extent practicable cause the Surviving Corporation to
provide employee benefits and programs to the Company's employees that, in the
aggregate, are substantially comparable or more favorable than those in
existence as of the date hereof and disclosed in writing to Parent prior to the
date hereof.

<PAGE>

5.19 TAX. Parent agrees that it will not knowingly take any action that
would have the effect of jeopardizing the qualification of the Merger as a
reorganization within the meaning of Section 368(a)(2)(E) of the Code.

ARTICLE 6
CLOSING CONDITIONS

6.1 CONDITIONS TO OBLIGATIONS OF PARENT, MERGER SUBSIDIARY, AND THE
COMPANY. The respective obligations of each party to consummate the Merger
shall be subject to the fulfillment at or prior to the Closing of the following
conditions:

(a) NO INJUNCTION. None of Parent, Merger Subsidiary, or the
Company shall be subject to any final order, decree, or injunction of a
court of competent jurisdiction within the United States that (i) prevents
or materially delays the consummation of the Merger, or (ii) would impose
any material limitation on the ability of Parent effectively to exercise
full rights of ownership of the Company or the assets or business of the
Company.

(b) SHAREHOLDER APPROVAL. The approval of the shareholders of
the Company referred to in Section 5.4 hereof shall have been obtained, in
accordance with the MBCA and the Company's Articles of Incorporation and
Bylaws.

(c) REGISTRATION STATEMENT. The Registration Statement (as
amended or supplemented) shall have become effective under the 1933 Act and
shall not be subject to any "stop order," and no action, suit, proceeding,
or investigation by the SEC to suspend the effectiveness or qualification
thereof shall have been initiated and be continuing or have been threatened
and be unresolved. Parent shall also have received all state securities
law or blue sky authorizations necessary to carry out the transactions
contemplated hereby.

(d) NYSE LISTING. The shares of Parent Common Stock to be
delivered pursuant to the Merger shall have been duly listed on the NYSE,
subject to official notice of issuance.

(e) WAITING PERIODS. The waiting periods applicable to the
consummation of the Merger under the HSR Act and any Foreign Merger Laws
shall have expired or been terminated.

6.2 CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUBSIDIARY. The
respective obligations of Parent and Merger Subsidiary to consummate the Merger
shall be subject to the fulfillment at or prior to the Closing of the following
additional conditions:

<PAGE>

(a) REPRESENTATIONS AND WARRANTIES TRUE. Each representation
and warranty of the Company contained in this Agreement, without regard to
any qualification or reference to immateriality or "Company Material
Adverse Effect," shall be true and correct on the date hereof and on the
Closing Date as though such representations and warranties were made on
such date (except those representations and warranties that address matters
only as of a particular date shall remain true and correct as of such
date), except for any inaccuracies that, individually or in the aggregate,
have not had, and would not have, a Company Material Adverse Effect.

(b) PERFORMANCE. The Company shall have performed and complied
in all material respects with all agreements, obligations, and conditions
required by this Agreement to be performed or complied with by it on or
prior to the Closing, and Parent shall have received a certificate to such
effect signed by the Chief Executive Officer of the Company.

(c) CONSENTS. The Company shall have obtained all permits,
authorizations, consents, and approvals required on its part to perform its
obligations under, and consummate the transactions contemplated by, this
Agreement, in form and substance reasonably satisfactory to Parent, and
Parent and Merger Subsidiary shall have received evidence reasonably
satisfactory to them of the receipt of such permits, authorizations,
consents, and approvals.

(d) OPINION OF COUNSEL FOR THE COMPANY. Parent and Merger
Subsidiary shall have received an opinion of Oppenheimer Wolff & Donnelly
LLP, counsel to the Company, dated the Closing Date, in form and substance
reasonably satisfactory to Parent, to the effect set forth in EXHIBIT F
hereto.

(e) AFFILIATES' LETTERS. Parent shall have received a letter
from each of the Affiliates pursuant to Section 5.6 hereof.

(f) NONCOMPETITION AGREEMENTS. Parent shall have received
executed agreements from such persons, and in such form satisfactory to
Parent, as described in Section 5.12 hereof.

(g) RESIGNATIONS. Such officers and directors of the Company or
of any Subsidiary as shall have been specified Parent shall have tendered
their respective resignations effective as of the Effective Time.

(h) [Intentionally omitted]

<PAGE>

(i) CONTINUED EMPLOYMENT OF CEO. The chief executive officer of
the Company shall have agreed to continue his employment with the Company
following the Merger on such terms as are mutually satisfactory to Parent
and such officer.

(j) SUBSIDIARY SHARES. The transfer of Subsidiary shares as
provided in Section 5.16 shall have occurred.

6.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of the
Company to consummate the Merger shall be subject to the fulfillment at or prior
to the Closing of the following additional conditions:

(a) REPRESENTATIONS AND WARRANTIES TRUE. Each representation
and warranty of Parent contained in this Agreement, without regard to any
qualification or reference to immateriality or "Parent Material Adverse
Effect," shall be true and correct on the date of this Agreement and on the
Closing Date as though such representations and warranties were made on
such date (except those representations and warranties that address matters
only as of a particular date shall remain true and correct as of such
date), except for any inaccuracies that, individually or in the aggregate,
have not had, and would not have, a Parent Material Adverse Effect.

(b) PERFORMANCE. Parent and Merger Subsidiary shall have
performed and complied in all material respects with all agreements,
obligations, and conditions required by this Agreement to be performed or
complied with by them on or prior to the Closing.

(c) CONSENTS. Parent and Merger Subsidiary shall have obtained
all permits, authorizations, consents, and approvals required on their part
to perform their obligations under, and consummate the transactions
contemplated by, this Agreement, in form and substance satisfactory to the
Company, and the Company shall have received evidence satisfactory to it of
the receipt of such permits, authorizations, consents, and approvals.

(d) OPINION OF COUNSEL FOR PARENT. The Company shall have
received an opinion of Fredrikson & Byron, P.A., counsel to Parent, dated
the Closing Date, in form and substance reasonably satisfactory to the
Company, to the effect set forth in EXHIBIT G hereto.

(e) TAX OPINION. The Company shall have received an opinion of
Oppenheimer Wolff & Donnelly LLP, counsel to the Company, to the effect
that, subject to customary conditions and representations, the Merger will
be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a)(2)(E) of the Code. This condition shall be
deemed waived in the event that such tax opinion is not rendered because
the Company or its shareholders have failed to provide such customary
representations.

<PAGE>

ARTICLE 7
TERMINATION AND ABANDONMENT

7.1 TERMINATION. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval by the shareholders of the
Company, only:

(a) by mutual written consent duly authorized by the Board of
Directors of Parent and the Board of Directors of the Company;

(b) by either Parent or the Company if the Merger shall not have
been consummated on or before the date that is six months after the date
hereof; provided, however, that the terminating party shall not have
breached in any material respect its obligations under this Agreement in
any manner that shall have been the proximate cause of, or resulted in, the
failure to consummate the Merger by such date and provided further,
however, that, if a request for additional information is received from the
U.S. Federal Trade Commission ("FTC") or Department of Justice ("DOJ")
pursuant to the HSR Act or additional information is requested by an
authority (a "Foreign Authority") pursuant to Foreign Merger Laws, such
date shall be extended to the 90th day following acknowledgment by the FTC,
DOJ, or Foreign Authority, as applicable, that Parent and the Company have
complied with such request, but in any event not later than nine months
from the date hereof;

(c) by either Parent or the Company if a court of competent
jurisdiction or an administrative, governmental, or regulatory authority
has issued a final nonappealable order, decree, or ruling, or taken any
other action, having the effect of permanently restraining, enjoining, or
otherwise prohibiting the Merger;

(d) by either Parent or the Company if, at the Company
Shareholders Meeting, the requisite vote of the shareholders of the Company
is not obtained, except that the right to terminate this Agreement under
this Section 7.1(d) will not be available to any party whose failure to
perform any material obligation under this Agreement has been the proximate
cause of, or resulted in, the failure to obtain the requisite vote of the
shareholders of the Company;

(e) by Parent if either (i) the Company has breached its
obligations under Section 5.2 in any material respect, (ii) the Board of
Directors of the Company has recommended, approved, accepted, or entered
into an agreement regarding, an Alternative Proposal, as defined in Section
5.2, (iii) the Board of Directors of the Company has withdrawn or modified
in a manner adverse to Parent its recommendation of the Merger, or (iv) a
tender offer or exchange offer for 15% or more of the outstanding shares of
Company Common Stock is commenced, and the Board of Directors of the
Company, within 10 business days after such tender offer or exchange offer
is so commenced, either fails to recommend against acceptance of such
tender offer or exchange offer by its

<PAGE>

shareholders or takes no position with respect to the acceptance of such
tender offer or exchange offer by its shareholders;

(f) by the Company if (i) it is not in material breach of its
obligations under Section 5.2, (ii) the Board of Directors of the Company
has authorized acceptance of an Alternative Proposal, and (iii) the Company
has paid to Parent the fee required by Section 7.2 to be paid to Parent in
the manner therein provided;

(g) by Parent if (i) Parent is not in material breach of its
obligations under this Agreement and (ii) there has been a material breach
by the Company of any of its representations, warranties, or obligations
under this Agreement of by an Affiliate of the Company under such person's
affiliate's letter described in Section 5.6 or by an officer or director of
the Company under such person's Agreement to Facilitate Merger described in
Section 5.11 such that the conditions in Section 6.2 will not be satisfied,
and the breach is not curable or, if curable, is not cured by the Company
within 30 calendar days after receipt by the Company of written notice from
Parent of such breach;

(h) by the Company if (i) the Company is not in material breach
of its obligations under this Agreement and (ii) there has been a material
breach by Parent of any of its representations, warranties, or obligations
under this Agreement such that the conditions in Section 6.3 will not be
satisfied, and the breach is not curable or, if curable, is not cured by
Parent within 30 calendar days after receipt by Parent of written notice
from the Company of such breach.

(i) by Parent if, within 10 business days following receipt of
the Disclosure Schedule as described in Section 3.1, Parent determines that
the Disclosure Schedule contains information which in Parent's good faith,
reasonable business judgment adversely affects the value of the Company's
business or prospects.

7.2 EFFECT OF TERMINATION.

(a) In recognition of the time, efforts, and expenses expended
and incurred by Parent with respect to the Company and the opportunity that
the acquisition of the Company presents to Parent, if:

(i) this Agreement is terminated pursuant to Section 7.1(e)
or 7.1(f); or

(ii) any third party makes an Alternative Proposal to which
the Company has made a response or any third party acquires 15% or
more of the outstanding Company Common Stock prior to the Company
Shareholders Meeting, and either (A) the requisite vote of the
shareholders of the Company to approve the Merger is not obtained
or (B) this Agreement is terminated pursuant

<PAGE>

to Section 7.1(g) where the Company's breach is willful and
intentional or is terminated pursuant to Section 7.1(d),

then, in any such event, the Company will pay to Parent, upon the
termination date in the event of termination pursuant to Section 7.1(f),
and immediately upon the date of entering into an agreement providing for
an Alternative Proposal (if such agreement is entered into within 12 months
of the termination of this Agreement), in the case of a termination
pursuant to Section 7.1(e) or in the case of the events specified in clause
(ii) above (by wire transfer of immediately available funds to an account
designated by Parent for such purpose), a fee equal to $2.75 million. The
Company acknowledges that the agreements contained in this Section 7.2 are
an integral part of the transactions contemplated by this Agreement and are
not a penalty, and that, without these agreements, Parent would not enter
into this Agreement. If the Company fails to pay promptly the fee due
pursuant to this Section 7.2, the Company shall also pay to Parent Parent's
costs and expenses (including legal fees and expenses) in connection with
any action, including the filing of any lawsuit or other legal action,
taken to collect payment, together with interest on the amount of the
unpaid fee under this section, accruing from its due date, at an interest
rate per annum equal to two percentage points in excess of the prime
commercial lending rate quoted by Norwest Bank Minnesota, N.A. Any change
in the interest rate hereunder resulting from a change in such prime rate
shall be effective at the beginning of the day of such change in such prime
rate.

(b) Except as provided in the next sentence of this paragraph,
in the event of the termination of this Agreement pursuant to any paragraph
of Section 7.1, the obligations of the parties to consummate the Merger
will expire, and none of the parties will have any further obligations
under this Agreement except pursuant to Sections 5.3, 5.7, and 7.2(a) and
which shall survive termination of this Agreement. In the event of the
termination of this Agreement pursuant to any paragraph of Section 7.1 that
is caused by a breach of a party, the party whose breach was the basis for
the termination will not be relieved from any liability for its breach or
its obligations pursuant to Section 7.2(a), and the other party will have
no further obligations under this Agreement except as provided in Sections
5.3 and 5.7 and Article 8.

ARTICLE 8
MISCELLANEOUS

8.1 AMENDMENT AND MODIFICATION. Subject to applicable law, this
Agreement may be amended, modified, or supplemented only by written agreement of
Parent, Merger Subsidiary, and the Company at any time prior to the Effective
Time with respect to any of the terms contained herein. This Agreement may not
be amended except by an instrument in writing signed on behalf of each of the
parties hereto.

<PAGE>

8.2 WAIVER OF COMPLIANCE; CONSENTS. Any failure of Parent or Merger
Subsidiary on the one hand, or the Company on the other hand, to comply with any
obligation, covenant, agreement, or condition herein may be waived by the
Company or Parent, respectively, only by a written instrument signed by an
officer of the party granting such waiver, but such waiver or failure to insist
upon strict compliance with such obligation, covenant, agreement, or condition
shall not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure. Whenever this Agreement requires or permits consent by or on
behalf of any party hereto, such consent shall be given in writing. Merger
Subsidiary agrees that any consent or waiver of compliance given by Parent
hereunder shall be conclusively binding upon Merger Subsidiary, whether or not
given expressly on its behalf.

8.3 INVESTIGATION; SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
respective representations and warranties of Parent and the Company contained
herein or in any certificates or other documents delivered prior to or at the
Closing shall not be deemed waived or otherwise affected by any investigation
made by any party hereto. Each and every representation and warranty contained
herein shall be deemed to be conditions to the Merger and shall not survive the
Merger. This Section 8.3 shall have no effect upon any other obligation of the
parties hereto, whether to be performed before or after the Closing. Parent
acknowledges and agrees that (i) other than the representations and warranties
of the Company and its Subsidiaries specifically contained in this Agreement,
including for this purpose the Disclosure Schedule and other matters referred to
in this Agreement or the Disclosure Schedule, there are no representations or
warranties of the Company or its Subsidiaries either expressed or implied with
respect to the Company, its Subsidiaries or their respective assets, liabilities
and businesses, and (ii) other than as incorporated, referred to or repeated in
the representations and warranties of the Company made in this Agreement or in
the Disclosure Schedule, it shall have no claim or right to indemnification with
respect to any information (whether written or oral), documents or material
furnished by the Company, its Subsidiaries or any of their respective officers,
directors, employees, agents or advisors to Parent, including any information,
documents or material made available to Parent in certain "data rooms,"
management presentations or any other form in expectation of the transactions
contemplated by this Agreement

8.4 NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed given when delivered personally by commercial
courier service or otherwise, or by telecopier, or three days after such notice
is mailed by registered or certified mail (return receipt requested) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):

(a) if to Parent or Merger Subsidiary, to it at:

Medtronic, Inc.
7000 Central Avenue, N.E.
Minneapolis, MN 55432

<PAGE>

with separate copies thereof addressed to

Attention: General Counsel
FAX: (612) 572-5459
and

Attention: Vice President and Chief Development Officer
FAX: (612) 572-5404

(b) If to the Company, to it at:

AVECOR Cardiovascular, Inc.
7611 Northland Drive
Minneapolis, MN 55428
FAX: (612) 391-9020
Attention: Anthony Badolato, CEO

with a copy to:

Oppenheimer Wolff & Donnelly LLP
Plaza VII Building, Suite 3400
45 South Seventh Street
Minneapolis, MN 55402
FAX: (612) 607-7100
Attention: Richard Lareau

8.5 ASSIGNMENT. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests, or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties, nor
is this Agreement intended to confer upon any other person except the parties
hereto any rights or remedies hereunder, except that Section 5.14 of this
Agreement shall inure to the benefit of the persons identified therein.

8.6 GOVERNING LAW. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Minnesota (regardless of
the laws that might otherwise govern under applicable Minnesota principles of
conflicts of law).

8.7 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.

<PAGE>

8.8 KNOWLEDGE. As used in this Agreement or the instruments,
certificates or other documents required hereunder, the term "knowledge" of an
entity shall mean knowledge actually possessed by any director or officer of
such entity.

8.9 INTERPRETATION. The Table of Contents, article and section
headings contained in this Agreement are inserted for reference purposes only
and shall not affect the meaning or interpretation of this Agreement. This
Agreement shall be construed without regard to any presumption or other rule
requiring the resolution of any ambiguity regarding the interpretation or
construction hereof against the party causing this Agreement to be drafted.

8.10 PUBLICITY. Upon execution of this Agreement by Parent, Merger
Subsidiary, and the Company, the parties shall jointly issue a press release, as
agreed upon by them. The parties intend that all future statements or
communications to the public or press regarding this Agreement or the Merger
will be mutually agreed upon by them and neither party shall, without such
mutual agreement or the prior consent of the other, issue any statement or
communication to the public or to the press regarding this Agreement, or any of
the terms, conditions, or other matters with respect to this Agreement, except
as required by law or the rules of the NYSE or Nasdaq and then only (a) upon the
advice of such party's legal counsel; (b) to the extent required by law or the
rules of the NYSE or Nasdaq; and (c) following prior notice to the other party
and an opportunity for the other party to discuss with the disclosing party
(which notice shall include a copy of the proposed statement or communication to
be issued to the press or public). The foregoing shall not restrict Parent's or
the Company's communications with their employees or customers in the ordinary
course of business.

8.11 ENTIRE AGREEMENT. This Agreement, including the exhibits and
schedules hereto and the Confidentiality Agreement referred to herein, embodies
the entire agreement and understanding of the parties hereto in respect of the
subject matter contained herein. This Agreement and the Confidentiality
Agreement supersede all prior agreements and the understandings between the
parties with respect to such subject matter. No discussions regarding or
exchange of drafts or comments in connection with the transactions contemplated
herein shall constitute an agreement among the parties hereto. Any agreement
among the parties shall exist only when the parties have fully executed and
delivered this Agreement.

<PAGE>

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

MEDTRONIC, INC.

By
----------------------------------
Its: Vice President

AC MERGER CORP.

By
----------------------------------
Its: President

AVECOR CARDIOVASCULAR, INC.

By
----------------------------------
Its: CEO

<PAGE>

EXHIBIT E
STOCK OPTION AGREEMENT

THIS AGREEMENT is dated as of July 12, 1998, between MEDTRONIC, INC., a
Minnesota corporation ("Grantee"), and AVECOR CARDIOVASCULAR, INC., a Minnesota
corporation ("Issuer").

RECITALS

A. Grantee, Issuer, and AC Merger Corp., a Minnesota corporation and
wholly-owned subsidiary of Grantee ("Merger Subsidiary"), are entering into an
Agreement and Plan of Merger (the "Merger Agreement") which provides, among
other things, that, upon the terms and subject to the conditions thereof, Merger
Subsidiary will be merged with and into Issuer (the "Merger").

B. Prior to the execution and delivery of this Agreement, certain
directors and officers of Issuer have, to induce Grantee to execute the Merger
Agreement, executed and delivered to Grantee the Agreements to Facilitate Merger
described in the Merger Agreement.

C. As a further and subsequent inducement to have Grantee enter into the
Merger Agreement, Grantee has required that Issuer enter into this Agreement,
which provides, among other things, that Issuer grant to Grantee an option to
purchase shares of Issuer's Common Stock, par value $.0l per share ("Issuer
Common Stock"), upon the terms and subject to the conditions provided for
herein.

NOW, THEREFORE, in consideration of the premises and mutual covenants and
agreements contained in this Agreement and the Merger Agreement, the parties
agree as follows:

1. GRANT OF OPTION. Subject to the terms and conditions of this
Agreement, Issuer hereby grants to Grantee an irrevocable option (the "Option")
to purchase 1,600,851 shares of Issuer Common Stock (the "Option Shares"), in
the manner set forth below, at an exercise price of $11.125 per share of Issuer
Common Stock, subject to adjustment as provided below (the "Option Price").
Issuer represents that the Option Shares represent at least 19.9% of the number
of shares of Issuer Common Stock outstanding on the date hereof. Capitalized
terms used herein but not defined herein shall have the meanings set forth in
the Merger Agreement.

<PAGE>

2. EXERCISE OF OPTION.

(a) Subject to the satisfaction or waiver of the conditions set forth
in Section 9 of this Agreement, prior to the termination or expiration of
this Agreement in accordance with its terms, Grantee or its designee (which
shall be a wholly-owned subsidiary of Grantee) may exercise the option, in
whole or in part, at any time or from time to time on or after the public
disclosure of, or the time at which Grantee shall have learned of, the
earliest of (i) or (ii) below to occur:

(i) the Merger Agreement is terminated pursuant to Section
7.1(e) of the Merger Agreement and within 12 months after termination
of the Merger Agreement the Issuer enters into an agreement providing
for an Alternative Proposal, or the Merger Agreement is terminated
pursuant to 7.1(f) of the Merger Agreement; or

(ii) any third party makes an Alternative Proposal to which the
Issuer has made a response or any third party acquires 15% or more of
the outstanding Issuer Common Stock prior to the Company Shareholders
Meeting, and either (A) the requisite vote of the shareholders of
Issuer to approve the Merger is not obtained or (B) the Merger
Agreement is terminated pursuant to Section 7.1(g) of the Merger
Agreement where the Issuer's breach is willful and intentional or is
terminated pursuant to Section 7.1(d) of the Merger Agreement, and in
the case of either (A) or (B) above, within 12 months after
termination of the Merger Agreement the Issuer enters into an
agreement providing for an Alternative Proposal.

(b) In the event Grantee wishes to exercise the Option at such time
as the Option is exercisable, Grantee shall deliver written notice (the
"Exercise Notice") to Issuer specifying its intention to exercise the
Option, the total number of Option Shares it wishes to purchase, and a date
and time for the closing of such purchase (a "Closing") not less than three
nor more than 30 business days after the later of (i) the date such
Exercise Notice is given and (ii) the expiration or termination of any
applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"). If prior to the
Expiration Date (as defined in Section 11 below) any person or group (other
than Grantee or its affiliates) shall have made a bona fide proposal that
becomes publicly disclosed, with respect to a tender offer or exchange
offer for 50% or more of the then outstanding shares of Issuer Common Stock
(a "Share Proposal"), a merger, consolidation, or other business
combination (a "Merger Proposal"), or any acquisition of a material portion
of the assets of Issuer (an "Asset Proposal"), or shall have acquired 50%
or more of the then outstanding shares of Issuer Common Stock (a "Share
Acquisition") , and this Option is then exercisable, then Grantee, in lieu
of exercising the Option, shall have the right at any time on or after the
date the Termination Fee (defined below) under the Merger Agreement becomes
due and payable to request in

<PAGE>

writing that Issuer pay, and promptly (but in any event not more than
five business days) after Grantee makes such request, Issuer shall,
subject to Section 2(c) below, pay to Grantee by certified check,
official bank check or wire transfer pursuant to Grantee's instructions,
in cancellation of the option, an amount in cash (the "Cancellation
Amount") equal to (i) the lesser of

(x) the excess over the Option Price of the greater of (A) the
last sale price of a share of Issuer Common Stock as reported on the
Nasdaq National Market on the last trading day prior to the date of
the Exercise Notice, or (B)(1) the highest price per share of Issuer
Common Stock offered to be paid or paid by any such person or group
pursuant to or in connection with a Share Proposal, a Share
Acquisition, or a Merger Proposal, or (2) the aggregate consideration
offered to be paid or paid in any transaction or proposed transaction
in connection with an Asset Proposal, divided by the number of shares
of Issuer Common Stock then outstanding, and

(y) $1.718 [$2.75 million divided by initial number of Option
Shares],

multiplied by (ii) the number of Option Shares then covered by the Option;
provided, however, that if, prior to payment of the Cancellation Amount,
Grantee has been paid by Issuer the termination fee described in Section
7.2 of the Merger Agreement (the "Termination Fee"), then the Cancellation
Amount shall be reduced (but not below zero) to the extent necessary so
that the sum of the Termination Fee and the Cancellation Amount shall not
exceed $3.6 million. If all or a portion of the price per share of Issuer
Common Stock offered, paid, or payable or the aggregate consideration
offered, paid, or payable for the assets of Issuer, each as contemplated by
the preceding sentence, consists of noncash consideration, such price or
aggregate consideration shall be the cash consideration, if any, plus the
fair market value of the noncash consideration as mutually determined by
the investment bankers of Issuer and the investment bankers of Grantee.

(c) Following exercise of the Option by Grantee, in the event that
Grantee sells, pledges, or otherwise disposes of (including, without
limitation, by merger or exchange) any of the Option Shares (a "Sale"),
then any Termination Fee due and payable by Issuer following such time
shall be reduced to the extent necessary so that the sum of

(x) the Termination Fee and

(y) the amount received (whether in cash, loan proceeds,
securities, or otherwise) by Grantee in such Sale less the exercise
price of such Option Shares sold in the Sale (the "Option Share
Profit")

shall not exceed $3.6 million. If Issuer has paid to Grantee the
Termination Fee prior to the Sale, then Grantee shall immediately
remit to Issuer by wire transfer of immediately

<PAGE>

available funds to a bank account designated by Issuer the excess, if
any, of the Option Share Profit over $850,000.

3. PAYMENT OF OPTION PRICE AND DELIVERY OF CERTIFICATE. Any Closings
under Section 2 of this Agreement shall be held at the principal executive
offices of Issuer, or at such other place as Issuer and Grantee may agree. At
any Closing hereunder, (a) Grantee or its designee will make payment to Issuer
of the aggregate price for the Option Shares being so purchased by delivery of a
certified check, official bank check, or wire transfer of funds pursuant to
Issuer's instructions payable to Issuer in an amount equal to the product
obtained by multiplying the Option Price by the number of Option Shares to be
purchased, and (b) upon receipt of such payment Issuer will deliver to Grantee
or its designee (which shall be a wholly-owned subsidiary of Grantee) a
certificate or certificates representing the number of validly issued, fully
paid, and nonassessable Option Shares so purchased, in the denominations and
registered in such names (which shall be Grantee or a wholly-owned subsidiary of
Grantee) designated in writing to Issuer by Grantee.

4. REGISTRATION AND LISTING OF OPTION SHARES.

(a) Issuer agrees to use its reasonable best efforts to (i) effect as
promptly as possible upon the request of Grantee and (ii) cause to become
and remain effective for a period of not less than six months (or such
shorter period as may be necessary to effect the distribution of such
shares) the registration under the 1933 Act, and any applicable state
securities laws, of all or any part of the Option Shares as may be
specified in such request; provided, however, that (i) Grantee shall have
the right to select the managing underwriter for any such offering after
consultation with Issuer, which managing underwriter shall be reasonably
acceptable to Issuer, and (ii) Grantee shall not be entitled to more than
two effective registration statements hereunder.

(b) In addition to such demand registrations, if Issuer proposes to
effect a registration of Issuer Common Stock for its own account or for the
account of any other shareholder of Issuer (other than on Form S-4 or Form
S-8), Issuer will give prompt written notice to all holders of Options or
Option Shares of its intention to do so and shall use its reasonable best
efforts to include therein all Option Shares requested by Grantee to be so
included, provided, however, if Issuer is in registration with respect to
an underwritten public offering of shares of Issuer Common Stock, and if in
the good faith judgment of the managing underwriter or managing
underwriters, or, if none, the sole underwriter, of such offering the
inclusion of the Option Shares and any other selling shareholder's shares
would interfere with the successful marketing of the shares of Issuer
Common Stock, the number of Option Shares and shares of other selling
shareholders otherwise to be covered in the registration statement
contemplated hereby may be reduced prorata. No registration effected under
this Section 4(b) shall relieve Issuer of its obligations to effect demand
registrations under Section 4(a) hereof.

<PAGE>

(c) Registrations effected under this Section 4 shall be effected at
Issuer's expense, including the reasonable fees and expenses of counsel to
the holder of Options or Option Shares, but excluding underwriting
discounts and commissions to brokers or dealers. In connection with each
registration under this Section 4, Issuer shall indemnify and hold each
holder of Options or Option Shares participating in such offering (a
"Holder"), its underwriters, and each of their respective affiliates
harmless against any and all losses, claims, damage, liabilities, and
expenses (including, without limitation, investigation expenses and fees
and disbursements of counsel and accountants), joint or several, to which
such Holder, its underwriters, and each of their respective affiliates may
become subject, under the 1933 Act or otherwise, insofar as such losses,
claims, damages, liabilities, or expenses (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any registration statement
(including any prospectus therein), or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, other than such losses, claims,
damages, liabilities, or expenses (or actions in respect thereof) that
arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in written information furnished by
a Holder to Issuer expressly for use in such registration statement.

(d) In connection with any registration statement pursuant to this
Section 4, each Holder agrees to furnish Issuer with such information
concerning itself and the proposed sale or distribution as shall reasonably
be required in order to ensure compliance with the requirements of the 1933
Act. In addition, Grantee shall indemnify and hold Issuer, its
underwriters and each of their respective affiliates harmless against any
and all losses, claims, damages, liabilities, and expenses (including,
without limitation, investigation expenses and fees and disbursements of
counsel and accountants), joint or several, to which Issuer, its
underwriters, and each of their respective affiliates may become subject
under the 1933 Act or otherwise, insofar as such losses, claims, damages,
liabilities, or expenses (or actions in respect thereof) arise out of or
are based upon an untrue statement or alleged untrue statement of a
material fact contained in written information furnished by any Holder to
Issuer expressly for use in such registration statement.

(e) Upon the issuance of Option Shares hereunder, Issuer will use its
reasonable best efforts promptly to list such Option Shares with the Nasdaq
National Market or on such national or other exchange on which the shares
of Issuer Common Stock are at the time listed.

5. REPRESENTATIONS AND WARRANTIES OF ISSUER. Issuer hereby represents
and warrants to Grantee as follows:

<PAGE>

(a) Issuer is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Minnesota and has requisite
power and authority to enter into and perform this Agreement.

(b) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of Issuer, and no other corporate
proceedings on the part of Issuer are necessary to authorize this Agreement
or to consummate the transactions contemplated hereby. The Board of
Directors of Issuer has duly approved the issuance and sale of the Option
Shares, upon the terms and subject to the conditions contained in this
Agreement, and the consummation of the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by Issuer
and, assuming this Agreement has been duly and validly authorized,
executed, and delivered by Grantee, constitutes a valid and binding
obligation of Issuer enforceable against Issuer in accordance with its
terms, subject to bankruptcy, insolvency, reorganization, moratorium, or
other similar laws affecting or relating to creditors, rights generally;
the availability of injunctive relief and other equitable remedies; and
limitations imposed by law on indemnification for liability under federal
securities laws.

(c) Issuer has taken all necessary action to authorize and reserve
for issuance and to permit it to issue, and at all times from the date of
this Agreement through the date of expiration of the Option will have
reserved for issuance upon exercise of the Option, such number of
authorized shares of Issuer Common Stock as is equal to the number of
Option Shares (or such other amount as may be required pursuant to Section
10 hereof), each of which, upon issuance pursuant to this Agreement and
when paid for as provided herein, will be validly issued, fully paid, and
nonassessable, and shall be delivered free and clear of all claims, liens,
charges, encumbrances, and security interests and not subject to any
preemptive rights.

(d) The execution, delivery, and performance of this Agreement by
Issuer and the consummation by it of the transactions contemplated hereby
except as required by the HSR Act (if applicable), and, with respect to
Section 4, compliance with the provisions of the 1933 Act and any
applicable state securities laws, do not require the consent, waiver,
approval, license, or authorization of or result in the acceleration of any
obligation under, or constitute a default under, any term, condition, or
provision of any charter or bylaw, or any indenture, mortgage, lien, lease,
agreement, contract, instrument, order, judgment, ordinance, regulation, or
decree or any restriction to which Issuer or any property of Issuer or its
subsidiaries is bound, except where the failure to obtain such consents,
waivers, approvals, licenses, or authorizations or where such acceleration
or defaults could not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect.

6. REPRESENTATIONS AND WARRANTIES OF GRANTEE. Grantee hereby represents
and warrants to Issuer that:

<PAGE>

(a) Grantee is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Minnesota and has requisite
power and authority to enter into and perform this Agreement.

(b) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of Grantee, and no other corporate
proceedings on the part of Grantee are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by Grantee and,
assuming this Agreement has been duly executed and delivered by Issuer,
constitutes a valid and binding obligation of Grantee enforceable against
Grantee in accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium, or other similar laws affecting or relating to
creditors' rights generally; the availability of injunctive relief and
other equitable remedies; and limitations imposed by law on indemnification
for liability under federal securities laws.

(c) Grantee or its designee is acquiring the Option and it will
acquire the Option Shares issuable upon the exercise thereof for its own
account and not with a view to the distribution or resale thereof in any
manner not in accordance with applicable law.

7. COVENANTS OF GRANTEE. Grantee agrees not to transfer or otherwise
dispose of the Option or the Option Shares, or any interest therein, except in
compliance with the 1933 Act and any applicable state securities law. Grantee
further agrees to the placement of the following legend on the certificates)
representing the Option Shares (in addition to any legend required under
applicable state securities laws):

"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER EITHER (1) THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR (2) ANY APPLICABLE STATE LAW GOVERNING THE OFFER AND SALE OF
SECURITIES. NO TRANSFER OR OTHER DISPOSITION OF THESE SHARES, OR OF
ANY INTEREST THEREIN, MAY BE MADE EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND SUCH OTHER STATE LAWS OR
PURSUANT TO EXEMPTIONS FROM REGISTRATION UNDER THE ACT, SUCH OTHER
STATE LAWS, AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER."

8. REASONABLE BEST EFFORTS. Grantee and Issuer shall take, or cause to
be taken, all reasonable action to consummate and make effective the
transactions contemplated by this Agreement, including, without limitation,
reasonable best efforts to obtain any necessary consents of third parties and
governmental agencies and the filing by Grantee and Issuer promptly after the
date hereof of any required HSR Act notification forms and the documents
required to comply with the HSR Act.

<PAGE>

9. CERTAIN CONDITIONS. The obligation of Issuer to issue Option Shares
under this Agreement upon exercise of the Option shall be subject to the
satisfaction or waiver of the following conditions:

(a) any waiting periods applicable to the acquisition of the Option
Shares by Grantee pursuant to this Agreement under the HSR Act shall have
expired or been terminated;

(b) the representations and warranties of Grantee made in Section 6
of this Agreement shall be true and correct in all material respects as of
the date of the Closing for the issuance of such Option Shares; and

(c) no order, decree, or injunction entered by any court of competent
jurisdiction or governmental, regulatory, or administrative agency or
commission in the United States shall be in effect that prohibits the
exercise of the option or acquisition of Option Shares pursuant to this
Agreement.

10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of any
change in the number of issued and outstanding shares of Issuer Common Stock by
reason of any stock dividend, stock split, recapitalization, merger, rights
offering, share exchange, or other change in the corporate or capital structure
of Issuer, Grantee shall receive, upon exercise of the Option, the stock or
other securities, cash, or property to which Grantee would have been entitled if
Grantee had exercised the Option and had been a holder of record of shares of
Issuer Common Stock on the record date fixed for determination of holders of
shares of Issuer Common Stock entitled to receive such stock or other
securities, cash, or property at the same aggregate price as the aggregate
Option Price of the Option Shares.

11. EXPIRATION. The Option shall expire at the earlier of (a) the
Effective Time (as defined in the Merger Agreement) or (b) if exercisable
pursuant to Section 2 hereof, 18 months after termination of the Merger
Agreement in accordance with the terms thereof (such expiration date is referred
to as the "Expiration Date").

12. GENERAL PROVISIONS.

(a) SURVIVAL. All of the representations, warranties, and covenants
contained herein shall survive each Closing and shall be deemed to have
been made as of the date hereof and as of the date of each Closing.

(b) FURTHER ASSURANCES. If Grantee exercises the Option, or any
portion thereof, in accordance with the terms of this Agreement, Issuer and
Grantee will execute and deliver all such further documents and instruments
and use their reasonable best efforts to take all such further action as
may be necessary in order to consummate the transactions contemplated
thereby.

<PAGE>

(c) SEVERABILITY. It is the desire and intent of the parties that
the provisions of this Agreement be enforced to the fullest extent
permissible under the law and public policies applied in each jurisdiction
in which enforcement is sought. Accordingly, in the event that any
provision of this Agreement would be held in any jurisdiction to be
invalid, prohibited, or unenforceable for any reason, such provision, as to
such jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of
such provision in any other jurisdiction. Notwithstanding the foregoing,
if such provision could be more narrowly drawn so as not be invalid,
prohibited, or unenforceable in such jurisdiction, it shall, as to such
jurisdiction, be so narrowly drawn, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of
such provision in any other jurisdiction.

(d) ASSIGNMENT. This Agreement shall be binding on and inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that Issuer shall not be entitled to assign or otherwise
transfer any of its rights or obligations hereunder and, prior to the
option becoming exercisable pursuant to Section 2, this Agreement may not
be assigned by Grantee.

(e) SPECIFIC PERFORMANCE. The parties agree and acknowledge that in
the event of a breach of any provision of this Agreement, the aggrieved
party would be without an adequate remedy at law. The parties therefore
agree that in the event of a breach of any provision of this Agreement, the
aggrieved party may elect to institute and prosecute proceedings in any
court of competent jurisdiction to enforce specific performance or to
enjoin the continuing breach of such provision, as well as to obtain
damages for breach of this Agreement. By seeking or obtaining any such
relief, the aggrieved party will not be precluded from seeking or obtaining
any other relief to which it may be entitled.

(f) AMENDMENTS. This Agreement may not be modified, amended,
altered, or supplemented except upon the execution and delivery of a
written agreement executed by Grantee and Issuer.

(g) NOTICES. All notices, requests, claims, demands, and other
communications hereunder shall be in writing and shall be deemed to be
sufficient if contained in a written instrument and shall be deemed given
if delivered personally, telecopied, sent by nationally-recognized
overnight courier or mailed by registered or certified mail (return receipt
requested), postage prepaid, to the other party at the following addresses
(or such other address for a party as shall be specified by like notice):

If to Grantee:

Medtronic, Inc.

<PAGE>

7000 Central Avenue N.E.
Minneapolis, MN 55432

with separate copies thereof addressed to

Attention: General Counsel
FAX: (612) 572-5459
and

Attention: Vice President and Chief Development Officer
FAX: (612) 572-5404

If to Issuer:

AVECOR Cardiovascular, Inc.
7611 Northland Drive
Minneapolis, MN 55428
FAX: (612) 391-9106
Attention: Anthony Badolato, CEO

with a copy to:

Oppenheimer Wolff & Donnelly LLP
Plaza VII Building
45 South Seventh Street
Minneapolis, MN 55402
FAX: (612) 7100
Attention: Richard Lareau

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

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

(j) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Minnesota applicable to
contracts made and to be performed therein.

(k) JURISDICTION AND VENUE. Each of Issuer and Grantee hereby agrees
that any proceeding relating to this Agreement shall be brought in a state
court of Minnesota. Each of Issuer and Grantee hereby consents to personal
jurisdiction in any such action

<PAGE>

brought in any such Minnesota court, consents to service of process by
registered mail made upon such party and such party's agent, and waives
any objection to venue in any such Minnesota court or to any claim that
any such Minnesota court is an inconvenient forum.

(l) ENTIRE AGREEMENT. This Agreement, the Confidentiality Agreement,
and the Merger Agreement and any documents and instruments referred to
herein and therein constitute the entire agreement between the parties
hereto and thereto with respect to the subject matter hereof and thereof
and supersede all other prior agreements and understandings, both written
and oral, between the parties with respect to the subject matter hereof and
thereof. This Agreement shall be binding upon, inure to the benefit of,
and be enforceable by the successors and permitted assigns of the parties
hereto. Nothing in this Agreement shall be construed to give any person
other than the parties to this Agreement or their respective successors or
permitted assigns any legal or equitable right, remedy, or claim under or
in respect of this Agreement or any provision contained herein.

(m) EXPENSES. Except as otherwise provided in this Agreement or the
Merger Agreement, each party shall pay its own expenses incurred in
connection with this Agreement.

<PAGE>

IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their respective officers thereunto duly authorized as of the date first written
above.

MEDTRONIC, INC.

By
----------------------------------
Its: Vice President

AVECOR CARDIOVASCULAR, INC.

By
----------------------------------
Its: CEO

<PAGE>

SECOND AMENDMENT TO RIGHTS AGREEMENT

This Second Amendment to Rights Agreement (this "Amendment") is between
AVECOR Cardiovascular Inc., a Minnesota corporation (the "Company") and Norwest
Bank Minnesota, N.A., a national banking association (the "Rights Agent"),
effective as of July 12, 1998.

A. The Company and the Rights Agent have entered into a Rights Agreement,
dated as of June 26, 1996 and as first amended July 22, 1997 (the "Rights
Agreement"). Capitalized terms used and not otherwise defined herein will have
the meaning given in the Rights Agreement.

B. Section 27 of the Rights Agreement provides that, prior to a
Distribution Date, the Company may amend the Rights Agreement upon the approval
of at least a majority of the Continuing Directors, and that, upon any such
amendment, the Rights Agent shall amend the Rights Agreement as the Company
directs.

C. The Company desires, and hereby directs the Rights Agent, to amend the
Rights Agreement and the Rights Agent agrees to such amendment, on the terms and
conditions hereof.

Accordingly, the Company and the Rights Agent agree as follows:

1. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to the
Rights Agent that:

(a) to the best knowledge of the Company, a Distribution Date has not
occurred prior to the effective date hereof; and

(b) this Amendment is authorized pursuant to the requirements of
Section 27 of the Rights Agreement, having been approved by a
majority of the Company's Continuing Directors.

2. DEFINITION OF PERMITTED OFFER. Section 1(y) of the Rights Agreement is
amended to insert the words "or a merger or other acquisition transaction
involving the Company" into the definition of "Permitted Offer" immediately
following the words "Common Shares" in the second line thereof.

3. SECTION 13(e). Section 13 of the Rights Agreement is amended by adding the
following as Section 13(e):

(e) Notwithstanding anything contained in this Agreement to
the contrary, upon the consummation of any merger or other
acquisition transaction involving the Company, pursuant to a
merger or other acquisition agreement between the Company and any
Person (or one or more of such Person's Affiliates or
Associates), which agreement has been

<PAGE>

approved by at least a majority of the Continuing Directors prior to
any Person becoming an Acquiring Person, all Rights hereunder shall
expire.

4. SECTION 7(a)(ii). Section 7(a)(ii) of the Rights Agreement is amended to
add "or Section 13(e)" to the end of such Section.

5. NO OTHER CHANGES. Except as specifically amended by this Amendment, all
other provisions of the Rights Agreement remain in full force and effect.
This Amendment shall not constitute or operate as a waiver of, or estoppel
with respect to, any provisions of the Rights Agreement by any party
hereto.

6. COUNTERPARTS. This Amendment may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same agreement.

The Company and the Rights Agent have caused this Amendment to be duly
executed on their behalf by their respective duly authorized representatives as
of the date first written above.

AVECOR CARDIOVASCULAR, INC. NORWEST BANK MINNESOTA, N.A.

By: /s/ Anthony Badolato By: /s/ Lisa Dornburg
------------------------------ ----------------------------
Anthony Badolato Lisa Dornburg
Its: Chief Executive Officer Its: Corporate Officer

<PAGE>
<ARTICLE> 5

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