<PAGE>
 
                                                                    Exhibit 10.1


                             DISTRIBUTION AGREEMENT

         DISTRIBUTION AGREEMENT, dated as of October 1, 1998, by and between
DIAMETRICS MEDICAL INCORPORATED, a Minnesota corporation ("Diametrics"), and
Johnson & Johnson Professional, Inc., a New Jersey corporation ("JJPI").

         WHEREAS, JJPI markets instruments and accessories for the diagnosis and
treatment of conditions affecting the central nervous system; and

         WHEREAS, Diametrics manufactures and distributes diagnostic probes and
related hardware and accessories used for monitoring certain components of
tissue, blood and other bodily fluids; and

         WHEREAS, the parties desire that JJPI distribute Diametrics's Products
(as defined below) under the Diametrics Trademarks (as defined below) pursuant
to the terms of this Agreement;

         NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements hereinafter set forth, the parties hereto agree as follows:


                                   ARTICLE ONE
                                   DEFINITIONS

         As used throughout this Agreement, each of the following terms shall
have the respective meaning set forth below:

         "Affiliate" of a party shall mean any entity or person that directly or
indirectly controls, is controlled by or is under common control with such
party. For purposes of this definition, "control" shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of an entity, whether through the ownership of voting
securities, by contract or otherwise.

         "Calendar Quarter" shall mean the calendar quarter customarily used by
JJPI for internal accounting purposes consisting of approximately three months
in which each of the first two months consists of four weeks and the third month
consists of five weeks.

         "Diametrics Patents" shall mean (i) all of the Patents, (ii) all other
patents and
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applications for patents that cover the manufacture, use, importation or sale of
any Product, in which Diametrics (or any Affiliate of Diametrics) has any
rights, any foreign counterparts thereof, as well as all continuations,
continuations-in-part, divisions and renewals thereof, all patents which may be
granted thereon, and all reissues, reexaminations and extensions.

         "Diametrics Trademarks" shall mean (i) the Trademark and (ii) all other
trademarks, applications for trademarks, copyrights, applications for
copyrights, slogans, tradedress, artwork, names and other intellectual property
that appear on or are otherwise used in connection with any Product, or any
packaging therefor in which Diametrics (or any Affiliate of Diametrics) has any
rights.

         "Field" shall mean the measurement of physiological parameters anywhere
within the central nervous system (i.e. the cranial cavity or the spinal
column).

         "Improvement" shall mean any adaptation, change, redesign, improvement,
modification or development to any Product, the Specifications therefor, the Raw
Materials or the method or process of manufacture or production of any Product.

         "Know-How" shall mean all know-how relating to the development,
manufacture, sale or use of any Product, including, without limitation,
processes, techniques, methods, products, apparatuses, biological materials and
other materials and compositions which are reasonably related thereto.

         "Manufacturing Costs" shall mean the direct labor, direct overhead and
Raw Materials costs incurred in the manufacture of Product.

         "Net Sales" means the gross revenues received from the sale of Products
to independent third parties during the applicable period less (i) discounts and
rebates, (ii) credits or allowances granted upon claims or returns, (iii)
freight charges paid for delivery and (iv) taxes and other governmental charges
levied on or measured by the invoiced amount.

         "Patents" shall mean the U.S. Patents set forth on Schedule D, along
with any foreign counterparts thereof, as well as all continuations,
continuations-in-part, divisions and renewals thereof, all patents which may be
granted thereon, and all reissues, reexaminations, extensions, patents of
addition, and any subsequent improvement patents or applications, such
improvement patents and applications being those the practice of which falls
within the claims any

                                       -2-
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of said patents.

         "Products" shall mean the fiber optic continuous probe for monitoring
tissue, blood and other bodily fluid monitoring and components therefor, as
described on Schedule A, along with any Improvements thereto (all for use in the
Field).

         "Raw Materials" shall mean the materials, components, and packaging
required to manufacture and to package any Product in accordance with the
Specifications.

         "Specifications" shall mean the specifications for the design,
composition, product safety assurance, manufacture, packaging, and/or quality
control of any Product, as set forth on Schedule A attached hereto and made a
part hereof, as the same may hereafter be modified by mutual agreement of the
parties in writing.

         "Trademark" shall mean the "Neurotrend" trademark (Federal Trademark
Registration No. 75/323,109, applied for on July 11, 1997 (not yet issued)).


                                   ARTICLE TWO
                                SUPPLY OF PRODUCT

         2.01 Distribution Rights. (a) Subject to the terms and conditions of
this Agreement, Diametrics hereby appoints JJPI, and JJPI hereby accepts
appointment, as Diametrics's exclusive worldwide distributor of the Products in
the Field (including for the sale of Sensors and other accessories to customers
using the Satellite System, Calibrator Patient Data Module or Senior Monitor
System as of the date hereof); provided Diametrics may continue to service its
existing (as of the date hereof) customers and sell Products until such time as
JJPI notifies Diametrics to cease such activities on a country-by country basis.
Diametrics understands and agrees that JJPI may utilize its Affiliates to act as
distributor hereunder in certain geographic areas, provided that JJPI shall at
all times remain responsible for performance of all of its obligations under
this Agreement. Within six months following execution of this Agreement, and at
least once every 12 months thereafter, representatives of JJPI and Diametrics
will meet to discuss the progress being made on the development, manufacture and
marketing of Products hereunder, including the development

                                       -3-
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plans for Improvements and new products in the Field, if any, and the
development plans, milestones and funding related thereto.

         (b)The parties acknowledge that Diametrics manufactures and markets
blood monitoring probes and related components for use outside the Field, and
that it is in their mutual interests to ensure that such other products are not
used in the Field. Diametrics shall be responsible for maintaining
differentiation and incompatibility between the Product and such other blood
monitoring probes to inhibit the use of such other probes in the Field. Such
differentiation and incompatibility may include variations in the connectors to
monitor, the probe introducer system, packaging and labeling of the sensors and
application specific software. The parties agree to meet within 30 days
following the execution of this Agreement to agree on a plan to develop such
differentiation and incompatibility. The parties acknowledge that to date, the
Product and such other probes are differentiated with respect to probe shape and
size and computer software only, and that there can be no guarantee that such
additional differentiation or incompatibility will be developed. In the event
Diametrics does not develop this additional differentiation or incompatibility
by (***), JJPI may, as its sole and exclusive remedy for such failure, terminate
this Agreement upon written notice to Diametrics, which notice must be given, if
at all, on or before (***). In the event Diametrics becomes aware that any of
its customers or users of blood monitor probes intended for use outside the
Field are using such probes in the Field, Diametrics shall take all such
reasonable actions as may be permitted by law to prevent or discourage such
continued use in the Field.

         (c) JJPI shall be responsible for developing devices for tunneling,
anchoring and access that may be used in connection with the use of the
Products, which development may include adaptation of existing products. Such
devices shall be marketed by JJPI, and JJPI shall be responsible for obtaining
and maintaining the required governmental approvals therefor. JJPI shall be the
exclusive owner of any and all intellectual property, and shall be solely
responsible for procuring and maintaining any proprietary rights therein. The
parties acknowledge that there can be no assurance such devices will be
developed or marketable. In the event JJPI does not develop

--------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

                                       -4-
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and commence marketing of one of each such devices on or before (***),
Diametrics may, as its sole and exclusive remedy for JJPI's failure to develop
such devices, terminate this Agreement upon written notice to JJPI, which notice
must be given, if at all, on or before (***). JJPI's obligation to develop a
particular type of device pursuant to this Section 2.01(c ) shall terminate in
the event JJPI elects to market such a device using Diametrics' design (either
by manufacturing such device under license from Diametrics or purchasing the
device from Diametrics).

         (d) The parties acknowledge that Diametrics is currently developing its
own anchoring and access devices for the Products. Unless the parties agree in
writing to develop such components jointly pursuant to Section 2.09, such
devices shall not be included as Products hereunder, but shall be deemed to be
new products in the Field for the purposes of Section 2.10.

         2.02 Supply of Product. During the term of this Agreement, Diametrics
shall supply JJPI (and its Affiliates) with all of those quantities of Product
as ordered by JJPI (and its Affiliates) pursuant to this Agreement. Each such
Product shall be packaged by Diametrics in accordance with the Specifications.

         2.03 Prices. (a) The price (the "Price") for each Product component
(other than sample units) shipped by Diametrics during the term of this
Agreement shall be as set forth on Schedule B hereto. In addition, during the
term of this Agreement, Diametrics shall supply JJPI with sample Products as
reasonably requested by JJPI. Such sample Products shall be fully functional and
shall be sold at the price set forth in Schedule B. The Prices set forth above
include all costs of packaging in accordance with the Specifications and are
F.O.B. Diametrics's factory in High Wycombe, England (Diametrics shall be
responsible for loading Product onto the applicable carrier, and JJPI bears risk
of loss and costs of delivery thereafter).

         (b) The prices set forth on Schedule B shall remain in effect for at
least 12 months following the first commercial sale of the Products by JJPI.
Thereafter the prices may be adjusted on a component-by-component basis
effective on each anniversary of such first commercial sale to reflect (***)% of
the actual increases, if any, in Diametrics' Manufacturing Costs since the most
recent

--------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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price increase; provided that in no event shall any price adjustment for a
particular component be greater than the percentage change in the U.S. Medical
Care component of the Consumer Price Index-All Urban Consumers (Current Series)
as provided in Series Catalog CUUR0000SAM published by the U.S. Department Of
Labor, Bureau of Labor Statistics (or if such index is not available, such
similar index as the parties shall mutually agree) since the most recent price
increase.

         (c) Diametrics shall notify JJPI of any decreases in its Manufacturing
Cost of the components of the Product excluding the Multiparameter sensor. If at
any time there is at least a (***)% reduction in Diametrics Manufacturing Costs
of any of such components since the most recent price decrease (or since
commercialization of the Product in the case of the first price decrease)
Diametrics shall reduce the price of such component to JJPI prospectively by an
amount equal to (***)% of such cost decrease. Diametrics hereby agrees that it
shall use its good faith efforts to minimize its Manufacturing Costs of
producing the Products to the extent it may do so without compromising the
quality of the Products or compliance with terms of this Agreement.

         2.04 Forecasts. On or before December 31, 1998, JJPI shall provide to
Diametrics a non-binding (except for the first quarter) forecast of its expected
orders of Products (including samples) broken down on a component-by-component
basis, for the following four calendar quarters (it being agreed such forecast
shall not include the United States market until Diametrics has obtained 510K
approval for the Product). JJPI shall provide an updated forecast at least 30
days before the beginning of the next Calendar Quarter which shall also cover
the following four quarters. JJPI shall be obligated to order the quantity
forecasted for the first quarter of each updated forecasted, and in no event
shall JJPI be obligated to purchase or have any liability in respect of the
quantities of Product set forth in second, third or fourth quarters of any such
forecast.

         2.05 Orders. JJPI shall place any binding orders for Product by written
or electronic purchase order (or by any other means agreed to by the parties) to
Diametrics. Such purchase orders shall set forth the desired date of delivery
with respect to the Products ordered and shall be placed at least thirty (30)
days prior to such desired date of delivery. To the extent of any conflict or

--------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

                                       -6-
<PAGE>
 
inconsistency between this Agreement and any purchase order, purchase order
release, confirmation, acceptance or any similar document, the terms of this
Agreement shall govern. For any calendar quarter, Diametrics shall be deemed to
have accepted, and shall be obligated to supply up to (***)% of the quantity
forecasted for first quarter of each updated forecasted provided pursuant to
Section 2.04. Orders in excess of such (***)% shall be subject to acceptance by
Diametrics; provided that Diametrics will accept such excess orders to the
extent it has the manufacturing capacity to supply them.

         2.06 Delivery. All charges for final packaging and transport packaging
are included in the Price. All shipments must be accompanied by a packing slip
which describes the articles, states the purchase order number and shows the
shipment's destination. Diametrics agrees to promptly forward the original bill
of lading or other shipping receipt for each shipment in accordance with JJPI's
instructions. Diametrics further agrees to promptly render correct and complete
invoices to JJPI, and to accept payment by check or, at JJPI's discretion, cash
or electronic transfer of funds. All invoices submitted by Diametrics shall be
payable net within thirty (30) days after the date of such invoices. The date of
invoice with respect to any Product shall not be earlier than the date of
shipment of such Product.

         2.07 Shipment. Diametrics shall ship Product, at JJPI's cost to the
extent set forth in Section 2.03, to any location chosen by JJPI utilizing
carriers approved by JJPI. The risk of loss with respect to all Product shall
remain with Diametrics until the same is loaded on to the carrier specified by
JJPI. Diametrics will package all Products in accordance with the packaging
requirements included in the Specifications.

         2.08 Initial Order; Minimum Purchase Requirements. (a) On or before
(***), JJPI shall issue a Purchase Order for at least $(***) of Product to be
delivered on or before (***). In addition if, by (***) Diametrics has (A)
obtained all regulatory approvals and clearances required to manufacture and
market the Products in the United States and (B) completed to the satisfaction
of JJPI the Supplier Qualification Activities set forth in Exhibit B, JJPI

--------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

                                       -7-
<PAGE>
 
will issue a Purchase Order for an additional $(***) of Product for delivery
within 30 days following the date of the Purchase Order. If Diametrics has not
satisfied the conditions in (A) and (B) of the preceding sentence by (***), JJPI
shall pay to Diametrics prior to (***), $(***) as a prepayment against future
purchases of Product. Such prepayment shall be creditable at the rate of 100%
against such future purchases.

         (b) (***) during 1999. In the year 2000 JJPI shall purchase from 
Diametrics at least $(***) of Products (including Product used for Clinical
Studies) as long as Diametrics has satisfied the Supplier Qualification
Activities set forth in Exhibit B by (***). JJPI shall notify Diametrics of
those Supplier Qualification Activities which are not satisfactory by (***). If
Diametrics has not satisfied the Supplier Qualification Activities by (***),
JJPI shall have the right, as its sole and exclusive remedy for Diametrics'
failure to timely satisfy such qualifications, to terminate this Agreement by
written notice to Diametrics, which notice must be given, if at all, by (***);
provided that the (***) and (***) deadlines set forth in this sentence shall be
delayed by one day for each day JJPI delays notifying Diametrics of
unsatisfactory Supplier Qualification Activities after (***). For each year
commencing 2001, JJPI shall purchase from Diametrics at least the following
percent of the previous year's actual purchases of Products (excluding Product
used for clinical studies):

                  Year     % of previous year's actual purchases
                  ----     -------------------------------------
                   2001                  (***)%
                   2002                  (***)%
                   2003                  (***)%
                   2004                  (***)%
                   2005                  (***)%

          (c) The minimum purchase obligations shall be appropriately reduced to
 the extent (i) Diametrics is for any reason unable or unwilling to supply
 Product in accordance with the terms of this Agreement, (ii) any Product is
 recalled or withdrawn from the market for reasons of product

--------
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

                                       -8-
<PAGE>
 
 safety, efficacy or quality, or (iii) a third party infringes any of the
 Patents and such infringement is deemed the cause for such minimums not to be
 met. Such minimum obligations shall be reduced to zero during the pendency of a
 claim that the manufacture, importation use or sale of the Product infringes
 the intellectual property rights of a third party, and will be appropriately
 adjusted prospectively upon final resolution of such claim.

         (d) If JJPI does not actually purchase sufficient quantities of volume
to fulfill its obligations under this Section 2.08, JJPI may, at its option,
nevertheless be deemed to have fulfilled such obligations by paying Diametrics
an amount equal the (***)% of the difference between (A) the amount JJPI would
have paid to Diametrics had it fulfilled its purchase obligations and (B) the
amount JJPI has paid (or will pay) for Product actually purchased during the
applicable period. Such payment, if made, shall be due within 30 days following
the end of the applicable year in which JJPI did not fulfill its purchase
obligation.

         (e) If JJPI does not fulfill any of its purchase obligations (or pay
the applicable shortfall amount) under this Section 2.08, Diametrics shall have
the right, as its sole and exclusive remedy, to (A) convert JJPI's distribution
rights hereunder to become non-exclusive or (B) terminate this Agreement, upon
written notice to JJPI, which notice must be given, if at all, within 90 days
following the end of the year in which JJPI did not fulfill its purchase
obligation.

         2.09 Research and Development. Diametrics shall, at its own expense
conduct ongoing research and development for Product Improvements and new
products in the Field. JJPI acknowledges that there can be no assurance any
Product Improvements or new products will be developed, and the lack thereof
shall not constitute a breach of this Agreement by Diametrics. Areas for
Improvements include, without limitation, system accuracy, stability, mechanical
integrity and strength, data display, calibrations processes and sensor extended
shelf-life. If JJPI requests Diametrics to pursue a particular research and
development project, such project shall be subject to the mutual agreement of
the parties with respect to the scope, methodology and costs thereof.

         2.10 New Products. If Diametrics develops or acquires rights to any new
product for use

--------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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in the Field, Diametrics shall offer JJPI the right to commercialize such new
product (a "Proposed Transaction") (which Proposed Transaction may be in the
form of a license, distributorship, supply arrangement, co-marketing arrangement
or otherwise) in accordance with the right of refusal described herein.
Diametrics shall not consummate or agree to consummate a Proposed Transaction
with any party, or in any way dispose of or encumber any rights with respect to
such new product, without first giving prompt notice thereof to JJPI in writing
(the "Notice") (i) specifying the pricing, terms, conditions and other material
provisions of such Proposed Transaction and (ii) providing a copy of a written
agreement in principal or letter of intent, if any, setting forth the terms of
such Proposed Transaction. In the event that JJPI elects to consummate a
Proposed Transaction upon the same pricing, terms, conditions and other material
provisions as specified in the Notice, JJPI shall have 30 days following receipt
of the Notice to so notify Diametrics and the parties shall use their best
efforts to facilitate the consummation of such a Proposed Transaction within 90
days following the receipt of such reply notification from JJPI. In the event
that JJPI does not elect to enter into the Proposed Transaction within the above
mentioned 30-day notice period, Diametrics may enter into an agreement with
respect to the Proposed Transaction on terms that are, in the aggregate, not
less favorable to Diametrics than the terms specified by Diametrics in the
Notice or contained in the last subsequent proposal by Diametrics to JJPI, if
any; provided, however, that if (x) Diametrics and the third party are unable to
consummate the Proposed Transaction within the (***) days following the later of
(i) the date of the Notice, or (ii) if JJPI elects to consummate the Proposed
Transaction but the parties are unable to agree on definitive terms, the day on
which such discussions terminate (either notice from JJPI or expiration of the
90 day period referred above), or (y) the pricing, terms, conditions and other
material provisions of the Proposed Transaction are modified to be less
favorable to Diametrics than were specified in the Notice or contained in the
last subsequent proposal by Diametrics, if any, to JJPI, then Diametrics shall
be required (each time such situation arises), pursuant to this Section 2.10, to
give a new Notice to JJPI and comply with the right of first refusal set forth
herein for an additional 30-day period following the receipt of such new Notice.
The

--------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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<PAGE>
 
provisions of this Section 2.10 shall not apply if JJPI is in breach of any of
its material obligations hereunder or if JJPI has satisfied the minimum purchase
obligations set forth in Section 2.08 for the calendar year preceding the date
of the applicable Notice only by paying the shortfall amount pursuant to Section
2.08(d). The provisions of this Section 2.10 shall survive the termination or
expiration of this Agreement with respect to any Proposed Transaction for which
the initial Notice was given during the term hereof (including any extensions or
renewals hereof).

         2.11 Marketing Plan. The Marketing Plan set forth in Schedule C
represents JJPI's anticipated marketing and clinical program for the Products
and JJPI undertakes to achieve all elements of such plan. The parties
acknowledge however that there can be no assurance that each component of such
plan will be achieved in a timely manner, if at all. If JJPI does not fulfill
all elements of the Marketing Plan for a particular year, JJPI may nevertheless
be deemed to have fully achieved the Marketing Plan for such year by (i)
demonstrating that it has spent at least the applicable amount on marketing and
clinical activities for the Products during such year as set forth below or (ii)
by paying to Diametrics the amount by which JJPI has underspent the applicable
commitment (in which event Diametrics shall apply such funds to internal
manufacturing improvements for the Products, further development of the Products
or its own marketing activities for the Products).

             Year                      Expenditures
             ----                      ------------
             1998                         $(***)
             1999                         $(***)
             2000                         $(***)

For purposes of this Section 2.11, marketing and clinical expenditures shall
include, without limitation, the following with respect to Products and related
tunneling, anchoring and access devices: planning, patient monitoring, data
analysis, reporting and Product purchases for clinical evaluations; training for
customers, users (surgeons), and JJPI or Diametrics personnel or sales
representatives; conventions, seminars, meetings, or presentations; advertising;
promotions;

--------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

                                      -11-
<PAGE>
 
mailings; user evaluations and direct in-service representative activities (and,
in 1998, development of tunneling, anchoring and access devices). If JJPI has
not fulfilled all elements of the Marketing Plan for a particular year and has
not fulfilled either (i) or (ii) of the immediately preceding sentence, then
Diametrics may, as its sole and exclusive remedy, terminate this Agreement on
written notice to JJPI which notice must be given, if at all, within 90 days
following the end of the applicable year. Upon request from Diametrics, JJPI
will provide reasonable evidence of its marketing and clinical expenditures, not
later than 30 days following the end of the applicable year.


                                  ARTICLE THREE
                      ADDITIONAL OBLIGATIONS OF THE PARTIES

         3.01 Sales of Product. All business decisions relating to the sale,
price, marketing and promotion of any Product supplied under this Agreement,
shall be within the sole discretion of JJPI. Diametrics further agrees that (i)
payment by JJPI to Diametrics of the Prices set forth in Section 2.03 hereof for
purchased Product, (ii) satisfying the minimum order requirements, or paying the
shortfall amount, in accordance with Section 2.08, and (iii) compliance with the
Marketing Plan, or expenditure of the minimum marketing and clinical
expenditures, in accordance with Section 2.11, shall constitute complete
satisfaction of any duty, whether express or implied, which could be imposed
upon JJPI to commercially exploit its rights under this Agreement and are
accepted by Diametrics in lieu of any best efforts obligations on the part of
JJPI, and the remedies for the failure to fulfill any such obligations shall be
limited, as applicable, to loss of exclusivity, termination or the payment of
the Price for purchased Product as expressly set forth herein.

         3.02 Package Labeling. Diametrics shall be responsible for the text and
regulatory compliance of all package labels and Product inserts used in
connection with the Products; provided JJPI shall have the opportunity to review
and comment on all such documents prior to their implementation (JJPI approval
thereof is not required). JJPI shall develop all other labeling for the
Products, including without limitation, all sales and promotional literature,
subject to compliance with approved Product claims; provided that Diametrics
shall have the opportunity to review and

                                      -12-
<PAGE>
 
comment on such labeling prior to their implementation (Diametrics approval
thereof is not required). Diametrics agrees that all labels and labeling shall
prominently identify JJPI (or its Codman Affiliate) as the distributor of the
Products to the extent permitted by law (except for Products subject to JJPI's
initial order under Section 2.08(a)). All labels and labeling shall also
prominently identify Diametrics as the manufacturer of the Products to the
extent permitted by law. In addition, all Products shall be printed, embossed or
engraved to prominently identify JJPI (or its Codman Affiliate) to the extent
permitted by law (except for Products subject to JJPI's initial order under
Section 2.08.(a)). For purposes of this Agreement the terms "label" and
"labeling" shall have the meanings set forth in Sections 201(k) and 201(m)
respectively of the U.S. Federal Food, Drug and Cosmetics Act.

         3.03 Trademarks. JJPI shall distribute the Products purchased by it
hereunder under the Diametrics Trademarks. JJPI acknowledges that Diametrics is
the exclusive owner of and has all rights to the Diametrics Trademarks, subject
to JJPI's rights under Section 9.01.

         3.04 Provision of Information by Diametrics. Diametrics shall, at the
request of JJPI, provide JJPI with the following information relating to the
Products and to the extent reasonably available to Diametrics, at no cost to
JJPI: (i) data, descriptions, processes, photographs and statements of claims
for safety, efficacy or performance;

         (ii)     the Device Master Record and Device History Record, as defined
                  in 21 Code of Federal Regulations, Part 820, for the Products
                  and components thereof;

         (iii)    copies of all U.S. and foreign regulatory submissions,
                  including the 510(k) submissions, for the Products;

         (iv)     any labeling, inserts, sales literature or customer
                  instruction prepared by Diametrics relating to the Products
                  for JJPI review (it being understood and agreed that no such
                  review shall relieve Diametrics of responsibility for the
                  accuracy of such materials);

         (v)      claim support for any claims, indications, or other
                  representations included in any labeling, inserts, sales
                  literature or customer instruction prepared by Diametrics
                  relating to the Products (it being understood and agreed that
                  in the

                                      -13-
<PAGE>
 
                  event JJPI reasonably disagrees with any such claims,
                  indications, or other representations, Diametrics shall modify
                  the same in a manner agreeable to both parties subject to
                  applicable regulatory requirements); and

         (vi)     review of all training materials and sales and promotional
                  literature developed by JJPI relating to the Products (it
                  being understood and agreed that no such review shall relieve
                  JJPI of responsibility for the accuracy of such materials).

         3.05 Changes. In no event shall any significant change to any Product
(or any change to the Specifications) be implemented or made without the prior
written approval of JJPI. If the parties agree on any such change, they shall
modify the Specifications to reflect the same. Diametrics further agrees that no
significant changes to the method or process of manufacture or production of any
Product or the Raw Materials shall be made without prior written notification to
and approval of JJPI. As used in this Section 3.05, the term "significant
change" shall mean any change that (i) results in a change to the Specifications
(ii) affects Product performance, labeling, physical appearance or
configuration, software (other than debugging or other error correction which
does not otherwise affect on the performance of the software) , packaging, or
sterilization processes, (iii) affects Product safety, reliability or integrity
or (iv) requires a submission to or approval from a governmental body. In the
event of any significant change, JJPI shall have the responsibility to establish
an appropriate qualification protocol, if required by JJPI, and JJPI and
Diametrics shall determine an appropriate inventory level for the pre-change
Product in order to cover on-going requirements during the qualification
process.

         3.06 Insurance. Diametrics agrees to procure and maintain in full force
and effect during the term of this Agreement valid and collectible insurance
policies in connection with its activities as contemplated hereby which policies
shall provide coverage in an amount not less than $10 million per occurrence.
Such policy shall name JJPI as an insured or an additional insured. Upon JJPI's
request, Diametrics shall provide to JJPI certificate of coverage or other
written evidence reasonably satisfactory to JJPI of such insurance coverage.
Such insurance policy shall provide that in the event such insurance coverage
should be materially adversely changed or terminated for any reason, the insurer
thereunder will give Diametrics and JJPI ten (10) days' prior notice. The
existence of such

                                      -14-
<PAGE>
 
coverage shall in no way limit Diametrics's liability or obligations hereunder.

         3.07 Training. JJPI shall develop and implement training programs for
its sales representatives and customers with respect to the operation and
maintenance of the Products. Diametrics shall be responsible for the technical
accuracy of all training materials and shall assist JJPI in preparing the
technical aspects of such training programs. Diametrics shall actively
participate in training JJPI trainers, who will in turn train JJPI sales
representatives and customers.

         3.08 Governmental Registrations. JJPI shall apply, in its name, for all
governmental registrations required for JJPI to market Products as a distributor
in those countries where JJPI desires to market Product, unless the applicable
laws of a particular country require that such registrations be obtained by and
in the name of the manufacturer of the applicable product, in which event
Diametrics shall apply for such approvals. Diametrics shall reasonably cooperate
with JJPI in its efforts to obtain such approvals. Upon termination or
expiration of this Agreement for any reason, JJPI shall transfer to Diametrics,
to the extent permitted by applicable law, those registrations obtained by JJPI.
Diametrics agrees that JJPI shall have access to all of Diametrics regulatory
submissions and technical files for the Products to the extent necessary to
exercise its rights or fulfill its obligations hereunder.



                                  ARTICLE FOUR
                  QUALITY/DEFECTIVE PRODUCT/INSPECTIONS/TESTING

         4.01 Inspections. JJPI shall have the right, upon reasonable notice to
Diametrics and during regular business hours, to inspect and audit the
facilities being used by Diametrics (or any third party) for production and
storage of Product to assure compliance by Diametrics (and its suppliers) with
(i) all applicable statutes, laws and regulations, including, without
limitation, Quality System Regulations ("QSRs") enforced by the United States
Food and Drug Administration (the "FDA"), (ii) JJPI Quality Assurance
Requirements attached as Exhibit A hereto, (iii) Johnson & Johnson Corporate
Quality Assurance Requirements attached as Exhibit B hereto, and (iv) the terms

                                      -15-
<PAGE>
 
and provisions of this Agreement. Diametrics shall within fourteen days remedy
or cause the remedy of any deficiencies which may be noted in any such audit or,
if any such deficiencies can not reasonably be remedied within such fourteen day
period, present to JJPI a written plan to remedy such deficiencies as soon as
possible; and the failure by Diametrics to remedy or cause the remedy of any
such deficiencies within such fourteen day period or to present such a plan
within such fourteen day period and then use its best efforts to remedy or cause
the remedy of such deficiencies in accordance with such written plan, as the
case may be, shall be deemed a material breach of this Agreement. Diametrics
acknowledges that the provisions of this Section 4.01 granting JJPI certain
audit rights shall in no way relieve Diametrics of any of its obligations under
this Agreement, nor shall such provisions require JJPI to conduct any such
audits.

         4.02 Acceptance; Disposition of Defective Product. JJPI shall have no
obligation to pay for any Product that is subject to such a claim of
non-compliance or defect; provided JJPI shall pay for Product within 30 days of
receipt unless such Product has been rejected within such 30 day period.
Diametrics shall replace at its own cost and expense, including reimbursement of
freight and disposition costs incurred by JJPI, Product that fails to comply
with the Specifications or other warranties made in Article Five, which
replacement shall constitute JJPI's sole and exclusive remedy therefor (but in
no way limiting Diametrics's indemnity obligations under Section 6.01). JJPI
shall notify Diametrics of the existence and nature of any non-compliance or
defect which comes to its attention and shall return such defective Product to
Diametrics. Diametrics shall have a reasonable opportunity, not to exceed ten
(10) days from receipt of such Product, to inspect such defective Product and
provide JJPI an explanation of the defect and proposed course of action (ie.
repair (including the nature of the repair) or replacement of the Product). The
acceptance (or non-rejection) of any Products shall in no way limits JJPI's
rights under Diametrics Product warranty or for indemnification hereunder;
provided however that Diametrics shall replace defective Product (i) under this
Section 4.02 if found to be defective within 60 days following receipt thereof
by JJPI and (ii) under Section 5.01 if found to be defective after such 60 day
period.

         4.03 Independent Testing. If, after Diametrics's inspections of any
Product, the parties disagree as to whether such Product conforms to the
Specifications or whether the Product has such a defect, either party may
deliver the item to an independent third-party laboratory, mutually and

                                      -16-
<PAGE>
 
reasonably acceptable to both parties, for analytical testing to confirm such
item's conformance to the Specifications or the presence or absence of defects.
All costs associated with such third-party testing shall be at JJPI's expense
unless the tested item is deemed by such third-party to be defective or not in
compliance with the Specifications, in which case all such costs, including
reimbursement of freight and disposition costs, shall be promptly paid by
Diametrics. No inspection or testing of or payment for Product by JJPI or any
third-party agent of JJPI shall constitute acceptance by JJPI thereof, nor shall
any such inspection or testing be in lieu or substitution of any obligation of
Diametrics for testing, inspection and quality control as provided in the
Specifications or under applicable local, state, or federal laws, rules,
regulations, standards, codes or statutes.

         4.04 Corrective Action. In the event any governmental agency having
jurisdiction shall request or order, or if JJPI shall determine to undertake,
any corrective action with respect to any Product, including any recall,
corrective action or market action, and the cause or basis of such recall or
action is attributable to a breach by Diametrics of any of its warranties,
guarantees, representations, obligations or covenants contained herein, then
Diametrics shall actively cooperate with JJPI in executing such corrective
action relating to Product quality and performance, and Diametrics shall
reimburse JJPI for the reasonable out of pocket costs of such action, including
the cost of replacing any Product which is so recalled, whether or not any such
specific unit of Product shall be established to be in breach of any warranty by
Diametrics hereunder.

         4.05 Notice of Audit or Inquiry. Each party agrees to promptly notify
the other of any FDA audit, or any audit by any other regulatory body, of its
facilities used for the manufacture, storage or distribution of Products, or any
request for information from the FDA, or other regulatory body, related to the
manufacture of Products, as soon as practicable after it received notice of such
audit or request.

         4.06 Complaint Handling. JJPI shall be responsible for interacting with
customers regarding complaints and other product performance issues. Diametrics
shall be responsible for all product performance complaint issues and will
maintain MDR and other product performance tracking systems. JJPI shall
reasonably cooperate with Diametrics in connection with its obligations under
this Section 4.06 and provide to Diametrics, on a timely basis to permit
Diametrics to fulfill its regulatory obligations, the necessary reports relating
to complaints and product performance

                                      -17-
<PAGE>
 
issues relating to the Products. Upon reasonable request by Diametrics, JJPI
shall make such reports (on behalf of Diametrics, if appropriate) directly to
the appropriate regulatory authorities. In addition, JJPI shall maintain a
tracking system for the Products, and shall provide such information to
Diametrics upon reasonable request. Diametrics shall have the right to review
and audit JJPI's complaint handling and product tracking systems for the
Products, upon reasonable request during normal business hours. JJPI and
Diametrics shall each be responsible for bearing their own costs associated with
all complaint analyses and evaluations. Diametrics shall be responsible for
bearing the cost of product replacement attributable to the failure of Product
to comply with the requirements set forth in this Agreement. Diametrics shall,
within 30 days following receipt of a returned Product, provide JJPI a written
report of the results of the analysis and corrective actions taken with respect
to such Product complaint.

         4.07. Warranty Service. Diametrics agrees to perform repair,
maintenance, modification and other services (including warranty repairs) on a
timely basis on Products purchased by JJPI, its Affiliates, or its customers.
All requests for service from customers shall be directed to JJPI, who will
arrange for the customer to ship the applicable Product directly to Diametrics.
Diametrics will repair and return product in accordance with JJPI instructions.
In the case of out-of-warranty service, Diametrics will bill JJPI, who in turn
will bill the customer. The rates for out-of-warranty service shall be agreed
upon from time-to-time by JJPI and Diametrics. Diametrics agrees to maintain an
inventory for spare and replacement parts for each Product sold under this
Agreement if and when production ceases for a period of at least three (3) years
following the delivery date of the particular Product.



                                  ARTICLE FIVE
                         REPRESENTATIONS AND WARRANTIES

         5.01 (a) Diametrics warrants to JJPI that the Products will meet the
Specifications and will be free from material defects in material, workmanship
and design for a period of eighteen (18)

                                      -18-
<PAGE>
 
months from the date of shipment from Diametrics or twelve (12) months from the
date of installation at the end user location, whichever is less, PROVIDED THAT:

         1.       The Product has been installed, stored, used and maintained in
                  strict compliance with the safety procedures, Operating
                  Instructions and storage and handling requirements provided
                  with the Product.

         2.       Diametrics or an authorized Diametrics representative is
                  notified, and the Product taken out of service, as soon as a
                  defect appears.

         3.       The Product has not been subject to (i) neglect, misuse or
                  operation contrary to the Operating Instructions provided with
                  the Product or (ii) improper storage or handling contrary to
                  the storage and handling requirements provided with the
                  Product.

         4.       No repairs have been attempted or parts replaced by anyone not
                  authorized by Diametrics to perform such repair, and that the
                  Product serial number, date stamp or other identification
                  marks have not been removed or defaced.

Diametrics's liability under this warranty is limited to the supply of
replacement parts or Product, or labor and parts repair at an authorized
Diametrics facility, to a value not exceeding the original Diametrics invoice
price of the Product.

The warranty does not include:

         i)       Packaging, freight and insurance to and from authorized
                  Diametrics repair facility.

         ii)      Products not provided by Diametrics or damage to the
                  Diametrics Product that is caused by any such products.


                                      -19-
<PAGE>
 
         iii)     Fuses
                  No rechargeable batteries
                  Cables
                  Lamps and Bulbs
                  Disposables or consumables

         (b) Diametrics represents and warrants that it complies and shall
comply with applicable statutes, laws, ordinances, rules and regulations
relating to the manufacture, assembly and supply of the Product, including,
without limitation, those enforced by the FDA (including compliance with QSRs)
and International Standards Organization (ISO) Rules 9,000 et seq. Diametrics
represents and warrants that it has obtained ISO 9001 certification and has
submitted to the FDA an application for 510K clearance for the Product and that
the applications for such certification and clearance contain (or prior to
certification or clearance will contain) complete and accurate information and
that the information contained therein was obtained in good faith in compliance
with all applicable statutes, laws, ordinances, rules and regulations.

         (c) Diametrics warrants and represents that (a) the current Product is
fully Year 2000 Compliant (as defined below), or it will be able to demonstrate
Year 2000 compliance in a full production version of the Product, with
accompanying documentation, no later than the specified delivery date if such
date is on or before (***); (b) Diametrics's information systems and other
business systems for estimates, performance schedules, orders, confirmations,
manufacture and delivery, invoicing and crediting of payments will accept and
properly process input for dates before, on or after January 1, 2000 no later
than (***); and (c) Year 2000 Compliant products and/or services will be
provided to JJPI under this Agreement in a timely and efficient manner without
interruption and/or disruption at no additional fee or charge of any kind
(including any installation,

--------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

                                      -20-
<PAGE>
 
freight, or other costs or fees) to JJPI. On or before (***) Diametrics shall
provide to JJPI a written plan as to how it will achieve Year 2000 Compliance as
required hereby. The term "Year 2000 Compliant" shall mean (a) the Product
performs in a consistent manner and functions without interruptions regardless
of the date in time on which the Product is delivered, used and/or further
distributed, whether before, on or after January 1, 2000 and whether or not the
dates are affected by leap years; (b) the Product, if computerized, accepts,
calculates, compares, sorts, extracts, sequences and otherwise processes date
inputs and date values, and returns and displays date values and performs, in a
consistent manner regardless of the dates used, whether before, on or after
January 1, 2000; (c) the Product, if computerized, accepts and responds to
two-digit year -date input in a manner that resolves any ambiguities as to the
century in a defined, predetermined and appropriate manner; (d) the Product, if
computerized, stores and displays date information in ways that are unambiguous
as to the determination of the century; (e) the Product will be delivered and
the services will be scheduled and performed in a timely manner without
interruptions caused by the date in time on which the Product is ordered or is
actually delivered or the services are scheduled or actually performed under
normal procedures in the ordinary course, whether before, on or after January 1,
2000; (f) Diametrics is now planning and taking action to implement and will
continue to implement, in a commercially reasonable manner, any and all measures
to continue to perform this Agreement according to its terms and otherwise to
meet the needs of its supplier-customer trading relationship with JJPI,
including without limitation those required for due performance and continued
performance without impairment due to interruption and/or disruption of
estimates, performance schedules, orders, confirmations, manufacture and
delivery of conforming products and/or services in a timely and efficient manner
to fulfill JJPI's requirements and to enable JJPI to deal with its own business
and its clients' needs and contract requirements, as well as to invoice JJPI and
credit its payments in a timely and accurate manner; and (g) Diametrics will
promptly provide to JJPI, in response to JJPI's periodic requests for updates,
information concerning Diametrics's Year 2000 compliance program to the extent
it affects performance of this Agreement itself according to

--------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

                                      -21-
<PAGE>
 
the terms hereof or affects the performance of the products and/or services
which are the subject matter of this Agreement and might impair its
supplier-customer relationship with JJPI. JJPI may cancel, refuse to order
and/or take delivery, reject and/or return non-complying goods and/or services
and receive a full refund or credit against invoices, as applicable. In no event
shall delays and failures caused by failures of Diametrics, its products or
services to be fully Year 2000 Compliant constitute a force majeure event or
excuse Diametrics from timely performance of its obligations.

     5.02 Execution and Performance of Agreement. Diametrics and JJPI each
represents and warrants to the other that it has full right, power and authority
to enter into and perform its obligations under this Agreement. Diametrics and
JJPI each further represents and warrants to the other that the performance of
its obligations under this Agreement will not result in a violation or breach
of, and will not conflict with or constitute a default under any agreement,
contract, commitment or obligation to which such party or any of its Affiliates
is a party or by which it is bound and that it has not granted and will not
grant during the term of this Agreement or any renewal thereof, any conflicting
rights, license, consent or privilege with respect to the rights granted herein.

         5.03 Intellectual Property. Diametrics represents and warrants to JJPI
that Diametrics owns all of the rights, title and interest in and to the
Diametrics Patents, Diametrics Trademarks, Know-How and all other intellectual
property that appear on or are otherwise used in connection with the Products;
no academic institution, member of an academic institution, corporation or other
entity, or any local, state or federal government holds any property rights
through it in any Product; Diametrics is able to consummate this Agreement in
the capacity of a free agent; the manufacture, use and sale of the Products in
accordance with the terms of this Agreement does not and will not infringe any
third party's rights under any patent; the use of the Diametrics Trademarks by
JJPI hereunder does not and will not infringe the rights of any third party; and
Diametrics is presently aware of no infringement by any third party of any
Diametrics Patent or any Diametrics Trademark.

         5.04 (a) DIAMETRICS MAKES NO WARRANTY OTHER THAN THOSE EXPRESSLY MADE
HEREIN, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF
MERCHANTABILITY OR OF FITNESS FOR ANY PARTICULAR PURPOSE.


                                      -22-
<PAGE>
 
         (b) THE ABOVE WARRANTY SHALL SUPERSEDE THE DISCLAIMER OF WARRANTIES
STATEMENT WHICH IS INCLUDED IN THE OPERATING INSTRUCTIONS, OR ANY OTHER
DOCUMENTATION PROVIDED WITH THE PRODUCT, TO THE EXTENT THE PROVISIONS OR SUCH
DISCLAIMER OF WARRANTIES ARE INCONSISTENT WITH THIS WARRANTY.

         (c) NOTHING CONTAINED IN THE ARTICLE 5 SHALL IN ANY WAY LIMIT
DIAMETRICS INDEMNITY OBLIGATIONS UNDER SECTION 6.01.




                                   ARTICLE SIX
                                 INDEMNIFICATION

         6.01 Indemnification by Diametrics. Diametrics shall indemnify and hold
harmless JJPI and its Affiliates and their respective officers, directors and
employees from and against any and all damages, liabilities, claims, costs,
charges, judgments and expenses (including interest, penalties and reasonable
attorneys' fees) (collectively "Damages") incurred by such party that arise out
of or result from any third party claim (i) alleging any breach by Diametrics of
any of its representations, warranties, guarantees, covenants or obligations
contained herein, or (ii) otherwise arising out of the use of the Products
except to the extent attributable to (A) claims made by JJPI that are beyond the
scope of claims that have been approved by Diametrics or (B) defective or
malfunctioning tunneling, anchoring, access or other devices manufactured by
JJPI.

         6.02 Indemnification by JJPI. JJPI shall indemnify and hold harmless
Diametrics and its Affiliates and their respective officers, directors and
employees from and against any and all Damages incurred by such party that arise
out of or result from any third party claim (i) alleging any breach by JJPI of
any of its representations, warranties, guarantees, covenants or obligations
contained herein or (ii) arising out of the use of the Products to the extent
attributable to (A) claims

                                      -23-
<PAGE>
 
made by JJPI that are beyond the scope of claims that have been approved by
Diametrics or (B) defective or malfunctioning tunneling, anchoring, access or
other devices manufactured by JJPI.

         6.03 Claims. Each indemnified party agrees to give the indemnifying
party prompt written notice of any matter upon which such indemnified party
intends to base a claim for indemnification (an "Indemnity Claim") under this
Article Six. The indemnified party shall have the right to participate with the
indemnifying party in the indemnifying party's defense, settlement or other
disposition of any Indemnity Claim, subject to the ultimate control of the
indemnifying party. With respect to any Indemnity Claim relating solely to the
payment of money damages and which could not result in the indemnified party's
becoming subject to injunctive or other equitable relief or otherwise adversely
affect the business of the indemnified party in any manner, and as to which the
indemnifying party shall have acknowledged in writing the obligation to
indemnify the indemnified party hereunder, the indemnifying party shall have the
sole right to defend, settle or otherwise dispose of such Indemnity Claim, on
such terms as the indemnifying party, in its sole discretion, shall deem
appropriate, provided that the indemnifying party shall provide reasonable
evidence of its ability to pay any damages claimed and with respect to any such
settlement shall have obtained the written release of the indemnified party from
the Indemnity Claim. The indemnifying party shall obtain the written consent of
the indemnified party prior to ceasing to defend, settling or otherwise
disposing of any Indemnity Claim if as a result thereof the indemnified party
would become subject to injunctive or other equitable relief or the business of
the indemnified party would be adversely affected in any manner.


                                  ARTICLE SEVEN
                        FAILURE TO SUPPLY; FORCE MAJEURE

         7.01 Failure to Supply. Notwithstanding the provisions of Section 7.02,
in the event that Diametrics shall be unable or unwilling or has failed for any
reason (including as a result of the commencement of a case by or against
Diametrics under Title 11 (as defined in Section 9.02)) to supply to JJPI any
Products in compliance with the desired delivery date specified in the purchase

                                      -24-
<PAGE>
 
orders submitted by JJPI in accordance with Section 2.05 hereof (to the extent
such quantities were included within the relevant forecasts submitted in
accordance with Section 2.04 hereof) (a "Failure to Supply"), then, upon ninety
(90) days written notice from JJPI (if Diametrics has failed to cure the breach
during such ninety (90) day period, which cure may include the use of a third
party manufacturer of Products that has satisfied the JJPI's Supplier
Qualification Activities), JJPI may use, sell, make and have made the Products
and use the Diametrics Trademarks in connection therewith pursuant to the
license granted in Section 9.01 until such time as Diametrics demonstrates to
JJPI's reasonable satisfaction its ability to fully resume its supply
obligations hereunder (such time period, a "License Period"); provided that JJPI
shall have no obligation to purchase Products from Diametrics, and the License
Period shall continue, until the earlier of (i) any contractual obligations that
JJPI has assumed in connection with producing the same or obtaining such
substitute source of supply shall have terminated, and (ii) 180 days following
the date on which Diametrics demonstrates to JJPI's reasonable satisfaction its
ability to fully resume its supply obligations hereunder. In the event of such
Failure to Supply, Diametrics shall make available to JJPI or its designee
access to all Know-How and any other technical and proprietary materials,
information and techniques necessary or helpful for JJPI to procure required raw
materials or produce or arrange an alternative supplier of Product, and to
provide advice and consultation in connection therewith. Diametrics shall not
sell any Product to any third party during a License Period. JJPI shall pay to
Diametrics a royalty equal to (***)% of Net Sales of Product manufactured by or
for JJPI under this Article 7 which, but for the license granted in Article 9 of
this Agreement, would infringe a valid claim of a Diametrics Patent, and a
royalty equal to (***)% of Net Sales of Product manufactured by or for JJPI
under this Article 7 which do not infringe a valid claim of a Diametrics Patent.
The provisions of this Section 7.01 shall constitute JJPI's sole and exclusive
remedy for a Failure to Supply except to the extent such Failure to Supply is
attributable to an intentional or willful act, omission or decision by
Diametrics.

--------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

                                      -25-
<PAGE>
 
         7.02 Force Majeure Events. If either party is prevented from performing
any of its obligations hereunder due to any cause which is beyond the
non-performing party's reasonable control, including fire, explosion, flood, or
other acts of God; acts, regulations, or laws of any government; war or civil
commotion; strike, lock-out or labor disturbances; or failure of public
utilities or common carriers (a "Force Majeure Event"), such non-performing
party shall not be liable for breach of this Agreement with respect to such
non-performance to the extent such non-performance is due to a Force Majeure
Event. Such non-performance will be excused for three months or as long as such
event shall be continuing (whichever period is shorter), provided that the
non-performing party gives immediate written notice to the other party of the
Force Majeure Event. Such non-performing party shall exercise all reasonable
efforts to eliminate the Force Majeure Event and to resume performance of its
affected obligations as soon as practicable.


                                  ARTICLE EIGHT
                                 CONFIDENTIALITY

         8.01 Confidential Information. As used herein, "Confidential
Information" shall mean all confidential or proprietary information that is
reduced to writing, marked as confidential and given to one party by the other
party relating to such other party or any of its Affiliates, including
information regarding any of the products of such other party or any of its
Affiliates, information regarding its advertising, distribution, marketing or
strategic plans or information regarding its costs, productivity or
technological advances. Neither party shall, during the term of this Agreement
and for a period of five years (seven years with respect to Know-How and other
technical and proprietary materials, information and techniques which may be
provided to JJPI pursuant to Section 7.01 or 9.01) following the termination or
expiration of this Agreement for any reason, use or disclose to third parties
any Confidential Information of the other (except to the extent reasonably
necessary to exercise its rights or comply with its obligations under this
Agreement) and each party shall insure that its employees, officers and agents
shall not use or disclose to third parties any Confidential Information of the
other (except to the extent reasonably necessary to exercise its rights or
comply with its obligations under this

                                      -26-
<PAGE>
 
Agreement); provided, however, that JJPI may disclose Confidential Information
of Diametrics to JJPI's Affiliates and consultants if such persons are informed
of the confidential nature of such information and are under an obligation to
keep such information confidential. Confidential Information shall not include
information that (i) was already known to the receiving party at the time of its
receipt thereof, as evidenced by its written records, (ii) is disclosed to the
receiving party after its receipt thereof by a third party who has a right to
make such disclosure without violating any obligation of confidentiality, (iii)
is or becomes part of the public domain through no fault of the receiving party
or (iv) is required to be disclosed to comply with applicable laws or
regulations or an order of a court or regulatory body having competent
jurisdiction. Nothing contained herein shall prevent JJPI from marketing and, if
applicable pursuant to Sections 7.01 and 9.01, manufacturing or having
manufactured the Products and JJPI shall be permitted to disclose such
Confidential Information as is reasonably necessary in connection with such
activities.


                                  ARTICLE NINE
                                 LICENSE RIGHTS

         9.01 License. Diametrics hereby grants to JJPI an exclusive worldwide
license, with the right to grant sub-licenses to its Affiliates, under the
Diametrics Patents and Know how in the Field, to use, sell, make and have made
the Products, and to use the Diametrics Trademarks in connection therewith;
provided, however, that the license granted hereunder shall be effective only
during License Periods (as defined in Section 7.01) and JJPI shall not exercise
its rights under this License other than during such License Periods. If JJPI
does exercise its rights under this license, JJPI shall pay to Diametrics the
royalties provided for in Section 7.01. The parties agree that under the license
in the Diametrics Trademarks granted herein, in order to protect the goodwill in
the Diametrics Trademarks, JJPI shall submit to Diametrics, for its written
approval, specimens of labels, advertising, and other materials bearing the
Diametrics Trademarks. Diametrics shall communicate its approval or disapproval
of JJPI's use of the Diametrics Trademarks within five (5) days following
receipt of such specimens. Failure of Diametrics to respond within such five (5)
day period shall

                                      -27-
<PAGE>
 
constitute approval of such use. Diametrics's approval of JJPI's use of the
Diametrics Trademarks shall not be unreasonably withheld.

         9.02 Rights Upon Insolvency. All rights and licenses to Diametrics
Patents, Diametrics Trademarks and Know-How granted under this Agreement by
Diametrics to JJPI are, for all purposes of Section 365(n) of Title 11 of the
U.S. Code ("Title 11"), licenses of rights to intellectual property as defined
in Title 11. Diametrics agrees during the term of this Agreement to create and
maintain current copies or, if not amenable to copying, detailed descriptions or
other appropriate embodiments, of all such Diametrics Patents, Diametrics
Trademarks and Know-How. If a case is commenced by or against Diametrics under
Title 11, then, unless and until this Agreement is rejected as provided in Title
11, Diametrics (in any capacity, including debtor-in-possession) and its
successors and assigns (including, without limitation, a Title 11 trustee) shall
either perform all of the obligations provided in this Agreement to be performed
by Diametrics or provide to JJPI all such intellectual property reasonable
required to make or have made, use and sell Products in the Field (including all
embodiments thereof) held by Diametrics and such successors and assigns, as JJPI
may elect in a written request, immediately upon such request. If a Title 11
case is commenced by or against Diametrics, this Agreement is rejected as
provided in Title 11 and JJPI elects to retain its rights hereunder as provided
in Title 11, then Diametrics (in any capacity, including debtor-inpossession)
and its successors and assigns (including, without limitation, a Title 11
trustee) shall provide to JJPI all such intellectual property (including all
embodiments thereof) held by Diametrics and such successors and assigns
immediately upon JJPI's written request therefor. All rights, powers and
remedies of JJPI, as a licensee hereunder, provided herein are in addition to
and not in substitution for any and all other rights, powers and remedies now or
hereafter existing at law or in equity (including, without limitation, Title 11)
in the event of the commencement of a Title 11 case by or against Diametrics.
JJPI, in addition to the rights, powers and remedies expressly provided herein,
shall be entitled to exercise all other such rights and powers and resort to all
other such remedies as may now or hereafter exist at law or in equity (including
Title 11) in such event.

         9.03 Prosecution of Patents. Diametrics agrees to, at its expense,
prosecute, or cause to be prosecuted to allowance or rejection, and reasonably
maintain, in the United States and such other countries selected by mutual
agreement of Diametrics and JJPI, the patents and patent applications

                                      -28-
<PAGE>
 
included in the Diametrics Patents. Diametrics shall issue as a patent each such
application prosecuted to allowance. Diametrics shall pay all government fees
required to keep in force patents and applications therefor included in the
Diametrics Patents and shall submit evidence to JJPI, upon request, that said
government fees have been timely paid.

         9.04 Registration of Trademarks. Diametrics shall be responsible for
the registration and maintenance of all applications required to protect, in the
United States and such other countries selected by mutual agreement of
Diametrics and JJPI, all trademarks included in the Diametrics Trademarks.
Diametrics shall pay all government fees required to keep in force trademarks
and applications therefor included in the Diametrics Trademarks and shall submit
evidence to JJPI, upon request, that said government fees have been timely paid.
In the event that Diametrics decides not to register in a country elected by
JJPI, not to pay a government fee due on, or otherwise to abandon a trademark or
application therefor within the Diametrics Trademarks, Diametrics shall send
JJPI written notice of said decision at least ninety (90) days in advance of the
action or payment due date. JJPI shall thereupon have the option, but not the
obligation, to register or pay the government fees, in which event the affected
trademark or application shall be promptly assigned to JJPI.

         9.05 Third-Party Infringement. In the event there is infringement by a
third party of any Diametrics Patent or Diametrics Trademark and JJPI becomes
aware of such infringement, JJPI shall give Diametrics written notice to that
effect, including with such written notice evidence establishing a prima facie
case of infringement by such third party. Diametrics shall bear all expenses of
any suit brought by it based upon such infringement and shall retain all damages
or other monies awarded or received in settlement of such suit. If, after the
expiration of ninety (90) days from the date of such notice, Diametrics has not
obtained a discontinuance of such infringement or brought suit against the third
party infringer, then JJPI shall have the right, but not the obligation, to
bring suit against such infringer. Diametrics will cooperate with JJPI in any
such suit for infringement brought by JJPI against a third party, and shall have
the right to consult with JJPI and to participate in and be represented by
independent counsel in such litigation at its own expense. JJPI shall bear all
expenses of such suit, and shall retain any damages or other monies awarded or
received in consequence of such litigation.

         9.06 Escrow. Diametrics shall, within 60 days following execution of
this Agreement, place

                                      -29-
<PAGE>
 
with an escrow agent mutually acceptable to Diametrics and JJPI, a description
of Diametrics's process for the manufacture of the Products in sufficiently
clear and detailed terms that it can be readily followed and carried out by a
trained scientist or engineer to make the Products in the manner Diametrics
considers most efficient. Furthermore, should Diametrics alter, modify or change
its process for manufacturing the Products, Diametrics shall amend the
description in escrow to include such alteration, modification or change. The
description held in escrow pursuant to this Section 9.06, shall be available to
JJPI or its designee only during License Periods. JJPI shall negotiate and pay
the fees of the escrow agent.

         9.07 Ownership of Developments.

         (a) All inventions made, conceived or acquired by Diametrics, and the
intellectual property related thereto, shall be the exclusive property of
Diametrics. Diametrics will pay all expenses relating to the securing and
maintaining of appropriate intellectual property protection with respect to such
inventions. 

         (b) All inventions made, conceived or acquired by JJPI, and the
intellectual property related thereto, will be the exclusive property of JJPI
and that JJPI will pay all expenses relating to the securing and maintaining of
appropriate intellectual property protection with respect to such inventions.

         (c) In the event that personnel of Diametrics and JJPI jointly
participate in an invention, such invention, and the intellectual property
related thereto shall be owned jointly by the parties. The parties shall jointly
own and share in the expenses of obtaining intellectual property protection of
the invention. The parties shall agree on a single attorney to prepare and
prosecute such intellectual property on behalf of both parties. For any
intellectual property protection in any country that one of the parties refuses
to share in such costs, that party shall assign all right, title and interest in
such invention to the other party retaining only a paid up, non-exclusive
license to make (or have made), use and sell products using or incorporating
such invention, without the right to grant sublicenses (except to affiliates).




                                      -30-
<PAGE>
 
                                   ARTICLE TEN
                              TERM AND TERMINATION

         10.01 Initial Term. The initial term of this Agreement (the "Initial
Term") shall commence on the date hereof and continue until the sixth 
anniversary of the date hereof, unless sooner terminated as expressly provided
under the terms of this Agreement.

         10.02 Renewal. JJPI shall have the right to extend this Agreement for
an additional two year term at the end of the Initial Term by giving Diametrics
at least 60 days prior written notice of such election; provided such extension
right is subject to the condition that JJPI has fulfilled its minimum purchase
obligations pursuant the Section 2.8 (but not if JJPI has satisfied such
obligations during the last year of the Initial Term only by paying the
shortfall amount pursuant to Section 2.08(d)). JJPI's election to extend this
Agreement shall be binding on Diametrics.

         10.03 Termination for Breach. If either Diametrics, on the one hand, or
JJPI, on the other hand, shall materially breach any covenant, agreement or
obligation under this Agreement, then the other party may give notice to
terminate this Agreement by giving such party notice of such breach. The party
receiving such notice shall have ninety (90) days from the date of receipt
thereof to cure such breach. If such breach is not cured within such ninety (90)
day period, then the non-breaching party shall have the right to terminate this
Agreement effective as of the end of such period. In the event such breach is
cured during such period, such notice shall be of no force or effect and this
Agreement shall not be terminated.

         10.04 Termination for Insolvency. Either party may terminate this
Agreement upon notice if the other party makes an assignment for the benefit of
creditors, is the subject of proceedings in voluntary or involuntary bankruptcy
instituted on behalf of or against such party, or has a receiver or trustee
appointed for all or substantially all of its property; provided that in the
case of an involuntary bankruptcy proceeding, such right to terminate shall only
become effective if the other party consents to the involuntary bankruptcy or
such proceeding is not dismissed within sixty

                                      -31-
<PAGE>
 
(60) days after the filing thereof.

         10.05 Termination for Patent Infringement. JJPI may terminate this
Agreement upon ninety (90) days written notice if a court of competent
jurisdiction determines the manufacture, use, importation or sale of a Product
infringes the patents rights of a third party.

         10.06 Effect of Termination. Notwithstanding the termination of this
Agreement for any reason, each party hereto shall be entitled to recover any and
all damages (other than consequential damages) that such party shall have
sustained by reason of the breach by the other party hereto of any of the terms
of this Agreement. Termination of this Agreement for any reason shall be without
prejudice to Diametrics's right to receive all payments accrued and unpaid on
the effective date of termination and shall not release either party hereto from
any liability which at such time has already accrued or which thereafter accrues
from a breach or default prior to such expiration or termination, nor affect in
any way the survival of any other right, duty or obligation of either party
hereto which is expressly stated elsewhere in this Agreement to survive such
termination.

         10.07 Survival of Certain Provisions. The provisions of this Agreement
set forth in Sections 10.06 and 8.01 and Articles Six and Eleven, and any
remedies for the breach thereof, shall survive the termination of this Agreement
under the terms hereof.


                                 ARTICLE ELEVEN
                                  MISCELLANEOUS

         11.01 Arbitration a. Any dispute, claim or controversy arising from or
related in any way to this agreement or the interpretation, application, breach,
termination or validity thereof, including any claim of inducement of this
agreement by fraud or otherwise, will be submitted for resolution to final and
binding arbitration pursuant to the commercial arbitration rules then pertaining
of the Center for Public Resources ("CPR"), except where those rules conflict
with these provisions, in which case these provisions control. The arbitration
will be held in New York City, New York.

         b. The panel shall consist of three arbitrators chosen from the CPR
Panels of Distinguished

                                      -32-
<PAGE>
 
Neutrals each of whom is a lawyer specializing in business litigation with at
least 15 years experience with a law firm of over 25 lawyers or was a judge of a
court of general jurisdiction. In the event the aggregate damages sought by the
claimant are stated to be less than $5 million, and the aggregate damages sought
by the counterclaimant are stated to be less than $5 million, and neither side
seeks equitable relief, then a single arbitrator shall be chosen, having the
same qualifications and experience specified above.

         c. The parties agree to cooperate (1) to obtain selection of the
arbitrator(s) within 30 days of initiation of the arbitration, (2) to meet with
the arbitrator(s) within 30 days of selection and (3) to agree at that meeting
or before upon procedures for discovery and as to the conduct of the hearing
which will result in the hearing being concluded within no more than 9 months
after selection of the arbitrator(s) and in the award being rendered within 60
days of the conclusion of the hearings, or of any post-hearing briefing, which
briefing will be completed by both sides with 20 days after the conclusion of
the hearings. In the event no such agreement is reached, the CPR will select
arbitrator(s), allowing appropriate strikes for reasons of conflict or other
cause and three peremptory challenges for each side. The arbitrator(s) shall set
a date for the hearing, commit to the rendering of the award within 60 days of
the conclusion of the evidence at the hearing, or of any post-hearing briefing
(which briefing will be completed by both sides in no more than 20 days after
the conclusion of the hearings), and provide for discovery according to these
time limits, giving recognition to the understanding of the parties hereto that
they contemplate reasonable discovery, including document demands and
depositions, but that such discovery be limited so that the time limits
specified herein may be met without undue difficulty. In no event will the
arbitrator(s) allow either side to obtain more than a total of 40 hours of
deposition testimony from all witnesses, including both fact and expert
witnesses. In the event multiple hearing days are required, they will be
scheduled consecutively to the greatest extent possible.

         d. The arbitrator(s) shall render their award following the substantive
law of New Jersey. The arbitrator(s) shall render an opinion setting forth
findings of fact and conclusions of law with the reasons therefor stated. A
transcript of the evidence adduced at the hearing shall be made and shall, upon
request, be made available to either party.

                                      -33-
<PAGE>
 
         e. To the extent possible, the arbitration hearings and award will be
maintained in confidence.

         f. The United States District Court for New Jersey may enter judgment
upon any award. In the event the panel's award exceeds $5 million in monetary
damages or includes or consists of equitable relief, then the court shall
vacate, modify or correct any award where the arbitrators' findings of fact are
clearly erroneous, and/or where the arbitrators' conclusions of law are
erroneous; in other words, it will undertake the same review as if it were a
federal appellate court reviewing a district court's findings of fact and
conclusions of law rendered after a bench trial. An award for less than $5
million in damages and not including equitable relief may be vacated, modified
or corrected only upon the grounds specified in the Federal Arbitration Act. The
parties consent to the jurisdiction of the above-specified Court for the
enforcement of these provisions, the entry of judgment on any award, and the
vacatur, modification and correction of any award as above specified. In the
event such Court lacks jurisdiction, then any court having jurisdiction of this
matter may enter judgment upon any award and provide the same relief, and
undertake the same review, as specified herein.

         g. Each party has the right before or during the arbitration to seek
and obtain from the appropriate court provisional remedies such as attachment,
preliminary injunction, replevin, etc. to avoid irreparable harm, maintain the
status quo, or preserve the subject matter of the arbitration.

         h. EACH PARTY HERETO WAIVES ITS RIGHT TO TRIAL OF ANY ISSUE BY JURY.

         i. EACH PARTY HERETO WAIVES ANY CLAIM TO PUNITIVE OR EXEMPLARY DAMAGES
FROM THE OTHER.

         j. EACH PARTY HERETO WAIVES ANY CLAIM OF CONSEQUENTIAL DAMAGES FROM THE
OTHER EXCEPT WITH RESPECT TO ANY BREACH OF SECTION 8.01; IT BEING AGREED THAT A
PARTY MUST PROVE THE EXISTANCE

                                      -34-
<PAGE>
 
OF, AND ITS ENTITLEMENT TO, CONSEQUENTIAL DAMAGES WITH RESPECT TO A BREACH OF
SECTION 8.01 IN ACCORDANCE WITH APPLICABLE LAW.

         11.02 Publicity. Except as provided in Section 3.02, neither party
hereto shall originate any publicity, news release, or other announcement,
written or oral, whether to the public press, the trade, JJPI's or Diametrics's
customers or otherwise, relating to this Agreement, or to performance hereunder
or the existence of an arrangement between the parties without the prior written
approval of the other party hereto. Diametrics shall not use the name of JJPI or
any of its Affiliates for advertising or promotional purposes without the prior
written consent of JJPI.

         11.03 Headings. The Article and Section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning and interpretation of this Agreement.

         11.04 Notices. All notices and other communications hereunder shall be
in writing. All notices hereunder of an Indemnity Claim, a Force Majeure Event,
default or breach hereunder, or, if applicable, termination of the term hereof,
or any other notice of any event or development material to this Agreement taken
as a whole, shall be delivered personally, or sent by national overnight
delivery service or postage pre-paid registered or certified U.S. mail, and
shall be deemed given when delivered, if by personal delivery or overnight
delivery service, or three business days after deposit in the mail, if sent by
U.S. mail, and shall be addressed as follows:

         If to Diametrics: Diametrics Medical Incorporated
                           2658 Patton Road
                           St. Paul, MN 55113
                           Fax: (612) 638 1078
                           Attention:  Vice President, Commercial Business

           with a copy to: Dorsey & Whitney LLP
                           Pillsbury Center South
                           220 South Sixth Street
                           Minneapolis, MN  55402
                           Attention:  Ken Cutler, Esq.



                                      -35-
<PAGE>
 
               If to JJPI: Johnson & Johnson Professional, Inc.
                           325 Paramount Drive
                           Raynham, MA   02767-0350
                           Attention:  Vice President, New Business Development

           with a copy to: Johnson & Johnson
                           One Johnson & Johnson Plaza
                           New Brunswick, NJ 08933
                           Attention:  Office of General Counsel

or to such other place as either party may designate by written notice to the
other in accordance with the terms hereof.

         11.05 Failure to Exercise. The failure of either party to enforce at
any time for any period any provision hereof shall not be construed to be a
waiver of such provision or of the right of such party thereafter to enforce
each such provision.

         11.06 Assignment. This Agreement, or any of the rights and obligations
created herein, shall not be assigned or transferred, in whole or in part, by
either party hereto without the prior written consent of the other party;
provided, however, that either party shall have the right to assign any or all
of its rights or obligations under this Agreement to any Affiliate, or a
successor to that part of its business to which this Agreement relates, without
such prior written consent; provided that any such assignee of Diametrics shall
have all rights to the Diametrics Patents, Diametrics Trademarks and Know-How.
Any attempted assignment or transfer of such rights or obligations without such
consent, except as provided herein, shall be void. Subject to the foregoing
sentence, this Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns.

         11.07 Severability. In the event that any one or more of the provisions
(or any part thereof) contained in this Agreement or in any other instrument
referred to herein, shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, then to the maximum extent permitted by law, such
invalidity, illegality or unenforceability shall not affect any other provision
of this Agreement or any other such instrument. Any term or provision of this
Agreement which is invalid, illegal or unenforceable in any jurisdiction shall,
to the extent the economic benefits conferred by this Agreement to both parties
remain substantially unimpaired, not affect the validity, legality or
enforceability of any of the terms or provisions of this Agreement in any other
jurisdiction.

                                      -36-
<PAGE>
 
         11.08 Relationship of the Parties. The relationship of JJPI and
Diametrics established by this Agreement is that of independent contractors, and
nothing contained herein shall be construed to (i) give either party any right
or authority to create or assume any obligation of any kind on behalf of the
other or (ii) constitute the parties as partners, joint venturers, co-owners or
otherwise as participants in a joint or common undertaking.

         11.09 Competing Products. Diametrics recognizes and acknowledges that
JJPI (and its Affiliates) has been, and will continue to be, actively involved
in the design, development and marketing of instruments and accessories for the
treatment of neurological, spinal and orthopedic disorders. Diametrics
understands and agrees that JJPI (and its Affiliates) does or may design,
develop, market, sell and distribute products which compete directly with the
Product, and may continue to market, sell and distribute these and other
competing products throughout the term of this Agreement. Notwithstanding the
foregoing, JJPI shall not, during the term of this Agreement, design, develop or
market, itself or through any Affiliates or third parties, an invasive probe for
monitoring (***) in the central nervous system (i.e. the cranial cavity and
spinal column) other than the Product; it being agreed by Diametrics that
nothing contained in the Section 11.09 shall restrict an Affiliate of JJPI from
engaging in any of such activities independently of JJPI.

         11.10 Entire Agreement. It is the desire and intent of the parties to
provide certainty as to their future rights and remedies against each other by
defining the extent of their undertakings herein. This Agreement constitutes and
sets forth the entire agreement and understanding between the parties with
respect to the subject matter hereof and is intended to define the full extent
of the legally enforceable undertakings of the parties hereto, and no promise,
agreement or representation, written or oral, which is not set forth explicitly
in this Agreement is intended by either party to be legally binding. Each party
acknowledges that in deciding to enter into this Agreement and to consummate the
transactions contemplated hereby it has not relied upon any statements, promises
or representations, written or oral, express or implied, other than those
explicitly set forth in this Agreement. This Agreement supersedes all previous
understandings, agreements and representations

--------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

                                      -37-
<PAGE>
 
between the parties, written or oral, with respect to the subject matter hereof.

         11.11 Counterparts. This Agreement 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 instrument.

         11.12 Expenses. Each party shall pay all of its own fees and expenses
(including all legal, accounting and other advisory fees) incurred in connection
with the negotiation and execution of this Agreement and the arrangements
contemplated hereby.

         11.13 Modifications and Amendments. This Agreement shall not be
modified or otherwise amended except pursuant to an instrument in writing
executed and delivered by each of the parties hereto.

         11.14 Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any of
the provisions of this Agreement.

         11.15 Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New Jersey, without giving effect
to the choice of laws provisions thereof.

         11.16 Incorporation of Exhibits and Schedules. The Exhibits and
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.



                                      -38-
<PAGE>
 
                  IN WITNESS WHEREOF, the parties hereto intending legally to be
bound hereby, have each caused this Agreement to be duly executed as of the date
first above written.

                                    DIAMTERICS MEDICAL INCORPORATED

                                    By:      /s/David T. Giddings 
                                             -----------------------------------
                                    Name:    David T. Giddings           
                                             -----------------------------------
                                    Title:   Chief Executive Officer     
                                             -----------------------------------

                                    JOHNSON & JOHNSON PROFESSIONAL, INC.

                                    By:      /s/David M. Hable
                                             -----------------------------------
                                    Name:    David M. Hable                   
                                             -----------------------------------
                                    Title:   Vice President, Sales and Marketing
                                             -----------------------------------


                                      -39-
<PAGE>
 
                                   SCHEDULE A

Product Specification:
NEUROTREND(R)


(***)

















--------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

<PAGE>
 
                                   SCHEDULE B
                            PRODUCT TRANSFER PRICING


(***)















--------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

<PAGE>
 
                                   SCHEDULE C

                   Product Launch, Clinical, & Marketing Plan


(***)


















--------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

<PAGE>
 
                                   SCHEDULE D

                         Patent Portfolio for Neurotrend


(***)

















--------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

<PAGE>
 
                                    EXHIBIT A
                      Johnson & Johnson Professional, Inc.
               Quality Assurance Procedures for Product Evaluation


(***)

















--------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

<PAGE>
 
                                    EXHIBIT B
                  Product and Supplier Qualification Activities


(***)


















--------
***Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.