Document:

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                                                                    Exhibit 10.6

                         Portal Manufacturing Agreement

                                 By and between

                            Diametrics Medical, Inc.
                                2658 Patton Road
                             St. Paul, MN 55113, USA

                    (hereinafter referred to as "Diametrics")

                                       and

                             PHILIPS Medical Systems

                     (hereinafter referred to as "Philips")

         on the supply of Portal cartridge reader M3561A (M3561-60001);
                        exchange repair unit M3561-68000
        plus accessories edge connector cleaning kit M3672A (DMI 450000);
            temp card M3565A (DMI 467900); edge connector M3561-66403
     (DMI 516300); and DeviceSet with DeviceCom on a CD M3564A (DMI464218)

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                         Portal Manufacturing Agreement

     THIS PORTAL MANUFACTURING AGREEMENT (the "Manufacturing Agreement"), made
as of this 10th day of April, 2003 (the "Effective Date"), by and among
Diametrics Medical Incorporated, a Minnesota corporation having its principal
place of business at 2658 Patton Road, St. Paul, Minnesota 55113 ("Diametrics")
and Philips Medical Systems North America Company, a division of Philips
Electronics North America Corporation, a Delaware corporation with offices at
3000 Minuteman Road, Andover, Massachusetts ("Philips"). Diametrics and Philips
shall each be a "Party."

                                    RECITALS

     A.    Philips and Diametrics previously entered into a distribution
agreement dated June 6, 1999 (the "Distribution Agreement") the term of which
expired on October 31, 2002, and the parties are entering into an amendment to
the Distribution Agreement, dated as of the date of this Manufacturing Agreement
(the "Amendment") in order to clarify some of the surviving rights and
obligations under the Distribution Agreement. All capitalized terms shall have
the meanings set forth in this Manufacturing Agreement.

     B.    Whereas as governed by the Distribution Agreement, Philips and
Diametrics have jointly developed the M3650A Blood Analysis Portal System
consisting of the M3561A Portal Reader and the M3562A Interface Module.

     C.    Under the terms of the Distribution Agreement, Philips has surviving
rights to distribute the Portal Measurement Module as a part of the Portal
Product in a specific field of use until October 31, 2004, and Diametrics will
manufacture the Portal Measurement Products in accordance with the Amendment and
this Manufacturing Agreement and provide Portal Measurement Products to Philips
to allow for the completing of the postponement step by Philips of the Portal
Products.

     C.    The Parties desire to enter into this Manufacturing Agreement for the
purposes of Diametrics' manufacture of the Portal Measurement Products solely
for Philips on the terms of this Manufacturing Agreement.

     NOW THEREFORE, in consideration of the foregoing premises and of the mutual
covenants and subject to the terms and conditions set forth herein below,
Philips and Diametrics agree as follows:

1.   Definitions

     1.1   DeviceSet/DeviceCom Software. Means DeviceSet software with DeviceCom
           software on a CD M3564A (DMI 464218), as more particularly described
           in the Specifications.

     1.2   Portal Measurement Accessories. Means the following (a) accessories
           edge connector cleaning kit M3672A (DMI 450000); (b) temp card M3565A
           (DMI 467900); (c) edge connector M3561-66403 (DMI 516300), and (d)
           M3561-40003

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           edge connector cover (DMI 466400), as more particularly described in
           the Specifications.

     1.3   Portal Measurement Module. Means the Portal cartridge reader M3561A
           (M3561-60001), as more particularly described in the Specifications.

     1.4   Portal Measurement Products. Means the Portal Measurement Module, the
           exchange repair unit M3561-68000, Portal Measurement Accessories and
           DeviceSet/DeviceCom Software, collectively.

     1.5   Portal Products. Has the meaning set forth in Section 1.14 of the
           Amendment.

     1.6   Required Quality Data. Means the data and information described on
           Schedule 1.

     1.7   Specifications. Means the specifications set forth in Schedule 2.

     1.8   Term. Means the period from the Effective Date through October 31,
           2004.

     1.9   Schedule References. All Schedule references shall mean the Schedules
           to this Amendment.

2.   Effect of Agreement

     2.1   Portal Manufacturing Agreement. This Manufacturing Agreement
           stipulates the additional terms and conditions for the supply of
           Portal Measurement Products to Philips by Diametrics, including any
           Portal Measurement Products supplied by Diametrics prior to or during
           the Term hereof. The Portal Measurement Products will be manufactured
           and supported by Diametrics as provided herein and the Amendment.

     2.2   Supplementary Agreement. The Parties are executing this Manufacturing
           Agreement as a supplement to the Amendment in order to provide for
           certain additional terms and conditions relating to the manufacture
           of the Portal Measurement Products. This Manufacturing Agreement does
           not supercede the Amendment, and the terms of the Amendment shall
           apply to the Portal Measurement Products, except as expressly set
           forth herein.

3.   Examination and delivery of the Diametrics production units prior to
     shipment to Philips.

     3.1   Supplier Evaluation. Diametrics shall manufacture the Portal
           Measurement Products with material purchased directly by Diametrics.
           A list of suppliers and contacts have been provided by Philips to
           Diametrics. Philips agrees to provide initially the "Supplier
           Evaluation". Diametrics' and Philips' engineering contacts (listed on
           Schedule 5) will jointly agree as to which supplied components of the
           Portal Measurement Module are required to be periodically audited by
           the Diametrics quality personnel.

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     3.2   Certificate of Compliance. Each serialized Portal Measurement Module
           will be provided with a completed Diametrics "Certificate of
           Compliance" certifying that said product was inspected and tested per
           controlled manufacturing procedures.

     3.3   Production Units. Diametrics shall produce units of Portal
           Measurement Modules and other Portal Measurement Products in
           accordance with the terms and provisions hereof. The scope of
           delivery and supply shall be as set forth in this Manufacturing
           Agreement and the Amendment.

     3.4   Audit by Philips. Philips may periodically audit via a functional
           test a sample of the delivered Portal Measurement Module. Should
           Philips detect deviations from the Specifications or defects during
           the course of the functional check of the full production Portal
           Measurement Modules, Philips shall inform Diametrics thereof
           forthwith in writing via an SAR ( Supplier Action Request) per the
           Supplier Action Request Process Q2920-00224. In this event,
           Diametrics shall provide Philips with repaired or newly manufactured
           units of Portal Measurement Modules which are free of the defect(s)
           in question and shall provide a written corrective action plan within
           a reasonable period of time to be defined and agreed to by the
           Parties. Diametrics shall ensure that defects are remedied and
           rectified by certified employees. Subject to mutual agreement between
           the Parties, such rectification of defects may be carried out by
           Philips.

     3.5   Functional Checks after Delivery. Following delivery of the repaired
           / newly manufactured units, Philips shall conduct another functional
           check in accordance with Section 3.4 above. If deviations from the
           Specifications or defects are still detected in the repaired/newly
           manufactured Portal Measurement Modules and these are not remedied
           and rectified within mutually agreed upon date negotiated within the
           SAR process, subject to mutual agreement of the Parties, such
           rectification of defects may be carried out by Philips or a third
           party named by Diametrics and agreed by Philips prior to the
           implementation at Diametrics expense.

     3.6   Ship to Stock. The quality of the Portal Measurement Modules will
           allow ship-to-stock, without need of incoming inspection/test.
           Philips may periodically audit via a functional test a sample of the
           delivered Portal Measurement Module with a goal of acceptable failure
           rate of 1 per 100 units.

4.   Scope of Delivery.

     4.1   Forecasting and Ordering. Philips shall issue to Diametrics a monthly
           written, rolling, non-binding six (6) month forecast of its purchase
           of Portal Measurement Products. Such forecasts shall be updated
           monthly. Philips shall issue binding written purchase orders for
           Portal Measurement Products at least sixty (60) days prior to the
           proposed shipping date for such items. All purchase orders in excess
           of Philips' forecast shall be subject to written acceptance by
           Diametrics. Diametrics will use reasonable efforts to supply such
           items in a timely fashion,

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           subject to Diametrics' reasonable production capabilities and
           provided that such purchase orders are consistent with Philips'
           forecasts.

     4.2   Fluctuations in Orders. The parties shall address purchasing of
           components and materials as provided in Section 4.1(c) of the
           Amendment. In addition, Diametrics will diligently monitor its supply
           chain and its production processes and will promptly inform Philips
           of any anticipated interruption or inability to supply Portal
           Measurement Products to Philips to meet its forecasts or its firm,
           binding purchase orders, in order to permit Philips to assess the
           manufacturing situation, to inform its sales and planning personnel
           to attempt to adjust for such shortfall, and to advise and assist
           Diametrics, at Diametrics' expense in its efforts to minimize or
           avert such interruption in or inability to supply Portal Measurement
           Products.

5.   Delivery.

     5.1   Purchase Orders for Portal Measurement Products. Philips shall be
           entitled to use its then current standard purchase order for its
           purchases hereunder. In the event of a conflict between the terms of
           any such purchase order and the terms of this Manufacturing
           Agreement, the terms of this Manufacturing Agreement shall take
           precedence. Additional terms included in the purchase order that are
           not terms of this Manufacturing Agreement will be subject to prior
           mutual written agreement.

     5.2   Terms for Delivery. All deliveries of Portal Measurement Products and
           Consumables shall be made by Diametrics F.O.B. Diametrics U.S. or
           European facility. Title and risk of loss shall pass to Philips at
           the time of tender at Diametrics' facility to the carrier designated
           by Philips. Upon delivery to Philips' designated carrier, Philips
           will assume title and risk of loss, and will be responsible for
           transportation, and, if applicable, export of such products from the
           country of manufacture and shall be entitled to any duty drawback for
           which the products qualify. Diametrics shall provide Philips, upon
           Philips' reasonable request and at Philips' expense, reasonable
           substantiation and assistance with respect to such duty drawbacks.
           The pricing for products excludes, and Philips shall pay, all
           shipping, handling and insurance costs for and other costs of
           transporting such products after delivery to the F.O.B. point.

     5.3   Diametrics Supply Obligation. Diametrics shall manufacture the Portal
           Measurement Products in accordance with the applicable specifications
           and in accordance with the FDA, EU and all applicable regulations.

6.   Prices.

     6.1   Prices. Portal Measurement Products shall be supplied at the prices
           set forth in Schedule 4. All prices are F.O.B. Diametrics
           manufacturing facility.

     6.2   Price Changes. Prices may be changed upon ninety (90) days written
           notice by Diametrics. Any changes will not impact orders received
           prior to the date of such change.

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     6.3   Terms of Payment. All payments for Portal Measurement Products shall
           be due and payable within thirty-five (35) days of the date of the
           applicable invoice. Philips shall make all payments in immediately
           available funds to the location and in the manner reasonably
           designated by Diametrics from time to time. A late fee shall be paid
           by Philips on any amount not received by Diametrics when due at a
           rate of 1.5% per month on all unpaid amounts, or the maximum rate
           permitted by law, whichever is less. As between the Parties, Philips
           shall be responsible for all taxes relating to the Portal Measurement
           Products so purchased (except for taxes on Diametrics' net income).

7.   Invoice Address.

     All of Diametrics' invoices are the addressed to:

               Philips Medizin Systeme Boeblingen Gmbh
               Financial Service Center
               Postfach 1471
               71034  Boeblingen/ Germany

8.   Contact Persons. Diametrics and Philips shall each designate a Contact
     Person who will meet (by phone or in person) as required to discuss and
     monitor any manufacturing and manufacturing capacity issues for the Portal
     Measurement Products. Both Parties shall appoint additional contact persons
     in Schedule 5 to facilitate communication regarding specific aspects of the
     manufacture and supply of the Portal Measurement Products hereunder.

9.   Term and Termination of this Manufacturing Agreement.

     9.1   Term. This Manufacturing Agreement shall become effective on the
           Effective Date and shall terminate on October 31, 2004, unless
           terminated as provided herein.

     9.2   Termination for Material Breach. Either party may terminate this
           Manufacturing Agreement if the other party materially breaches this
           Manufacturing Agreement and fails to remedy such breach within ninety
           (90) days written notice from the non-breaching party. Material
           breaches shall include failure by Diametrics to meet the agreed
           quality standards for the Portal Measurement Products as set forth in
           Schedule 2.

     9.3   Effect of Termination. No termination or expiration of this
           Manufacturing Agreement shall affect or discharge any obligations,
           rights, disclaimers, conditions or limitations of either Party which
           arose prior to the effective date of such termination. In addition,
           Articles 15 (Confidentiality) and 21 (Miscellaneous) and any Sections
           necessary to give effect to this Article 9 shall survive any
           termination or expiration of this Manufacturing Agreement.

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10.  Technical Alteration. Diametrics agrees and undertakes to effect technical
     alterations (i.e., any required technical changes due to third party
     supplier changes, such as part obsolescence, revision changes and the like)
     to the Portal Measurement Modules only after written consent of Philips.

11.  Product Change Notification. No process changes, design changes,
     geographical relocation of manufacturing processes, or process step
     discontinuances affecting the electrical performance (whether specified or
     not), the mechanical form or fit, the environmental compatibility or
     material chemical characteristics, or the life reliability of Portal
     Measurement Products, but excluding any changes that do not affect the fit,
     form or function of the Portal Measurement Products (hereinafter
     collectively called "Changes") shall be made or incorporated in Portal
     Measurement Products without following the change notification process
     established herein. Diametrics shall give Philips written notice of any
     proposed change via the established Philips/Diametrics change order process
     and provide evaluation samples and other appropriate information as
     specified by Philips. For planned/scheduled changes that require
     re-qualification by Philips, Diametrics notice must be received by Philips
     at least three (3) months prior to the first proposed shipment of any such
     Products. For changes not requiring re-qualification by Philips, Diametrics
     notice must be received by Philips at least one (1) month prior to the
     first proposed shipment unless mutually agreed by the Parties. The Supplier
     Change Notification Agreement process Q2920-00094 will be followed. All
     product changes will be reflected in the 10 digit serial number by an
     appropriate change of the year (digit 3) and/or week of the change (digit
     4-5) as appropriate.

12.  Replacement Requirements/Exchange Products. Diametrics guarantees to
     Philips that replacement and or exchange Portal Measurement Modules will be
     supplied for a further seven (7) years following delivery of the last
     series/batch. After expiration of this seven (7) year period, Diametrics
     shall make available replacements (backward compatible or equivalent) in
     accordance with the respective technical possibilities or give Philips the
     possibility of placing a final order of a reasonable quantity, thus
     guaranteeing Philips a supply up until the end of the service period. The
     prices, terms and conditions as well as the technical feasibility of these
     two cases will form the subject of a separate agreement at the time of
     delivery of the last series/batch.

13.  Repaired / Exchanged Products.

     Diametrics will provide a test and repair service for Portal Measurement
     Modules returned from the customers (internal or external) as faulty
     whether still in warranty or out of warranty. Philips will provide
     Diametrics' field failure information. Philips will pay Diametrics the
     exchange repair cost per Schedule 4. Diametrics shall perform root cause
     analysis (sub-assembly level) on any failed unit in order to determine
     failure mode. Diametrics will provide a pareto trend analysis of failure
     data for all failed units to Philips on a monthly basis.

14.  Documentation

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     14.1  Rights of Access. Philips shall have the right to access and use
           Diametrics' manufacturing documentation for the Portal Measurement
           Products to comply with regulatory requirements.

     14.2  Record Retention. Diametrics shall retain records of any safety,
           quality and reliability related data relating to the Portal
           Measurement Products as well as any data necessary for "Current Good
           Manufacturing Practices" (CGMP, as required by FDA), the "In Vitro
           Diagnostics Directive" (the IVDD, as required by the European Union)
           and the "Medical Device Directive" (MDD, as required by the European
           Union), to the extent provided under Schedule 1, Required Quality
           Data.

     14.3  Access to Filings. Diametrics assures the access of DHR (Device
           History Record), DHT (Device History Traveler), and DMR (Device
           Master Record) in support of Philip's timely answering of Portal
           Measurement Product questions from the FDA. Diametrics shall
           cooperate with Philips in connection with its regulatory obligations
           to provide to Philips, on a timely basis, the necessary reports
           relating to complaints and product performance issues regarding the
           Portal Measurement Products. Upon reasonable request, Diametrics
           shall promptly make such reports (on behalf of Philips) directly to
           the appropriate regulatory authorities.

15.  Confidentiality.

     15.1  Non-Use and Non-Disclosure. Each Party acknowledges and agrees that
           all the other Party's Confidential Information is confidential to the
           disclosing Party. Each Party shall take the same reasonable measures
           as it uses to protect its own confidential information from the
           unauthorized disclosure or misuse to protect the other Party's
           Confidential Information from unauthorized disclosure or misuse,
           including without limitation, any disclosure by its employees,
           agents, contractors, permitted sublicensees, or consultants of the
           other Party's Confidential Information. As used herein, the term
           reasonable measures shall mean at least those measures a Party
           applies to the protection of its own Confidential Information and the
           term misuse shall mean use for any purpose other than as permitted or
           required hereunder.

     15.2  Marking. To be entitled to protection as Confidential Information,
           all Diametrics or Philips documents containing that Party's
           Confidential Information shall be appropriately and clearly marked as
           "Proprietary," "Secret," "Confidential," or other words to similar
           effect. If a disclosure of Confidential Information is made orally,
           as in a meeting, the disclosing Party shall indicate the nature of
           that information at the time of its disclosure and shall confirm such
           designation in writing within ten (10) days of the date of such
           disclosure to the receiving Party.

     15.3  Exclusions. Information shall not be considered Confidential
           Information hereunder if it:

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           (a)  was already in the possession of the receiving Party prior to
                its receipt from the disclosing Party;

           (b)  is, or becomes, part of the public knowledge or literature
                through no fault, act or omission of the receiving Party,
                provided, Confidential Information shall not be deemed to have
                entered the public domain by reason of its having been filed
                with any regulatory authority; provided the disclosing Party has
                taken advantage of any procedures available to protect
                confidentiality, including FOIA marking and protective orders;

           (c)  is, or becomes, available to the receiving Party from a source
                other than the disclosing Party, which source has rightfully
                obtained the same information and has no obligation of
                confidentiality to the disclosing Party with respect to it;

           (d)  is made available on an unrestricted basis by the disclosing
                Party to a third party unaffiliated with the disclosing Party;
                or

           (e)  is required to be revealed pursuant to law or requirements of
                any securities exchange on which a Party's shares are listed and
                traded, provided, however, the receiving Party which is under
                any such requirement of law shall give reasonable notice to the
                disclosing Party of such requirement and shall cooperate with
                the disclosing Party, at the disclosing Party's expense in
                reasonable legal efforts to limit or mitigate any such
                revelation so as to preserve the proprietary nature of any
                Confidential Information contained therein.

     15.4  Duration; Surviving Obligation. This Article 15 shall be deemed to
           cover and include any non-public information disclosed by a Party to
           the other during the course of their negotiations of this
           Manufacturing Agreement, whether or not marked or indicated as
           provided in Section 15.2. Each Party's obligations of non-use and
           non-disclosure of the other Party's Confidential Information shall
           apply during the term of this Manufacturing Agreement and shall also
           survive for a period of three (3) years after its termination for any
           reason.

     15.5  Confidentiality of this Agreement. The terms of this Manufacturing
           Agreement itself and the Schedules hereto shall be deemed to be
           Confidential Information hereunder. In the event that a Party is
           required to disclose the content of this Manufacturing Agreement
           pursuant SEC requirements or requirements of any securities exchange
           on which a Party's share are listed and traded, such Party shall use
           its reasonable efforts to obtain confidential treatment of at least
           the terms of Schedules 1, 2, 4, 6 and 7.

16.  Warranty.

     16.1  Warranty Terms. Diametrics warrants to Philips that the Portal
           Measurement Products at the time of their delivery by Diametrics to
           Philips (a) shall meet the Specifications as set forth on Schedule 2;
           (b) shall have been manufactured in

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           accordance with all laws and regulations applicable to their
           manufacture in those jurisdictions in which Philips is distributing
           the Portal Measurement Products (provided that Philips gives
           Diametrics at least ninety (90) days written notice of any
           jurisdictions in addition to those in effect as of the Effective Date
           of this Amendment); (c) shall be new or newly manufactured; and (d)
           shall be of good and merchantable title, free of liens and
           encumbrances. Diametrics shall, promptly, at Diametrics' sole option,
           replace, repair or make a purchase price (in the amount paid by
           Philips to Diametrics) refund for any of such Portal Measurement
           Products proved to be non-conforming, provided that written notice
           and reasonable documented evidence of each warranty claim and the
           fact that the failure occurred during the warranty period is received
           by Diametrics within thirty (30) days after the expiration thereof.
           Diametrics shall have the sole right to verify such non-conformance.
           Such replacement, repair or refund shall be Philips' sole remedy
           hereunder. Unless otherwise agreed by the Parties, the warranty
           period under this Section 16.1 for (1) the Portal Measurement Modules
           shall be eighteen (18) months from the date of shipment to Philips;
           (2) any DeviceSet/DeviceCom Software shall be forty-five (45) days
           from the date of delivery of such software to Philips' customer; and
           (3) any Portal Measurement Accessory shall be ninety (90) days from
           the date of shipment to Philips. If requested by Diametrics, Philips
           shall return the non-conforming Portal Measurement Products to
           Diametrics at the time of submission of the warranty claim therefore.
           Philips agrees to provide Diametrics sufficient notice of additional
           countries in which it intends to distribute the Portal Measurement
           Products to permit Diametrics to meet its obligations under
           subsection (b) of this Section 16.1.

     16.2  Exclusions. This warranty does not apply to Portal Measurement
           Modules or Portal Measurement Accessories that have been repaired,
           modified or tampered with by anyone other than Diametrics qualified
           technical personnel, nor to Portal Measurement Modules or Portal
           Measurement Accessories that have been exposed (by customer
           negligence) to adverse conditions through improper installation,
           application or maintenance.

     16.3  NFF Procedures. Any Portal Measurement Modules returned to Diametrics
           with no fault found (NFF) shall undergo twenty four (24) hour
           "burn-in" (i.e. 4 cycles of Treadmill test) upon no fault
           determination. Following completion of burn-in, the Portal
           Measurement Modules shall be subjected to a full functional test.
           Provided no fault is found, the Portal Measurement Modules shall be
           labeled (i.e. DHR annotated) prior to return to Philips in order to
           identify the Portal Measurement Modules, should they every be
           returned again. If the same Portal Measurement Modules should be
           returned to Diametrics' facility for a second time, and NFF, the
           Portal Measurement Modules shall be analyzed and replaced. For Portal
           Measurement Module's second NFF, the pc boards will be replaced and
           product fully tested before returned to Philips. If same Portal
           Measurement Module is returned a third time and NFF, the entire
           Portal Measurement Module will be removed from use and replaced at
           Diametrics' expense. The foregoing obligations apply only if the
           Portal Measurement Module is under warranty.

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     16.4  Warranty Disclaimer. EXCEPT AS EXPRESSLY PROVIDED IN THIS ARTICLE 16
           OF THIS AGREEMENT, DIAMETRICS MAKES NO REPRESENTATIONS OR WARRANTIES,
           EXPRESSED OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF
           MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

     16.5  Customer Warranties. Philips shall be entitled to warrant the Portal
           Measurement Products to its customers on terms it deems appropriate;
           provided that Philips shall bear any expenses it may incur with
           respect to such warranties, to the extent that such warranties exceed
           the scope or term of the express warranties made by Diametrics
           hereunder.

     16.6  Customer Complaints, Warranty and Out-of Warranty Repair. Philips
           will be responsible for handling customer complaints regarding the
           Portal Measurement Products. Diametrics will provide reasonable
           assistance to Philips in resolving such customer complaints.
           Diametrics will accept the return of any Portal Measurement Products
           that do not conform to the warranties set forth in Section 16.1, and
           will repair or replace any such defective Portal Measurement Product
           (or refund Philips' purchase price) as provided in Section 16.1.
           Philips agrees to maintain an inventory of Portal Measurement
           Products to meet its on-going repair obligations; provided that
           Diametrics agrees to maintain a reasonable inventory of Portal
           Measurement Products to support significant Product warranty issues.
           As between Diametrics and Philips, Philips will be responsible for
           providing its customers with such replacement Portal Measurement
           Products for use while such defective Products are being repaired or
           replaced. Diametrics will also provide out-of-warranty repair service
           on the Portal Measurement Modules, on the terms set forth on Schedule
           4 for a period of not less than seven (7) years after last production
           run of the Portal Measurement Module (or such longer period as may be
           required by local laws).

     16.7  Return Procedures. Reasonable attempts by Philips 1st Level
           Application Support (Response Centers) to determine failure mode(s)
           of the Portal Measurement Products is assumed. This information will
           be transferred to Diametrics prior to any Portal Measurement Products
           being returned from the field. This will provide initial information
           to assist in the investigation of the failed Portal Measurement
           Product. Upon receipt of a failed Portal Measurement Module, the unit
           will go through the standard repair process, which includes the known
           repair (if applicable) and then 1 cycle of Treadmill testing (roughly
           equivalent to 6 hour "burn-in"), and the subsequent quality tests. If
           the failure mechanism cannot be identified the unit will undergo the
           quality (diagnostic) tests, the repair pursued and then a full retest
           of the Portal Measurement Module (including Treadmill and the quality
           tests). If the fault cannot be re-created internally, and it passes
           all testing requirements the unit will be sent back out as acceptable
           (and documented as no fault found ("NFF") on the DHR). Diametrics
           will follow the Supplier Corrective Action Report ("SCAR") process or
           Distributor Action Request ("DAR") process to notify Philips if there
           is are multiple failures of any one component of any of the Philips
           engineered

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           components. Diametrics, likewise will also pursue a Corrective Action
           Report ("CAR") if there are multiple failures of any one component of
           any Diametrics engineered components. Philips will be notified at the
           time of the CAR initiation.

     16.8  Repair Period. Diametrics agrees to use commercially reasonable
           efforts to repair or replace the non-conforming Portal Measurement
           Products and return conforming Portal Measurement Products to Philips
           within four (4) weeks of receipt of Diametrics. Failed units returned
           from the field that are out-of-warranty will be repaired within 10
           working days for customer units and within 30 days for Service
           Logistics International ("SLI") exchange units.

17.  Quality Performance. If the failure rate of the Portal Measurement Module
     exceeds specified limits, (e.g. as per Section 3.5) and/or the Philips
     field failure rate is higher than the expectation (i.e. for Portal
     Measurement Module less than 4% the first year with a decrease to 1% the
     second year), Diametrics commits to initiate an SCAR, DAR or CAR driven
     corrective action project for quality / reliability improvements on Portal
     Measurement Modules (material, processes, subassemblies) effective per the
     SCAR or CAR.

     The goal for the Portal Measurement Module is not to exceed an annual
     failure rate (AFR) of 4% the first year with a decrease to 1% the second
     year for the Portal Measurement Module within a one year rolling period
     starting when the contract becomes effective:

           AFR =  # units failed/ #units shipped by Philips (annualized)

     Diametrics and Philips will do a monthly failure clearance on a common
     basis before entering the numbers into the calculation.

18.  Product Recall.

     18.1  If either Party believes that a recall of any Portal Measurement
           Product manufactured under this Manufacturing Agreement is desirable
           or required by law, it shall promptly notify the other Party. The
           Parties shall then discuss reasonably and in good faith whether such
           recall is appropriate or required and the manner in which any
           mutually agreed recall shall be handled. This Section 18 shall not
           limit the obligations of either Party under law with respect to
           recall of Portal Measurement Products required by law or properly
           mandated by governmental authority. Voluntary recalls shall be
           conducted by mutual agreement (with such agreement not to be
           unreasonably withheld) provided that if mutual agreement is not
           reached, either Party may individually conduct the voluntary recall
           in question in a manner consistent with its own regulatory guidelines
           and criteria. The "Recalling Party" shall bear all costs and expenses
           of any voluntary recall of any Portal Measurement Products and shall
           reimburse the "Other Party" for the reasonable, out-of-pocket costs
           incurred by the Other Party as a result of such recall, including the
           replacement cost of any Portal Measurement Products affected thereby,
           unless (i) such recall is unjustified and

                                       11

<PAGE>

           neither requested nor classified as a recall by a governmental agency
           or delegee or (ii) the cause or basis of such recall is attributable
           to a condition, fact or action that constitutes (A) a breach by the
           Other Party of any of its obligations hereunder or (B) negligence or
           willful misconduct of the Other Party in which case the Other Party
           will be liable for the costs and expenses of such recall, and shall
           reimburse the Recalling Party for the reasonable, out-of-pocket costs
           incurred by Recalling Party as a result of such recall, including the
           replacement cost of any Product affected thereby. The Parties shall
           cooperate fully with each other in effecting any recall of the
           Products pursuant to this Section 18, including communications with
           any customers or to the public.

     18.2  If any governmental agency having jurisdiction (including without
           limitation the FDA) shall request or order any corrective action with
           respect to Portal Measurement Products supplied hereunder, including
           any Portal Measurement Product recall, customer notice, restriction,
           corrective action or market action or any Product change, Diametrics
           shall bear the costs and expenses of such corrective action and shall
           reimburse Philips for the reasonable, out-of-pocket costs incurred by
           Philips as a result of such corrective action, including the
           replacement cost of any Products affected thereby, to the extent that
           the cause or basis of such corrective action is attributable to a
           condition, fact or action that constitutes (A) a breach by Diametrics
           of any of its obligations hereunder or (B) negligence or willful
           misconduct of Diametrics. Philips shall bear all other costs and
           expenses of such corrective action, and shall reimburse Diametrics
           for the reasonable out-of-pocket costs incurred by Diametrics as a
           result of such action, including the replacement cost of any Portal
           Measurement Product affected thereby.

19.  Environmental Considerations.

     Diametrics agrees to provide commercially reasonable support to Philips, at
     Philips' written request and at Philip's expense, as required to meet
     United States and international environmental laws, regulations and
     standards applicable to the manufacture of the Portal Measurement Products.

20.  Product Discontinuances. Diametrics acknowledges its obligation to
     manufacture the Portal Measurement Products during the term of this
     Manufacturing Agreement; however, if the Portal Measurement Products will
     not be available from Diametrics prior to the conclusion of the term,
     Diametrics shall give written notice to Philips. Diametrics notice shall be
     given immediately upon Diametrics knowing about the unavailability, but in
     any event no less than six (6) months in advance of the last order date of
     the Products. In any event of termination of this Manufacturing Agreement
     and subject to Diametrics' manufacturing capacity, and in addition to any
     other remedies that Philips may have at law or in equity, Philips shall be
     entitled to determine its lifetime-buy quantities and to purchase such
     quantities in accordance with this Manufacturing Agreement for purchase and
     shipment by the end of the Term.

21.  Miscellaneous Provisions

                                       12

<PAGE>

     21.1  Entire Agreement. This Manufacturing Agreement, together with any
           Schedules or other Attachments hereto and the Amendment, constitutes
           the entire agreement between the parties in relation to this subject
           matter and as such, supersedes all prior and contemporaneous
           negotiations, agreements, representations, understandings and
           commitments with respect thereto and shall take precedence over all
           terms, conditions and provisions on any purchase order form, or order
           acknowledgment, or order release purporting to address the same
           subject matter.

     21.2  Modification. This Manufacturing Agreement shall not be released,
           discharged, changed or modified in any manner except by a writing
           signed by the duly authorized officers or agents of each Party
           hereto, which writing shall make specific reference to this
           Manufacturing Agreement and shall express the plan or intention to
           modify same.

     21.3  Severability. If any provision or provisions of this Manufacturing
           Agreement shall be determined to be unenforceable, then the Parties
           shall in good faith negotiate for a substitute provision addressing
           the same subject matter as the unenforceable provision(s) as may then
           be considered to be enforceable, provided, however, if no substitute
           provision can be formulated which shall be accepted by the Parties as
           enforceable, this Manufacturing Agreement shall nonetheless continue
           in full force and effect with the unenforceable provision(s) stricken
           here from. In such case the applicable law shall apply with regard to
           unenforceable and / or void provisions.

     21.4  Governing Law. This Manufacturing Agreement shall be governed by and
           construed in accordance with the laws of the United States and the
           State of Delaware, excluding its choice of law rules. The Parties
           consent to the jurisdiction of the state and federal courts of
           Delaware.

22.  Schedules. Should conflicts occur between this Manufacturing Agreement and
     any part of the following Schedules, the requirements of this Manufacturing
     Agreement shall govern. The following Schedules form an integral part of
     this Manufacturing Agreement:

     Schedule 1:  Required Quality Data
     Schedule 2:  Portal Measurement Products and Specifications
     Schedule 3:  Philips Terms of Delivery
     Schedule 4:  Prices/Quantities
     Schedule 5:  Contact Persons
     Schedule 6:  Cosmetic Defect Guideline
     Schedule 7:  Cosmetic Inspection Guideline

                                       13

<PAGE>

DIAMETRICS MEDICAL, INC.                  PHILIPS MEDICAL SYSTEMS NORTH
                                          AMERICA COMPANY, A DIVISION OF
                                          PHILIPS ELECTRONICS NORTH
                                          AMERICA CORPOPRATION

By:  /s/ David B. Kaysen                  By:  /s/ Jay Mazelsky
   -----------------------------------       -----------------------------------
   David Kaysen, Chairman of the Board       Jay Mazelsky
   and Chief Executive Officer               Vice-President & General
                                             Manager - POCD

                                       14

<PAGE>

                                   Schedule 1

                              Required Quality Data

Diametrics assures 5 years of record retention of all the following quality and
reliability related data:

Starting on the Effective Date, Diametrics shall provide the following data to
Philips Procurement once every quarter:

1.  Outgoing data (Also known as F2 data) on each Portal Measurement Module:
          100% outgoing inspection means
          N = total (100%) each products tested.

2.  YIELD (overall - from incoming through outgoing -
          Philips expects a yield > 92%, per test station
          @ manufacturing, 1/st/ cycle)

          2.1)  and a pareto analysis of all materials failures,1/st/ cycle.

          2.2)  and a pareto analysis of all process failures, 1/st/ cycle.

3.  A pareto analysis of all root cause failures (sub-assembly level) for
    returned products.

                                       1

<PAGE>

                                   Schedule 2

                  Portal Measurement Products & Specifications

Item            Part Number                Respective             Date of
                Description               Specification        Specification

1.      M3561A Portal Reader              B-M3561-60000-1*     09/12/03
        (M3561-6001)

2.      M3561-68001                       B-M3561-60000-1      09/12/03
        Exchange repair Portal

3.      M3565A temp card                  B-M3561-60000-1      09/12/03
        (DMI 467900)

4.      M3561-66403 edge connector
        (DMI 516300)                      B-M3561-60000-1      09/12/03

5.      M3564A DeviceSet w/DeviceCom
        (DMI 464218)                      B-M3561-60000-1      09/12/03

6.      M3672A edge connector
        Cleaning kit (DMI 450000)         N/A                  N/A

7.      Cosmetic Defect Guideline         see schedule 6

8.      Cosmetic inspection               see schedule 7

* B-M3561-60000-1 is the M3561A Portal Product Specification. Rev. A of such
specification applied prior to 9/12/03. To the extent of any conflict between
Rev. A or B of the M3561A Portal Product Specification and Diametrics'
manufacturing process document MP46000 Rev. X., MP46000 shall apply.

                                       1

<PAGE>

                                   Schedule 3

                                Terms of Delivery

-  Delivery and Packaging Standard of Philips
   HP Dwg. A-5961-3658-1, Rev. D

-  EDI - capabilities for order receiving and acknowledgment

-  Shipping date as specified on Philips-Purchase Order

-  Date of dispatch:  Philips Delivery Date minus 7 days

-  Mode of transport :  Airfreight

-  Each shipment must indicate the exact address of the addressee on the outside
   of the packaging.

-  Products are shipped F.O.B. point of origin.

   For Shipping and Production and Failure Analysis:

        Philips Medizin Systeme Boeblingen Gmbh
        Hewlett Packard Str. 2
        71034 Boeblingen /Germany
        POCD Production Engineer
        Gebaeude 5/ Ebene 3 2 F15

-  The minimum order and ship quantity is 10 pieces.

-  Dangerous goods must be packed and labeled in accordance with the relevant
   regulations (Postal regulations, Regulation on the transport of dangerous
   goods, etc.).

-  Each shipment must contain a delivery voucher indicating the Philips order
   number and the Philips part
   number.

-  The total number of Portal Measurement Modules shipped shall be exactly as
   specified on the Philips purchase order.

                                       2

<PAGE>

                                   Schedule 4

                       Diametrics/Philips Transfer Prices

1.   M3561A Portal Reader                                     ***
            (M3561-60001)

2.   M3561-68000        Exchange repair Portal

The first two rates assume the unit is part of the exchange program, whereas the
third rate assumes the unit is not part of the exchange program.

-  Combined repair/recondition rate (if outside warranty):    ***
     (assumes part of exchange program, and covers
     reconditioning and functional repairs while
     outside of the standard warranty period)

-  Recondition only rate (would apply if within warranty):    ***
     (assumes part of exchange program, and covers
     reconditioning and functional repairs while within
     the standard warranty period, e.g., reconditioning
     is not covered by warranty)

-  Repair only rate (no recondition occurs):                  ***
     (assumes not part of exchange program)

3.   M3565A temp card                                         ***
      (DMI 467900)

4.   M3561-66403 edge connector                               ***
      (DMI 516300)

5.   M3564A DeviceSet w/DeviceCom                             ***
      (DMI 464218)

6.   M3672A edge connector                                    ***
      Cleaning kit (DMI 450000)

7.   M3561-40003 edge connector cover                         ***
      (DMI 466400)

----------
***  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.

                                       3

<PAGE>

                                   Schedule 5

                                 Contact Persons

For Philips:
------------

Manufacturing              e-mail: guido.sarnowski@philips.com
                           telephone:+49 (07031) 463-1218
                           FAX:+49(7031)463-1660

Purchasing Dept.           e-mail: gabriele.southwood@philips.com
                           telephone:+49(07031)464-1770
                           FAX:+49 (07031)464-1881

Materials Engineering      e-mail: jochen.sponholz@philips.com
                           Telephone:+49(07031)463-1932
                           FAX:+49(7031)463-1660

Order Processing           e-mail:gabriele.southwood@philips.com
                           telephone:+49(07031)464-1770
                           FAX:+49(07031)464-1881

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

For Diametrics:
---------------

Operations                                e-mail:dnorton@diametrics.com
Diane Norton                              telephone:  651-638-1153
                                          FAX:  651-638-1060

Purchasing Dept.                          e-mail:vjereczek@diametrics.com
Vern Jereczek                             telephone:  651-638-1162
                                          FAX:  651-638-1060

Materials Engineering/Manufacturing       e-mail:jkurkowski@diametrics.com
Jim Kurkowski                             telephone:  651-638-1112
                                          FAX:  651-638-1060

Order Processing                          e-mail: acottrell@diametrics.com
Amy Cottrell                              telephone:  651-638-1191
                                          FAX:  651-638-1060

                                       4

<PAGE>

                                   Schedule 6
                            Cosmetic Defect Guideline

                    Exchange Portal Cosmetic Defect Guideline

Purpose

This document provides guidelines for inspecting used (also called exchange)
Portal Measurement Modules during the repair process. The overall purpose of
this guideline is to ensure that exchange products which are shipped to
customers are in a condition which will lead to consistent customer
satisfaction.

Scope

This document does not cover cosmetic specifications for individual recovered
parts of assemblies, nor cosmetic specifications for new whole units. This
guideline only applies to the Portal Measurement Module and its related exchange
parts.

Because this guide applies to refurbished product only, inspectors should be
examining the product for end-user and shipping induced damage, or wear, not
defects caused during manufacturing. Only cosmetic defects that could be caused
by end-user or shipment can fail the product since any manufacturing-induced
defects have already passed manufacturing inspection. For that reason,
manufacturing-caused cosmetic defects such as blush, flash, flow marks, haze,
sinks, and weld lines should not be considered as defects when examining
refurbished units.

General Guidelines

Cosmetics, in this context refer to superficial, visual appearance of the
product and as such do not affect the functioning of the product. Any defect
that interferes with the normal operation of the product, should be considered a
non-cosmetic defect. In the strictest sense, missing parts are not considered a
cosmetic defect, even if they are not needed for the operation of the product
(example: missing label). Note, however, that a missing part would be considered
a defect, and would necessitate some form of repair or action. Also, it is very
important to realize that cosmetics are largely subjective, so inspectors should
apply their best judgment in all cases.

The guiding principal when applying this judgment should be that this product is
not a new product and should not be considered as such. A balance needs to take
place between attempting to achieve near perfect cosmetic appearances which
would result in a large financial liability to the company versus the
possibility of having a high customer dissatisfaction rate if we were to ship
exchange product which looks shabby.

Evaluation Criteria

Cosmetic defects will be evaluated using a weighted criteria basis based on the
location of the defect and the severity of the defect. Guidance is provided in
Table 1.

Customer Added Labels

                                       5

<PAGE>

Any labels or marking put on a system by customers must be removed . This
includes such items as inventory tags and safety stickers. All glues used to
attach these labels must also be removed.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
    Surface
      Area
    Location                                      (a)  Type of Cosmetic Defect
                   ------------------------------------------------------------------------------------------
                                                                                   Small       Deep Scratches
                      Paint                                       Pits, Nicks     Scratches        (Very
                   Discoloration                    Heat Dis-      Gouges-      (minimally     visible- Note
                     or wear         Abrasion       coloration     (Note 2        visible)            2)
-------------------------------------------------------------------------------------------------------------
<S>                <C>            <C>              <C>           <C>           <C>            <C>
Product            Minor OK-      Minor OK-        Minor OK-     Minor OK      Minor OK       OK
Serial # Label
                   Note 1         Note 1           Note 1        Note 1        Note 1         Note 1
-------------------------------------------------------------------------------------------------------------
Logo "Portal"      Very minor;    Very minor;      Very minor;   None          Very minor;    None
(top)
                   Still          Still clearly    Still                       Still
                   clearly        read name        clearly                     clearly read
                   read name                       read name                   name
-------------------------------------------------------------------------------------------------------------
Display Screen
(glass area)       N/A            None             N/A           None          None           None
-------------------------------------------------------------------------------------------------------------
Case Top           Minor OK       Minor OK         Minor OK      None          Minor OK       None
-------------------------------------------------------------------------------------------------------------
Case Bottom        Minor OK       Minor OK         Minor OK      Minor OK      Minor OK       Minor OK
-------------------------------------------------------------------------------------------------------------
</TABLE>

Note 1: Damage to the label that makes the reading of the serial number, product
number, impossible or difficult to read are not acceptable.
Note 2: Judgment needed here. A scratch, gouge, or nick, could be deep but small
in size (width and length). If this defect is small in size it may be acceptable
if in a location where seldom seen).

                                       6

<PAGE>

                                   Schedule 7

                         Cosmetic Inspection Guideline

--------------------------------------------------------------------------------
Acceptance Criteria
--------------------------------------------------------------------------------
Checking Contents        Packaging / box labeling
                         Portal
                         Edge connector cleaning kit
                         Certification sheet

Checking Portal          Confirm Correct Label, Placement & Affixment for the
                         Unit
                         Ensure that there are 4 Rubber Feet and no abnormal
                         scuffing or damage, other than normal production
                         scuffs
                         Check for 4 torque screws on the bottom of Portal
                         Check for serial port cover and 2 torque screws
                         Check for light pipe
                         No scratches or fingerprints on screen
                         No dust between the touchscreen and display
                         No residues on portal
                         Sensor/IR probe flush or less
                         Discoloration, Flow marks, and Haze: Two per surface;
                         max dimension:0.5 mm (.02")
                         Weld Line Exceptions: Weld lines of up to 9.5mm
                         (.375") long shall be
                         allowed next to the IR Probe hole and the Light Pipe
                         hole in the M3561-40000 Top Housing
                         Pits and Specks: Two per surface; max
                         dimension: 0.5 mm (.02)
                         Scratches: Two per surface;
                         max dimension: 0.3 mm x 0.8 mm (.01" x .03")
                         Sinks: Two per surface; max dimension: 0.8mm (.03")
                         Weld Lines per surface: Two;
                         max dimension: 3 mm (.125")
                         No visual gasket btw. Touchscreen and top housing

Checking portal box      Edge  connector  cleaning kit in Box
                         Certificate  of  Conformance
                         No crumb or dirt in the box
                         No bent connector pins
                         Confirm Correct Label, Placement & Affixment / for
                         the BOX

                                      7<PAGE>

                                                                    Exhibit 10.7

                            Diametrics Medical, Inc.
     Shares of Series E Convertible Preferred Stock and Common Stock Warrant

                             SUBSCRIPTION AGREEMENT

                                                                    May 12, 2003

Mercator Momentum Fund, LP
Mercator Momentum Fund III, LP
Mercator Focus Fund, LP
555 South Flower Street, Suite 4500
Los Angeles, California 90071

Ladies and Gentlemen:

Diametrics Medical, Inc., a Minnesota corporation (the "Company"), hereby
confirms its agreement with you (the "Purchasers"), as set forth below.

          1. The Securities. Subject to the terms and conditions herein
contained, the Company proposes to issue and sell to Purchasers (a) 15,000
shares (the "Shares") of its Series E Convertible Preferred Stock, par value
$0.01 per share (the "Series E Stock"), which shall be convertible into shares
(the "Conversion Shares") of the Company's Common Stock (the "Common Stock") in
accordance with the formula set forth in the Certificate of Designation further
described below and (b) a warrant, substantially in the form attached hereto at
Exhibit A (the "Warrant"), to acquire up to 735,000 shares of Common Stock (the
"Warrant Shares"). The rights, preferences and privileges of the Series E Stock
are as set forth in the Certificate of Designation of Series E Preferred Stock
as filed with the Secretary of State of the State of Minnesota (the "Certificate
of Designation") in the form attached hereto as Exhibit B. The number of
Conversion Shares and the number of Warrant Shares are both subject to
adjustment as set forth in the Certificate of Designation and in the Warrant, so
that the aggregate number of shares of Common Stock issuable upon such
conversion and exercise shall in no event equal more than 9.99% of the Company's
then outstanding Common Stock.

          The Shares and the Warrant are sometimes herein collectively referred
to as the "Securities." This Agreement and the Warrant are sometimes herein
collectively referred to as the "Transaction Documents."

          The Securities will be offered and sold to the Purchaser without such
offers and sales being registered under the Securities Act of 1933, as amended
(together with the rules and regulations of the Securities and Exchange
Commission (the "Commission") promulgated thereunder, the "Securities Act"), in
reliance on exemptions therefrom.

          In connection with the sale of the Securities, the Company has made
available (including electronically via the Commission's EDGAR system) to
Purchasers its periodic and current reports, forms, schedules, proxy statements
and other documents (including exhibits and all other information incorporated
by reference) filed with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") since January
1, 2000. These reports, forms, schedules, statements, documents, filings and
amendments, are collectively referred to as the "Disclosure Documents." All
references in this Agreement to financial statements and schedules and other
information which is "contained," "included" or "stated" in the Disclosure
Documents (or other references of like import) shall be deemed to mean and
include all such financial statements and schedules, documents, exhibits and
other information which is incorporated by reference in the Disclosure
Documents.

          2. Representations and Warranties of the Company. The Company
represents and warrants to and agrees with Purchasers and Mercator Group, LLC
(collectively, the "Mercator Group") as follows:

<PAGE>

               (a) The Disclosure Documents as of their respective dates did not
(after giving effect to any updated disclosures therein), and as of the Closing
Date as defined in Section 3 below will not, contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The Disclosure Documents and the documents incorporated or deemed to
be incorporated by reference therein, at the time they were filed (after giving
effect to any updated disclosures therein) or hereafter are filed with the
Commission, complied and will comply in all material respects with the
requirements of the Securities Act and/or the Exchange Act, as the case may be,
as applicable.

               (b) Each of the Company and its subsidiaries set forth on
Schedule A attached hereto (the "Subsidiaries") has been duly incorporated and
each of the Company and the Subsidiaries is validly existing in good standing as
a corporation under the laws of its jurisdiction of incorporation, with the
requisite corporate power and authority to own its properties and conduct its
business as now conducted as described in the Disclosure Documents and is duly
qualified to do business as a foreign corporation in good standing in all other
jurisdictions where the ownership or leasing of its properties or the conduct of
its business requires such qualification, except where the failure to be so
qualified would not, individually or in the aggregate, have a material adverse
effect on the business, condition (financial or other), properties, prospects or
results of operations of the Company and the Subsidiaries, taken as a whole (any
such event, a "Material Adverse Effect"); as of the Closing Date, the Company
will have the authorized, issued and outstanding capitalization set forth in the
Disclosure Documents (subject to the issuance of shares pursuant to options
outstanding under the Company's stock option plans, employee stock purchase
plans or outstanding warrants, 2,013,432 shares issuable upon conversion of
convertible notes, or other rights to acquire shares described in the Disclosure
Documents, and subject to the filing of the Certificate of Designation); except
as set forth in the Disclosure Documents, the Company does not have any
subsidiaries or own directly or indirectly any of the capital stock or other
equity or long-term debt securities of or have any equity interest in any other
person; all of the outstanding shares of capital stock of the Company and the
Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable and were not issued in violation of any preemptive or similar
rights and are owned free and clear of all liens, encumbrances, equities, and
restrictions on transferability (other than those imposed by the Securities Act
and the state securities or "Blue Sky" laws) or voting; except as set forth in
the Disclosure Documents, all of the outstanding shares of capital stock of the
Subsidiaries are owned, directly or indirectly, by the Company; except as set
forth in the Disclosure Documents, no options, warrants or other rights to
purchase from the Company or any Subsidiary, agreements or other obligations of
the Company or any Subsidiary to issue or other rights to convert any obligation
into, or exchange any securities for, shares of capital stock of or ownership
interests in the Company or any Subsidiary are outstanding; and except as set
forth in the Disclosure Documents, there is no agreement, understanding or
arrangement among the Company or any Subsidiary and each of their respective
stockholders or any other person relating to the ownership or disposition of any
capital stock of the Company or any Subsidiary or the election of directors of
the Company or any Subsidiary or the governance of the Company's or any
Subsidiary's affairs, and, if any, such agreements, understandings and
arrangements will not be breached or violated as a result of the execution and
delivery of, or the consummation of the transactions contemplated by, the
Transaction Documents.

               (c) The Company has the requisite corporate power and authority
to execute, deliver and perform its obligations under the Transaction Documents.
Each of the Transaction Documents has been duly and validly authorized by the
Company and, when executed and delivered by the Company, will constitute a valid
and legally binding agreement of the Company, enforceable against the Company in
accordance with its terms except as the enforcement thereof may be limited by
(A) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
other similar laws now or hereafter in effect relating to or affecting
creditors' rights generally or (B) general principles of equity and the
discretion of the court before which any proceeding therefore may be brought
(regardless of whether such enforcement is considered in a proceeding at law or
in equity) (collectively, the "Enforceability Exceptions").

               (d) The Shares and the Warrant have been duly authorized and,
when issued upon payment thereof in accordance with this Agreement, will have
been validly issued, fully paid and nonassessable. The Conversion Shares have
been duly authorized and validly reserved for issuance, and when issued upon
conversion of the Shares in accordance with the terms of the Certificate of
Designation, will have been validly issued, fully paid and nonassessable. The
Warrant Shares have been duly authorized and validly reserved for issuance, and
when issued upon exercise of the Warrant in accordance with the terms thereof,
will have been validly

<PAGE>

issued, fully paid and nonassessable. The Common Stock of the Company conforms
to the description thereof contained in the Disclosure Documents. The
stockholders of the Company have no preemptive or similar rights with respect to
the Common Stock.

               (e) No consent, approval, authorization, license, qualification,
exemption or order of any court or governmental agency or body or third party is
required for the performance of the Transaction Documents by the Company or for
the consummation by the Company of any of the transactions contemplated thereby,
or the application of the proceeds of the issuance of the Securities as
described in this Agreement, except for such consents, approvals,
authorizations, licenses, qualifications, exemptions or orders (i) as have been
obtained on or prior to the Closing Date, (ii) as are not required to be
obtained on or prior to the Closing Date that will be obtained when required, or
(iii) the failure to obtain which would not, individually or in the aggregate,
have a Material Adverse Effect.

               (f) None of the Company or the Subsidiaries is (i) in material
violation of its articles of incorporation or bylaws (or similar organizational
document), (ii) in breach or violation of any statute, judgment, decree, order,
rule or regulation applicable to it or any of its properties or assets, which
breach or violation would, individually or in the aggregate, have a Material
Adverse Effect, or (iii) except as described in the Disclosure Documents, in
default (nor has any event occurred which with notice or passage of time, or
both, would constitute a default) in the performance or observance of any
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, deed of trust, loan agreement, note, lease, license,
franchise agreement, permit, certificate or agreement or instrument to which it
is a party or to which it is subject, which default would, individually or in
the aggregate, have a Material Adverse Effect.

               (g) The execution, delivery and performance by the Company of the
Transaction Documents and the consummation by the Company of the transactions
contemplated thereby and the fulfillment of the terms thereof will not (a)
violate, conflict with or constitute or result in a breach of or a default under
(or an event that, with notice or lapse of time, or both, would constitute a
breach of or a default under) any of (i) the terms or provisions of any
contract, indenture, mortgage, deed of trust, loan agreement, note, lease,
license, franchise agreement, permit, certificate or agreement or instrument to
which any of the Company or the Subsidiaries is a party or to which any of their
respective properties or assets are subject, (ii) the articles of incorporation
or bylaws of any of the Company or the Subsidiaries (or similar organizational
document) or (iii) any statute, judgment, decree, order, rule or regulation of
any court or governmental agency or other body applicable to the Company or the
Subsidiaries or any of their respective properties or assets or (b) result in
the imposition of any lien upon or with respect to any of the properties or
assets now owned or hereafter acquired by the Company or any of the
Subsidiaries, which violation, conflict, breach, default or lien would,
individually or in the aggregate, have a Material Adverse Effect.

               (h) The audited consolidated financial statements included in the
Disclosure Documents present fairly the consolidated financial position, results
of operations, cash flows and changes in shareholders' equity of the entities,
at the dates and for the periods to which they relate and have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis; the interim unaudited consolidated financial statements included in the
Disclosure Documents present fairly the consolidated financial position, results
of operations and cash flows of the entities, at the dates and for the periods
to which they relate subject to year-end audit adjustments and have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis with the audited consolidated financial statements included
therein; the selected financial and statistical data included in the Disclosure
Documents present fairly the information shown therein and have been prepared
and compiled on a basis consistent with the audited financial statements
included therein, except as otherwise stated therein; and KPMG LLP, which has
examined certain of such financial statements as set forth in its report
included in the Disclosure Documents, is an independent certified public
accountant as required by the Securities Act for an offering registered
thereunder.

               (i) Except as described in the Disclosure Documents, there is not
pending or, to the knowledge of the Company, threatened any action, suit,
proceeding, inquiry or investigation, governmental or otherwise, to which any of
the Company or the Subsidiaries is a party, or to which their respective
properties or assets are subject, before or brought by any court, arbitrator or
governmental agency or body, that, if determined adversely to the Company or any
such Subsidiary, would, individually or in the aggregate, have a Material
Adverse Effect or that seeks to restrain, enjoin, prevent the consummation of or
otherwise challenge the issuance or sale of

<PAGE>

the Securities to be sold hereunder or the application of the proceeds therefrom
or the other transactions described in the Disclosure Documents.

               (j) The Company and the Subsidiaries own or possess adequate
licenses or other rights to use all patents, trademarks, service marks, trade
names, copyrights and know-how that are necessary to conduct their businesses as
described in the Disclosure Documents. None of the Company or the Subsidiaries
has received any written notice of infringement of (or knows of any such
infringement of) asserted rights of others with respect to any patents,
trademarks, service marks, trade names, copyrights or know-how that, if such
assertion of infringement or conflict were sustained, would, individually or in
the aggregate, have a Material Adverse Effect.

               (k) Each of the Company and the Subsidiaries possesses all
licenses, permits, certificates, consents, orders, approvals and other
authorizations from, and has made all declarations and filings with, all
federal, state, local and other governmental authorities, all self-regulatory
organizations and all courts and other tribunals presently required or necessary
to own or lease, as the case may be, and to operate its respective properties
and to carry on its respective businesses as now or proposed to be conducted as
set forth in the Disclosure Documents ("Permits"), except where the failure to
obtain such Permits would not, individually or in the aggregate, have a Material
Adverse Effect and none of the Company or the Subsidiaries has received any
notice of any proceeding relating to revocation or modification of any such
Permit, except as described in the Disclosure Documents and except where such
revocation or modification would not, individually or in the aggregate, have a
Material Adverse Effect.

               (l) Subsequent to the respective dates as of which information is
given in the Disclosure Documents and except as described therein, (i) the
Company and the Subsidiaries have not incurred any material liabilities or
obligations, direct or contingent, or entered into any material transactions not
in the ordinary course of business (other than an amendment to the distribution
agreement between the Company and Philips Medical Systems, as further described
in a press release by the Company on April 11, 2003), (ii) the Company and the
Subsidiaries have not purchased any of their respective outstanding capital
stock, or declared, paid or otherwise made any dividend or distribution of any
kind on any of their respective capital stock or otherwise (other than, with
respect to any of such Subsidiaries, the purchase of capital stock by the
Company), (iii) there has not been any material increase in the long-term
indebtedness of the Company or any of the Subsidiaries, (iv) there has not
occurred any event or condition, individually or in the aggregate, that has a
Material Adverse Effect, and (v) the Company and the Subsidiaries have not
sustained any material loss or interference with respect to their respective
businesses or properties from fire, flood, hurricane, earthquake, accident or
other calamity, whether or not covered by insurance, or from any labor dispute
or any legal or governmental proceeding.

               (m) There are no material legal or governmental proceedings nor
are there any material contracts or other documents required by the Securities
Act to be described in a prospectus that are not described in the Disclosure
Documents (other than an amendment to the distribution agreement between the
Company and Philips Medical Systems, as further described in a press release by
the Company on April 11, 2003). Except as described in the Disclosure Documents,
none of the Company or the Subsidiaries is in default under any of the contracts
described in the Disclosure Documents, has received a notice or claim of any
such default or has knowledge of any breach of such contracts by the other party
or parties thereto, except for such defaults or breaches as would not,
individually or in the aggregate, have a Material Adverse Effect.

               (n) Each of the Company and the Subsidiaries has good and
marketable title to all real property described in the Disclosure Documents as
being owned by it and good and marketable title to the leasehold estate in the
real property described therein as being leased by it, free and clear of all
liens, charges, encumbrances or restrictions, except, in each case, as described
in the Disclosure Documents or such as would not, individually or in the
aggregate, have a Material Adverse Effect. All material leases, contracts and
agreements to which the Company or any of the Subsidiaries is a party or by
which any of them is bound are valid and enforceable against the Company or any
such Subsidiary, are, to the knowledge of the Company, valid and enforceable
against the other party or parties thereto and are in full force and effect.

               (o) Each of the Company and the Subsidiaries has filed all
necessary federal, state and foreign income and franchise tax returns, except
where the failure to so file such returns would not, individually or in the
aggregate, have a Material Adverse Effect, and has paid all taxes shown as due
thereon; and other than tax

<PAGE>

deficiencies which the Company or any Subsidiary is contesting in good faith and
for which adequate reserves have been provided in accordance with generally
accepted accounting principles, there is no tax deficiency that has been
asserted against the Company or any Subsidiary that would, individually or in
the aggregate, have a Material Adverse Effect.

               (p) None of the Company or the Subsidiaries is, or immediately
after the Closing Date will be, required to register as an "investment company"
or a company "controlled by" an "investment company" within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company Act").

               (q) None of the Company or the Subsidiaries or, to the knowledge
of any of such entities' directors, officers, employees, agents or controlling
persons, has taken, directly or indirectly, any action designed, or that might
reasonably be expected, to cause or result in the stabilization or manipulation
of the price of the Common Stock.

               (r) None of the Company, the Subsidiaries or any of their
respective Affiliates (as defined in Rule 501(b) of Regulation D under the
Securities Act) directly, or through any agent, engaged in any form of general
solicitation or general advertising (as those terms are used in Regulation D
under the Securities Act) in connection with the offering of the Securities or
in any manner involving a public offering within the meaning of Section 4(2) of
the Securities Act. Assuming the accuracy of the representations and warranties
of the Purchasers in Section 6 hereof, it is not necessary in connection with
the offer, sale and delivery of the Securities to the Purchaser in the manner
contemplated by this Agreement to register any of the Securities under the
Securities Act.

               (s) Except as set forth in the Disclosure Documents, there is no
strike, labor dispute, slowdown or work stoppage with the employees of the
Company or any of the Subsidiaries which is pending or, to the knowledge of the
Company or any of the Subsidiaries, threatened.

               (t) Each of the Company and the Subsidiaries carries general
liability insurance coverage comparable to other companies of its size and
similar business.

               (u) Each of the Company and the Subsidiaries maintains internal
accounting controls which provide reasonable assurance that (A) transactions are
executed in accordance with management's authorization, (B) transactions are
recorded as necessary to permit preparation of its financial statements and to
maintain accountability for its assets, (C) access to its material assets is
permitted only in accordance with management's authorization and (D) the
reported accountability for its material assets is compared with existing assets
at reasonable intervals.

               (v) Except for a fee payable to Mercator Group and The Seidler
Companies, the Company does not know of any claims for services, either in the
nature of a finder's fee or financial advisory fee, with respect to the offering
of the Shares and the transactions contemplated by the Transaction Documents.

               (w) The Common Stock is listed on the Nasdaq SmallCap Market.
Except as described in the Disclosure Documents, the Company currently is not in
violation of, and the consummation of the transactions contemplated by the
Transaction Documents will not violate, any rule of the National Association of
Securities Dealers.

               (x) The Company is eligible to use Form S-3 for the resale of the
Conversion Shares and the Warrant Shares by Purchaser or its transferees. The
Company has no reason to believe that it is not capable of satisfying the
registration or qualification requirements (or an exemption therefrom) necessary
to permit the resale of the Conversion Shares and the Warrant Shares under the
securities or "blue sky" laws of any jurisdiction within the United States that
is the residence or domicile of any Purchaser.

          3. Purchase, Sale and Delivery of the Shares. On the basis of the
representations, warranties, agreements and covenants herein contained and
subject to the terms and conditions herein set forth, the Company agrees to
issue and sell to the Purchasers, and Purchasers agree to purchase from the
Company, the 15,000

<PAGE>

Shares of Series E Stock at $100.00 per Share. In connection with the purchase
and sale of Shares hereunder, Purchasers will receive, for no additional
consideration, a Warrant to purchase up to 735,000 shares of Common Stock,
subject to adjustment as set forth in the Warrant.

          One or more certificates in definitive form for the Shares that the
Purchasers have agreed to purchase hereunder, as well as the Warrant, shall be
delivered by or on behalf of the Company, against payment by or on behalf of the
Purchasers, of the purchase price therefor by wire transfer of immediately
available funds to the account of the Company previously designated by it in
writing. Such delivery of and payment for the Series E Stock and the Warrant
shall be made at the offices of Sheppard, Mullin, Richter & Hampton, LLP, 333
South Hope Street, Los Angeles, California 90071, on May 12, 2003, or at such
date as the Purchasers and the Company may agree upon, such time and date of
delivery against payment being herein referred to as the "Closing Date."

          4. Certain Covenants of the Company. The Company covenants and agrees
with each Purchaser as follows:

               (a) None of the Company or any of its Affiliates will sell, offer
for sale or solicit offers to buy or otherwise negotiate in respect of any
"security" (as defined in the Securities Act) which could be integrated with the
sale of the Securities in a manner which would require the registration under
the Securities Act of the Securities.

               (b) The Company will not become, at any time prior to the
expiration of three years after the Closing Date, an open-end investment
company, unit investment trust, closed-end investment company or face-amount
certificate company that is or is required to be registered under the Investment
Company Act.

               (c) None of the proceeds of the Series E Stock will be used to
reduce or retire any insider note or convertible debt held by an officer or
director of the Company.

               (d) The Company will promptly file a Listing of Additional Shares
Notification Form with the Nasdaq Stock Market with respect to the Conversion
Shares and the Warrant Shares. The Conversion Shares and the Warrant Shares will
be listed on the Nasdaq SmallCap Market, or such market on which the Company's
shares are subsequently listed or traded, immediately following their issuance.

               (e) The Company will use its best efforts to do and perform all
things required to be done and performed by it under this Agreement and the
other Transaction Documents prior to or after the Closing Date and to satisfy
all conditions precedent on its part to the obligations of the Purchasers to
purchase and accept delivery of the Securities.

          5. Conditions of the Purchasers' Obligations. The obligation of each
Purchaser to purchase and pay for the Securities is subject to the following
conditions unless waived in writing by the Purchaser:

               (a) The representations and warranties of the Company contained
in this Agreement shall be true and correct in all material respects (other than
representations and warranties with a Material Adverse Effect qualifier, which
shall be true and correct as written) on and as of the Closing Date; the Company
shall have complied in all material respects with all agreements and satisfied
all conditions on its part to be performed or satisfied hereunder at or prior to
the Closing Date.

               (b) None of the issuance and sale of the Securities pursuant to
this Agreement or any of the transactions contemplated by any of the other
Transaction Documents shall be enjoined (temporarily or permanently) and no
restraining order or other injunctive order shall have been issued in respect
thereof; and there shall not have been any legal action, order, decree or other
administrative proceeding instituted or, to the Company's knowledge, threatened
against the Company or against any Purchaser relating to the issuance of the
Securities or any Purchaser's activities in connection therewith or any other
transactions contemplated by this Agreement, the other Transaction Documents or
the Disclosure Documents.

<PAGE>

               (c) The Purchasers shall have received certificates, dated the
Closing Date and signed by the Chief Executive Officer and the Chief Financial
Officer of the Company, to the effect of paragraphs 5(a) and (b).

               (d) The Purchasers shall have received an opinion of Dorsey &
Whitney LLP, counsel to the Company, with respect to the authorization of the
Shares, the Warrant and the Warrant Shares and other customary matters in the
form attached hereto as Exhibit C.

          6. Representations and Warranties of the Purchasers.

               (a) Each Purchaser represents and warrants to the Company that
the Securities to be acquired by it hereunder (including the Conversion Shares
and the Warrant Shares that it may acquire upon conversion or exercise thereof,
as the case may be) are being acquired for its own account for investment and
with no intention of distributing or reselling such Securities (including the
Conversion Shares and the Warrant Shares that it may acquire upon conversion or
exercise thereof, as the case may be) or any part thereof or interest therein in
any transaction which would be in violation of the securities laws of the United
States of America or any State. Nothing in this Agreement, however, shall
prejudice or otherwise limit a Purchaser's right to sell or otherwise dispose of
all or any part of such Conversion Shares or Warrant Shares under an effective
registration statement under the Securities Act and in compliance with
applicable state securities laws or under an exemption from such registration.
By executing this Agreement, each Purchaser further represents that such
Purchaser does not have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participation to any Person with respect
to any of the Securities.

               (b) Each Purchaser understands that the Securities (including the
Conversion Shares and the Warrant Shares that it may acquire upon conversion or
exercise thereof, as the case may be) have not been registered under the
Securities Act and may not be offered, resold, pledged or otherwise transferred
except (a) pursuant to an exemption from registration under the Securities Act
(and, if requested by the Company, based upon an opinion of counsel acceptable
to the Company) or pursuant to an effective registration statement under the
Securities Act and (b) in accordance with all applicable securities laws of the
states of the United States and other jurisdictions.

          Each Purchaser agrees to the imprinting, so long as appropriate, of
the following legend on the Securities (including the Conversion Shares and the
Warrant Shares that it may acquire upon conversion or exercise thereof, as the
case may be):

     The shares of stock evidenced by this certificate have not been registered
     under the U.S. Securities Act of 1933, as amended, and may not be offered,
     sold, pledged or otherwise transferred ("transferred") in the absence of
     such registration or an applicable exemption therefrom. In the absence of
     such registration, such shares may not be transferred unless, if the
     Company requests, the Company has received a written opinion from counsel
     in form and substance satisfactory to the Company stating that such
     transfer is being made in compliance with all applicable federal and state
     securities laws.

          The legend set forth above may be removed if and when the Conversion
Shares or the Warrant Shares, as the case may be, are disposed of pursuant to an
effective registration statement under the Securities Act or in the opinion of
counsel to the Company experienced in the area of United States Federal
securities laws such legends are no longer required under applicable
requirements of the Securities Act. The Shares, the Conversion Shares and the
Warrant Shares shall also bear any other legends required by applicable Federal
or state securities laws, which legends may be removed when in the opinion of
counsel to the Company experienced in the applicable securities laws, the same
are no longer required under the applicable requirements of such securities
laws. The Company agrees that it will provide each Purchaser, upon request, with
a substitute certificate, not bearing such legend at such time as such legend is
no longer applicable. Each Purchaser agrees that, in connection with any
transfer of the Conversion Shares or the Warrant Shares by it pursuant to an
effective registration statement under the Securities Act, such Purchaser will
comply with all prospectus delivery requirements of the Securities Act. The

<PAGE>

Company makes no representation, warranty or agreement as to the availability of
any exemption from registration under the Securities Act with respect to any
resale of the Shares, the Conversion Shares or the Warrant Shares.

               (c) Each Purchaser is an "accredited investor" within the meaning
of Rule 501(a) of Regulation D under the Securities Act.

               (d) Each Purchaser represents and warrants to the Company that it
has such knowledge, sophistication and experience in business and financial
matters so as to be capable of evaluating the merits and risks of the
prospective investment in the Securities, having been represented by counsel,
and has so evaluated the merits and risks of such investment and is able to bear
the economic risk of such investment and, at the present time, is able to afford
a complete loss of such investment.

               (e) Each Purchaser represents and warrants to the Company that
(i) the purchase of the Securities to be purchased by it has been duly and
properly authorized and this Agreement has been duly executed and delivered by
it or on its behalf and constitutes the valid and legally binding obligation of
the Purchaser, enforceable against the Purchaser in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights generally and to general principals of equity; (ii) the
purchase of the Securities to be purchased by it does not conflict with or
violate its charter, by-laws or any law, regulation or court order applicable to
it; and (iii) the purchase of the Securities to be purchased by it does not
impose any penalty or other onerous condition on Purchaser under or pursuant to
any applicable law or governmental regulation.

               (f) Each Purchaser represents and warrants to the Company that
neither it nor any of its directors, officers, employees, agents, partners,
members, or controlling persons has taken, directly or indirectly, any actions
designed, or might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Common Stock.

               (g) Each Purchaser acknowledges it or its representatives have
reviewed the Disclosure Documents and further acknowledges that it or its
representatives have been afforded (i) the opportunity to ask such questions as
it has deemed necessary of, and to receive answers from, representatives of the
Company concerning the terms and conditions of the offering of the Securities
and the merits and risks of investing in the Securities; (ii) access to
information about the Company and the Company's financial condition, results of
operations, business, properties, management and prospects sufficient to enable
it to evaluate its investment in the Securities; and (iii) the opportunity to
obtain such additional information which the Company possesses or can acquire
without unreasonable effort or expense that is necessary to verify the accuracy
and completeness of the information contained in the Disclosure Documents.

               (h) Each Purchaser represents and warrants to the Company that it
has based its investment decision solely upon the information contained in the
Disclosure Documents and such other information as may have been provided to it
or its representatives by the Company in response to their inquiries, and has
not based its investment decision on any research or other report regarding the
Company prepared by any third party ("Third Party Reports"). Each Purchaser
understands and acknowledges that (i) the Company does not endorse any Third
Party Reports and (ii) its actual results may differ materially from those
projected in any Third Party Report.

               (i) Each Purchaser understands and acknowledges that (i) any
forward-looking information included in the Disclosure Documents supplied to
Purchaser by the Company or its management is subject to risks and
uncertainties, including those risks and uncertainties set forth in the
Disclosure Documents; and (ii) the Company's actual results may differ
materially from those projected by the Company or its management in such
forward-looking information.

               (j) Each Purchaser understands and acknowledges that (i) the
Securities are offered and sold without registration under the Securities Act in
a private placement that is exempt from the registration provisions of the
Securities Act and (ii) the availability of such exemption depends in part on,
and that the Company and its counsel will rely upon, the accuracy and
truthfulness of the foregoing representations and Purchaser hereby consents to
such reliance.

<PAGE>

          7. Covenants of Purchasers Not to Short Stock. Each Purchaser and its
affiliates and assigns agree not to short the Company Common Stock as long as
shares of the Series E Stock are outstanding.

          8. Termination.

               (a) This Agreement may be terminated in the sole discretion of
the Company by notice to each Purchaser if at the Closing Date:

                    (i) the representations and warranties made by any Purchaser
in Section 6 are not true and correct in all material respects; or

                    (ii) as to the Company, the sale of the Securities hereunder
(i) is prohibited or enjoined by any applicable law or governmental regulation
or (ii) subjects the Company to any penalty, or in its reasonable judgment,
other onerous condition under or pursuant to any applicable law or government
regulation that would materially reduce the benefits to the Company of the sale
of the Securities to such Purchaser, so long as such regulation, law or onerous
condition was not in effect in such form at the date of this Agreement.

               (b) This Agreement may be terminated in the sole discretion of
Purchaser by notice to the Company given in the event that the Company shall
have failed, refused or been unable to satisfy all conditions on its part to be
performed or satisfied hereunder on or prior to the Closing Date or if after the
execution and delivery of this Agreement and prior to the Closing Date trading
in securities of the Company or in securities generally on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National or Small Cap Market
shall have been suspended or minimum or maximum prices shall have been
established on any such exchange.

               (c) This Agreement may be terminated by mutual written consent of
both parties.

          9. Registration. Within 15 days from the Closing Date, the Company
shall prepare and file with the Securities and Exchange Commission (the "SEC") a
Registration Statement covering the resale of the Conversion Shares and the
Warrant Shares (collectively, the "Registrable Securities") for an offering to
be made on a continuous basis pursuant to Rule 415 (the "Registration
Statement"). The Registration Statement required hereunder shall be on Form S-3
(except if the Company is not then eligible to register for resale the
Registrable Securities on Form S-3, in which case such registration shall be on
another appropriate form). The Company shall use diligent efforts to cause such
Registration Statement to become effective within 50 days after the initial
filing with the SEC, but shall not be liable for any damages should such
effectiveness be delayed by the SEC review process. The Company shall use
diligent efforts to keep such Registration Statement continuously effective
under the Securities Act until the date which is two years after the date that
such Registration Statement is declared effective by the SEC or such earlier
date when all Registrable Securities covered by such Registration Statement have
been sold or may be sold without volume restrictions pursuant to Rule 144(k) as
determined by the counsel to the Company pursuant to a written opinion to such
effect addressed and acceptable to the Company's transfer agent.

          10. Lien on Assets upon Event of Default. If an Event of Default (as
defined below) occurs and remains uncured for a period of 10 days, the
Purchasers shall receive a first lien on the Company's assets associated solely
with its intermittent blood testing business (as further described in Exhibit D,
hereto) located in Roseville, Minnesota (hereinafter referred to as
"Intermittent Testing Business"). An "Event of Default" shall include the
commencement by the Company of a voluntary case or proceeding under the
bankruptcy laws prior to the sale of the Company's Intermittent Testing
Business, or the Company's failure to: (i) discharge or stay a bankruptcy
proceeding within 60 days of such action being taken against the Company prior
to the sale of the Company's Intermittent Testing Business; (ii) file the
Registration Statement with the SEC within 30 days after the Closing Date, other
than due to a delay not caused by the Company; or (iii) sell the Company's
Intermittent Testing Business within 120 days of the Closing Date.

          11. Put Option. In the event the Company sells the Intermittent
Testing Business any time after the Closing Date, each Purchaser shall have a
"put option," for the 30 day period immediately following such

<PAGE>

sale, pursuant to which the Purchaser may sell up to 50% of their Shares back to
the Company at a purchase price of $100.00 per Share, plus 1% interest for each
month such Share was outstanding.

          12. Notices. All communications hereunder shall be in writing and
shall be hand delivered, mailed by first-class mail, couriered by next-day air
courier or by facsimile and confirmed in writing (i) if to the Company, at the
addresses set forth below, or (ii) if to Purchaser, to the address(es) set forth
on the signature page hereto.

                    If to the Company:

                    Diametrics Medical, Inc.
                    2658 Patton Road
                    St. Paul, Minnesota 55113
                    Attention:  Chief Financial Officer
                    Facsimile: 651/638-1197

                    with a copy to:

                    Dorsey & Whitney LLP
                    50 South Sixth Street, Suite 1500
                    Minneapolis, Minnesota 55402
                    Attention: Kenneth L. Cutler
                    Facsimile: 612/340-7800

          All such notices and communications shall be deemed to have been duly
given: (i) when delivered by hand, if personally delivered; (ii) five business
days after being deposited in the mail, postage prepaid, if mailed certified
mail, return receipt requested; (iii) one business day after being timely
delivered to a next-day air courier guaranteeing overnight delivery; (iv) the
date of transmission if sent via facsimile to the facsimile number as set forth
in this Section or the signature page hereof prior to 6:00 p.m. on a business
day, or (v) the business day following the date of transmission if sent via
facsimile at a facsimile number set forth in this Section or on the signature
page hereof after 6:00 p.m. or on a date that is not a business day. Change of a
party's address or facsimile number may be designated hereunder by giving notice
to all of the other parties hereto in accordance with this Section.

          13. Survival Clause. The respective representations, warranties,
agreements and covenants of the Company and the Purchaser set forth in this
Agreement shall survive until the first anniversary of the Closing.

          14. Fees and Expenses. The Company agrees to pay Purchasers'
out-of-pocket expenses incurred in connection with the preparation and
negotiation of the Transaction Documents up to $25,000.

          15. Successors. This Agreement shall inure to the benefit of and be
binding upon Purchasers and the Company and their respective successors and
legal representatives, and nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any other person any legal or equitable
right, remedy or claim under or in respect of this Agreement, or any provisions
herein contained; this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person. Neither the Company nor any Purchaser may
assign this Agreement or any rights or obligation hereunder without the prior
written consent of the other party.

          16. No Waiver; Modifications in Writing. No failure or delay on the
part of the Company or any Purchaser in exercising any right, power or remedy
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy. The
remedies provided for herein are cumulative and are not exclusive of any
remedies that may be available to the Company or Purchaser at law or in equity
or otherwise. No waiver of or consent to any departure by the Company or
Purchaser from any provision of this Agreement shall be effective unless signed
in writing by the party entitled to the benefit thereof, provided that notice of
any such waiver

<PAGE>

shall be given to each party hereto as set forth below. Except as otherwise
provided herein, no amendment, modification or termination of any provision of
this Agreement shall be effective unless signed in writing by or on behalf of
each of the Company and the Purchaser. Any amendment, supplement or modification
of or to any provision of this Agreement, any waiver of any provision of this
Agreement, and any consent to any departure by the Company or Purchaser from the
terms of any provision of this Agreement shall be effective only in the specific
instance and for the specific purpose for which made or given. Except where
notice is specifically required by this Agreement, no notice to or demand on the
Company in any case shall entitle the Company to any other or further notice or
demand in similar or other circumstances.

          17. Entire Agreement. This Agreement, together with Transaction
Documents, constitutes the entire agreement among the parties hereto and
supersedes all prior agreements, understandings and arrangements, oral or
written, among the parties hereto with respect to the subject matter hereof and
thereof.

          18. Severability. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby.

          19. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT,
AND THE TERMS AND CONDITIONS SET FORTH HEREIN SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO
PROVISIONS RELATING TO CONFLICTS OF LAW TO THE EXTENT THE APPLICATION OF THE
LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.

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

          If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this Agreement shall constitute a binding agreement among the Company
and the Purchaser.

                                   Very truly yours,

                                   Diametrics Medical, Inc.

                                   By: /s/ David B. Kaysen
                                       -----------------------------------------
                                       Name:  David B. Kaysen
                                       Title: Chief Executive Officer

<PAGE>

ACCEPTED AND AGREED:

Mercator Momentum Fund, LP              Mercator Momentum Fund III, LP

By: /s/ Daivd Firestone                 By: /s/ David Firestone
    --------------------------              --------------------------
Name:  David Firestone                  Name:  David Firestone
Title: Managing Partner                 Title: Managing Partner

Mercator Focus Fund, LP

By: /s/ David Firestone
    --------------------------
Name:  David Firestone
Title: Managing Partner

Address for Notice:

Mercator Group, LLC
555 South Flower Street, Suite 4500
Los Angeles, California 90071
Attention: David Firestone
Facsimile: (213) 533-8285

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00055-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00055-of-00352.parquet"}]]