Cardia, Inc. – ‘424B3’ on 9/15/99

On:  Wednesday, 9/15/99   ·   Accession #:  897101-99-913   ·   File #:  333-84875

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Prospectus   —   Rule 424(b)(3)
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 1: 424B3       Prospectus                                           103    456K 

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                                                      Pursuant to Rule 424(b)(3)
                                                      Registration No. 333-84875

VIDEO LEARNING SYSTEMS, INC.

6111 BLUE CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343-9108
(612) 930-1011

 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
 TO BE HELD ON OCTOBER 6, 1999

TO THE SHAREHOLDERS OF VIDEO LEARNING SYSTEMS, INC.:                            

      NOTICE IS HEREBY GIVEN that a special meeting of the shareholders of
Video Learning Systems, Inc., a Minnesota corporation ("VLS"), will be held on  
October 6, 1999, at 10:00 a.m., local time, at the offices of Lindquist & Vennum
P.L.L.P. located at 4200 IDS Center, 80 South Eighth Street, Minneapolis,       
Minnesota for the following purposes:                                           

    1.   To consider and vote upon a proposal to adopt and approve the
         Agreement and Plan of Merger dated as of July 1, 1999, by and
             between Cardia, Inc., a Minnesota corporation, and Video Learning
             Systems, Inc., a Minnesota corporation, and to approve the merger
      of VLS with and into Cardia pursuant to which the separate
existence of VLS will cease; and                    

      2.   To transact such other business as may properly come before the
      special meeting or any adjournment or postponement of that
meeting.                                            

       Information regarding the merger agreement and the merger and related
matters as well as any other matters to be acted upon at the special meeting is 
contained in the attached joint proxy statement/prospectus and its appendices.  

THE BOARD OF DIRECTORS OF VLS UNANIMOUSLY RECOMMENDS THAT VLS 
SHAREHOLDERS VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE
MERGER.                                                                         

         The close of business on September 14, 1999 has been fixed by the board
of directors of VLS as the record date for determination of the shareholders of 
VLS entitled to notice of, and to vote at, the special meeting or any           
adjournment or postponement thereof. A list of VLS shareholders entitled to vote
at the special meeting will be available for examination during ordinary        
business hours at the offices of VLS' legal counsel, Duckson & Carlson, LLC, 10 
South Fifth Street, Suite 300, Minneapolis, Minnesota for 10 days prior to the  
special meeting.                                                                

       Whether or not you plan to attend the special meeting, we urge you to
complete, sign and return the enclosed proxy card in the enclosed postage-paid  
envelope. You may revoke your proxy at any time before it is voted by delivering
a written notice of such revocation or a duly executed, later-dated proxy to    
Video Learning Systems, Inc., 6111 Blue Circle Drive, Minnetonka, Minnesota     
55343-9108, Attention: Paul R. Peterson, Secretary, or by attending the special 
meeting and voting in person.                                                   

                                   By order of the Board of Directors,

                           PAUL R. PETERSON, SECRETARY

Minneapolis, Minnesota                                                          
September 15, 1999                                                              

 YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY.
HOLDERS OF VLS COMMON STOCK SHOULD NOT
 SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.

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VIDEO LEARNING SYSTEMS, INC.

6111 BLUE CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343-9108

Dear VLS Shareholder:                                                           

You are cordially invited to attend a special meeting of the  
shareholders of Video Learning Systems, Inc. on October 6, 1999 at the offices  
of Lindquist & Vennum P.L.L.P. located at 4200 IDS Center, 80 South Eighth      
Street, Minneapolis, Minnesota, at 10:00 a.m., local time. At the special       
meeting, you will be asked to vote on a proposal to approve the merger agreement
entered into between VLS and Cardia, Inc. As a result of the transaction, VLS   
will merge with and into Cardia whereby the separate legal existence of VLS will
terminate and you will become a shareholder of Cardia.                          

    The merger contemplates a taxable exchange of shares of VLS common
stock for shares of Cardia common stock. Upon the closing of the merger, the    
holders of the outstanding shares of VLS common stock will receive a total of   
200,000 shares of Cardia common stock. As a result, each outstanding VLS share  
will be exchanged for 0.188 of a share of Cardia common stock.                  

        Cardia common stock is not currently traded on any market, although it
is expected to begin trading on the over-the-counter market under the symbol    
"CRDI" following the merger. VLS common stock is not traded on any market.      

        VLS' BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO YOU AND IN
YOUR BEST INTERESTS. THE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
THE MERGER AND RECOMMENDS THAT YOU VOTE TO APPROVE BOTH THE MERGER AGREEMENT AND
THE MERGER.                                                                     

      Because of the significance of the merger, your participation in the
special meeting, either in person or by proxy, is especially important. We hope 
you will be able to attend the special meeting. However, even if you anticipate 
attending in person, we urge you to mark, sign and return the enclosed proxy    
card promptly in the enclosed postage-paid envelope to ensure that your shares  
of common stock will be represented at the special meeting. If you do attend,   
you will, of course, be able to vote your shares in person.                     

  Thank you. We look forward to seeing you at the special meeting.

PETER R. PETERSON 
                               CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER

      WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS DOCUMENT IN
ITS ENTIRETY. YOU SHOULD BE AWARE THAT THE MERGER INVOLVES CERTAIN RISKS TO VLS 
SHAREHOLDERS, INCLUDING THOSE RISKS IDENTIFIED AS "RISK FACTORS" BEGINNING ON   
PAGE 7.                                                                         

         NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
DOCUMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATIONS TO THE CONTRARY IS A      
CRIMINAL OFFENSE.                                                               

THIS DOCUMENT IS DATED SEPTEMBER 15, 1999 AND IS FIRST BEING MAILED TO
SHAREHOLDERS ON OR ABOUT SEPTEMBER 15, 1999.

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                                                                                                               PAGE 

                                                                                                                    
WHERE YOU CAN FIND MORE INFORMATION...............................................................................1 
WHO CAN HELP ANSWER YOUR QUESTIONS................................................................................1 
SUMMARY...........................................................................................................2 
     The Companies................................................................................................2 
     The Combined Company.........................................................................................3 
     Exchange Ratio...............................................................................................3 
     Ownership of Cardia Following the Merger.....................................................................3 
     Reasons for the Merger.......................................................................................3 
     VLS' Recommendation to You...................................................................................4 
     The Special Meeting..........................................................................................4 
     Record Date and Voting Power.................................................................................4 
     Required Vote................................................................................................4 
     Exchange of Stock Certificates...............................................................................4 
     Share Ownership of Management and Certain Shareholders.......................................................5 
     Market Price Information.....................................................................................5 
     Tax Matters..................................................................................................5 
     Dissenters' Rights...........................................................................................5 
     Conditions to the Merger.....................................................................................5 
     Limitation on Discussing or Negotiating Other Transaction Proposals..........................................6 
     Termination of the Merger Agreement..........................................................................6 
RISK FACTORS......................................................................................................7 
     Risks Relating to the Merger.................................................................................7 
     Risks Relating to Cardia's Business..........................................................................8 
COMPARATIVE PER SHARE DATA.......................................................................................14 
PRO FORMA FINANCIAL INFORMATION..................................................................................15 
THE VLS SPECIAL MEETING..........................................................................................15 
     Date, Time and Place of Meeting.............................................................................15 
     Purpose of the VLS Special Meeting..........................................................................15 
     Record Date and Outstanding Shares..........................................................................16 
     Voting of Proxies...........................................................................................16 
     Required Vote...............................................................................................16 
     Quorum; Abstentions; Broker Non-Votes.......................................................................16 
     Solicitation of Proxies; Expenses...........................................................................17 
     Other Matters...............................................................................................17 
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS..................................................................17 
     Background of the Merger....................................................................................17 
     Reasons for the Merger......................................................................................18 
     Recommendation of the VLS Board.............................................................................20 
     Interests of Certain Persons in the Merger..................................................................20 
     Material Federal Income Tax Consequences....................................................................20 
     Accounting Treatment of the Merger..........................................................................22 
     Expenses....................................................................................................22 

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     Appraisal Rights............................................................................................22
     Resale of Cardia Common Stock...............................................................................25
MATERIAL TERMS OF THE MERGER AGREEMENT...........................................................................26
     Structure of the Merger.....................................................................................26
     Effective Time of the Merger................................................................................26
     Merger Consideration........................................................................................26
     Exchange of Shares..........................................................................................26
     Conditions to the Merger....................................................................................26
     Representations and Warranties..............................................................................27
     Covenants; Conduct of Business Prior to the Merger..........................................................28
     Limitation on Discussing or Negotiating other Transaction Proposals.........................................29
     Termination of the Agreement................................................................................29
INFORMATION WITH RESPECT TO CARDIA...............................................................................31
     Business of Cardia..........................................................................................31
     Market for Cardia's Common Equity and Related Shareholder Matters...........................................36
     Management's Discussion and Analysis of Financial Condition and Results of Operations.......................37
     Management's Plan of Operation..............................................................................37
     Management..................................................................................................39
     Stock Option Plan and Related Information...................................................................40
     Indemnification and Waiver of Director Liability............................................................41
     Principal Shareholders......................................................................................42
INFORMATION WITH RESPECT TO VLS..................................................................................44
     Business of VLS.............................................................................................44
     Market for VLS' Common Equity and Related Shareholder Matters...............................................44
     Management's Discussion and Analysis of Financial Condition and Results of Operations.......................44
     Principal Shareholders......................................................................................46
     Executive Compensation and other Matters....................................................................47
COMPARISON OF RIGHTS OF HOLDERS OF CARDIA COMMON STOCK                                                             
  AND HOLDERS OF VLS COMMON STOCK................................................................................47
     Description of Cardia Capital Stock.........................................................................47
     Comparative Rights of Cardia and VLS Shareholders...........................................................48
INDEPENDENT ACCOUNTANTS..........................................................................................51
LEGAL MATTERS....................................................................................................51
REPRESENTATIVES OF INDEPENDENT PUBLIC ACCOUNTANTS OF VLS.........................................................51
INDEX TO CARDIA FINANCIAL STATEMENTS............................................................................F-1
     Report of Independent Accountants..........................................................................F-2
     Balance Sheets as of December 31, 1997 and 1998, and June 30, 1999 (unaudited).............................F-3
     Statements of Operations for the period ended December 31, 1997, the year ended                               
        December 31, 1998, and the six month periods ended June 30, 1998 and 1999 (unaudited)...................F-4
     Statement of Advances by Parent and Shareholders' Equity for the period ended                                 
       December 31, 1997, the year ended December 31, 1998, and the six months                                     
       ended June 30, 1999 (unaudited)..........................................................................F-5
     Statements of Cash Flows for the period ended December 31, 1997, the year ended                               
        December 31, 1998, and the six month periods ended June 30, 1998 and 1999 (unaudited)...................F-6
     Notes to Financial Statements..............................................................................F-7

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INDEX TO VLS FINANCIAL STATEMENTS..............................................................................F-12
     Independent Auditors' Report..............................................................................F-13
     Balance Sheets as of December 31, 1997 and 1998, and June 30, 1999 (unaudited)............................F-14
     Statements of Income for the years ended December 31, 1997 and 1998, and for the six month                    
          period ended June 30, 1999 (unaudited)...............................................................F-15
     Statements of Shareholders' Equity for the years ended December 31, 1997 and 1998, and for the                
          six month period ended June 30, 1999 (unaudited).....................................................F-16
     Statements of Cash Flows for the years ended December 31, 1997 and 1998, and for the six                      
          month period ended June 30, 1999 (unaudited).........................................................F-17
     Notes to Financial Statements.............................................................................F-18
APPENDICES:                                                                                                        
     Appendix A:  Agreement and Plan of Merger Between Cardia, Inc. and                                            
       Video Learning Systems, Inc. dated as of July 1, 1999....................................................A-1
     Appendix B:  Minnesota Statutes, Section 302A.471 and Section 302A.473.....................................B-1

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 WHERE YOU CAN FIND MORE INFORMATION

  Cardia files annual, quarterly and special reports, proxy statements and
other information with the United States Securities and Exchange Commission. You
may read and copy any document filed by Cardia at the SEC's public reference    
facilities. Please call the SEC at 1-800-SEC-0330 for further information about 
its public reference facilities. Cardia's SEC filings are also available to the 
public at the SEC's website at http: //www.sec.gov. VLS does not file any       
reports with the SEC.                                                           

WHO CAN HELP ANSWER YOUR QUESTIONS

If you have additional questions about the merger, you should contact:

VIDEO LEARNING SYSTEMS, INC.
6111 Blue Circle Drive
Minnetonka, Minnesota 55343-9108
Attention: Peter R. Peterson
 Phone Number (612) 930-1011

CARDIA, INC.
13754 Frontier Court
 Burnsville, Minnesota 55337
 Attention: Joseph A. Marino
Phone Number: (612) 997-2100

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 SUMMARY

     THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE      
MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE      
MERGER, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE OTHER AVAILABLE  
INFORMATION REFERRED TO IN "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 1. THE 
MERGER AGREEMENT IS ATTACHED AS APPENDIX A TO THIS DOCUMENT. WE ENCOURAGE YOU TO
READ THE MERGER AGREEMENT. IT IS THE LEGAL DOCUMENT THAT GOVERNS THE MERGER.    

  WE HAVE INCLUDED PAGE REFERENCES PARENTHETICALLY TO DIRECT YOU TO A MORE
COMPLETE DESCRIPTION OF THE TOPICS AND INFORMATION PRESENTED IN THIS SUMMARY.   

   CARDIA HAS PROVIDED THE INFORMATION IN THIS DOCUMENT ABOUT CARDIA AND VLS
HAS PROVIDED THE INFORMATION IN THIS DOCUMENT ABOUT VLS.                        

    THE RISK FACTORS BEGINNING ON PAGE 7 SHOULD BE CONSIDERED CAREFULLY BY THE
VLS SHAREHOLDERS IN EVALUATING WHETHER TO ADOPT THE MERGER AGREEMENT AND APPROVE
THE MERGER. THESE FACTORS SHOULD ALSO BE CONSIDERED IN CONJUNCTION WITH         
FORWARD-LOOKING STATEMENTS MADE IN THIS DOCUMENT OR IN ANY OTHER INFORMATION OR 
DOCUMENT INCLUDED OR INCORPORATED BY REFERENCE HEREIN.                          

THE COMPANIES                                                                   

Cardia, Inc.  (SEE PAGE 31)                                                     
13754 Frontier Court                                                            
Burnsville, Minnesota 55337                                                     
(612) 997-2100                                                                  

Cardia, Inc. was formed in October of 1998 as a subsidiary of Applied 
Biometrics, Inc. It was spun off to the shareholders of Applied Biometrics in a 
distribution on February 11, 1999. Cardia is developing, manufacturing and      
marketing transcatheter closure device products for the repair of certain       
cardiac defects.                                                                

Transcatheter closure devices are a new family of small, implantable  
devices which are delivered through a catheter inserted into a major blood      
vessel to permanently repair certain cardiac defects. The procedure is performed
in a cardiac catheterization laboratory and is intended to reduce the need for  
open heart surgery. Cardia is in the initial stages of developing these closure 
devices. Cardia believes its closure devices offer certain advantages over      
transcatheter closure devices offered by its competitors.                       

 Cardia is currently marketing and selling a device for the closure of a
pediatric cardiac defect known as patent ductus arteriosus on an experimental   
basis in Europe only. This defect is an abnormal passage between two major blood
vessels of the heart and is generally corrected in children. Cardia is also     
currently focusing significant development and regulatory approval efforts on a 
closure device for the correction of another cardiac defect known as patent     
foramen ovale. The foramen ovale defect is an abnormal passage between the right
and left chambers of the heart and is generally corrected in adults.            

    The pediatric product has already been sold in Germany and implanted on an
experimental basis in over 150 human cases. Cardia expects to complete          
enhancements to its adult device in the near future and has begun selling and   
distributing the adult device on an experimental basis in Europe while pursuing 
certain regulatory approvals.                                                   

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Video Learning Systems, Inc.  (SEE PAGE 44)                                     
6111 Blue Circle Drive                                                          
Minnetonka, Minnesota 55343-9108                                                
(612) 930-1011                                                                  

     Video Learning Systems, Inc. was incorporated as a Minnesota corporation on
December 7, 1982. From 1982 to 1989, VLS was engaged in the development,        
production, manufacturing and marketing of "self-help" and "how- to" video tapes
covering a variety of topics for the home video market. VLS focused its initial 
efforts on researching the video market and then became a co-producer for a     
number of video tapes, including exercise and training tapes and tapes for      
teaching preschool children. VLS ceased operations in approximately 1989 and has
not engaged in any active operations since that time.                           

     VLS currently has no active business or significant assets other than cash,
cash equivalents and a note receivable. The company's only income during the    
last four fiscal years was attributable to certain interest and dividend income.
VLS has no employees, facilities or operations of any kind.                     

    It is expected that Peter R. Peterson, a director and officer of VLS, will
be elected to the board of directors of Cardia upon the completion of the       
merger. No other director, officer, employee or member of VLS' management will  
be a director or part of the management organization of Cardia.                 

THE COMBINED COMPANY                                                            

   The combined company will carry on the current business of Cardia. Cardia
will not change its operations or strategies following the merger.              

EXCHANGE RATIO  (SEE PAGE 26)                                                   

   VLS shareholders will receive 0.188 of a share of Cardia common stock for
each share of VLS common stock owned immediately prior to the closing of the    
merger.                                                                         

OWNERSHIP OF CARDIA FOLLOWING THE MERGER  (SEE PAGE 26)                         

  VLS shareholders will receive a total of 200,000 shares of Cardia common
stock in the merger. Based on the number of shares of Cardia common stock       
outstanding on June 30, 1999, existing VLS shareholders will own approximately  
16.7% of the outstanding Cardia common stock after the merger.                  

REASONS FOR THE MERGER  (SEE PAGE 18)                                           

 CARDIA. A special committee of the board of directors of Cardia
approved the merger based on a number of factors including, among other things, 
the following:                                                                  

  *    the merger is an efficient way for Cardia to acquire cash
        necessary for the company to pursue its business plans and
strategies for growth;                            

         *    the merger will enable Cardia to obtain the services of Peter R.
 Peterson as a member of its board of directors; and

          *    the merger will provide an efficient way for Cardia to expand the
     ownership and interest in the company and its business.

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    VLS. The board of directors of VLS believes that the merger should
result in a number of benefits to VLS shareholders, including, among other      
benefits, the following:                                                        

    *    the merger will provide holders of VLS common stock with an
         opportunity to obtain increased value through the potential
               growth of an operating business, as compared to VLS which has not
               engaged in any significant operational activity for approximately
ten years;                                        

    *    the merger will afford holders of VLS common stock with the
           opportunity to own stock in an active business enterprise and
               potentially participate in a market for their shares which is not
currently available to shareholders of VLS; and   

    *    the merger will offer holders of VLS common stock a greater
           diversification of risk by an investment in Cardia instead of
VLS.                                              

VLS' RECOMMENDATION TO YOU  (SEE PAGE 20)                                       

        The VLS board of directors believes that the merger is fair to you and
in your best interests. The VLS board of directors unanimously recommends that  
you vote "FOR" the adoption of the merger agreement and approval of the merger. 

THE SPECIAL MEETING  (SEE PAGE 15)                                              

         A special meeting of the shareholders of VLS will be held on October 6,
1999, at the offices of Lindquist & Vennum P.L.L.P. located at 4200 IDS Center, 
80 South Eighth Street, Minneapolis, Minnesota at 10:00 a.m. local time to adopt
the merger agreement and to consider and vote upon a proposal to approve the    
merger.                                                                         

RECORD DATE AND VOTING POWER  (SEE PAGE 16)                                     

        You are entitled to vote at the special meeting if you owned shares of
VLS common stock on the close of business on September 14, 1999, the record date
for the special meeting. You will have one vote at the special meeting for each 
share of VLS common stock you owned on the record date. There are 1,063,750     
shares of VLS common stock entitled to be voted at the special meeting.         

REQUIRED VOTE  (SEE PAGE 16)                                                    

 The adoption of the merger agreement and approval of the merger
requires the affirmative vote of a majority of the shares of VLS common stock   
outstanding on the record date.                                                 

EXCHANGE OF STOCK CERTIFICATES                                                  

 If you are a VLS shareholder, you should not send in your stock
certificates now. After the merger is completed, Cardia will send VLS           
shareholders written instructions for receiving shares of Cardia common stock in
exchange for their stock certificates. Cardia shareholders will keep their      
current certificates, and will continue to hold the same number of shares of    
Cardia common stock after the merger.                                           

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SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN SHAREHOLDERS  (SEE PAGE 46)           

        The directors and executive officers of VLS own approximately 21.1% of
the shares entitled to vote at the special meeting. All of them have agreed to  
vote their shares for the adoption of the merger agreement and approval of the  
merger.                                                                         

MARKET PRICE INFORMATION   (SEE PAGE 36)                                        

         Cardia common stock is not traded on any exchange or market, although a
market is expected to develop after the merger closes. VLS common stock is not  
traded on any exchange or market.                                               

TAX MATTERS  (SEE PAGE 20)                                                      

        The merger will be a taxable event. This means that, depending on your
current tax basis in the shares of VLS common stock that you own, you may       
recognize a taxable gain or loss in connection with the shares of Cardia common 
stock and cash in lieu of any fractional shares you receive in the merger. Your 
gain or loss will be based on the difference between the cost of your VLS shares
and the fair market value of Cardia common stock and cash you receive in        
exchange for those shares. The management of Cardia does not believe that the   
merger will create a tax obligation for Cardia.                                 

        TAX MATTERS CAN BE COMPLICATED, AND THE TAX CONSEQUENCES OF THE MERGER
TO YOU WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR  
OWN TAX ADVISORS TO FULLY UNDERSTAND THE TAX CONSEQUENCES OF THE MERGER TO YOU. 

DISSENTERS' RIGHTS  (SEE PAGE 22)                                               

         VLS is organized under Minnesota law. Under Minnesota law, shareholders
of VLS have a right, under certain conditions, to an appraisal of the value of  
their shares in connection with the merger. These dissenters' rights are set    
forth in Sections 302A.471 and 302A.473 of the Minnesota Business Corporation   
Act, copies of which are attached to this document as Appendix B.               

    YOU SHOULD BE AWARE THAT A FAILURE TO FOLLOW THE STEPS REQUIRED BY
SECTIONS 302A.471 AND 302A.473 OF THE MINNESOTA BUSINESS CORPORATION ACT FOR    
PERFECTING DISSENTERS' RIGHTS MAY RESULT IN THE LOSS OF THOSE RIGHTS.           

CONDITIONS TO THE MERGER  (SEE PAGE 26)                                         

       Cardia and VLS will not complete the merger unless several conditions
are satisfied or, in some cases, waived, including the following:               

       *    adoption of the merger agreement and approval of the merger by
the VLS shareholders;                             

        *    receipt of all material approvals and consents of third parties
necessary to consummate the merger;               

          *    the registration statement of which this document is a part being
  declared effective under the Securities Act of 1933;

         *    receipt of all permits and authorizations required by applicable
           state securities laws for Cardia common stock to be issued in
connection with the merger;                       

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      *    compliance by Cardia and VLS with their obligations under the
             merger agreement and the representations and warranties made by
               Cardia and VLS, respectively, in the merger agreement being true;
and                                               

         *    delivery by counsel for each company of its legal opinion to the
other company.                                    

LIMITATION ON DISCUSSING OR NEGOTIATING OTHER TRANSACTION PROPOSALS  (SEE PAGE  
29)                                                                             

VLS has agreed not to pursue a business combination or other  
significant transaction with another party while the merger is pending, unless  
such party has made a proposal to the VLS board of directors for a superior     
transaction with VLS.                                                           

TERMINATION OF THE MERGER AGREEMENT  (SEE PAGE 29)                              

     Cardia and VLS can agree by mutual written consent to terminate the
merger agreement at any time, whether before or after the receipt of shareholder
approval. In addition, either company can terminate the merger agreement if     
certain events occur, including the following:                                  

      *    the shareholders of VLS do not vote to approve the merger and
adopt the merger agreement;                       

          *    either party materially breaches its representations, warranties,
           covenants or agreements set forth in the merger agreement and
            fails to exercise commercially reasonable efforts to cure such
breach; or                                        

         *    the VLS board of directors breaches its obligation not to pursue
          an alternative business transaction, recommends, approves or
             authorizes the acceptance or execution of a letter of intent or
              definitive agreement providing for an alternative transaction to
               the merger, withdraws or modifies, in a manner materially adverse
              to Cardia, its recommendation to its shareholders to approve the
             merger, or fails to recommend against acceptance of a tender or
          exchange offer or takes no position with respect to an offer
within ten days after such offer is made.         

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RISK FACTORS

     THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS
RELATE TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF CARDIA AND VLS.  
IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH  
AS "MAY," "WILL," "SHOULD," "EXPECTS," "PLANS," "ANTICIPATES," "BELIEVES,"      
"FUTURE," "INTENDS," "ESTIMATES," "PREDICTS," "POTENTIAL," OR "CONTINUE" OR THE 
NEGATIVE OF SUCH TERMS AND OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ONLY  
REFLECT MANAGEMENT'S EXPECTATIONS AND ESTIMATES. ACTUAL EVENTS OR RESULTS MAY   
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A   
RESULT OF COMPETITION, TECHNOLOGICAL CHANGE, GENERAL ECONOMIC CONDITIONS AND THE
RISKS OUTLINED BELOW. THESE FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER          
MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS.                                 

      WE ARE NOT UNDERTAKING ANY OBLIGATIONS TO UPDATE ANY FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS DOCUMENT TO REFLECT ANY FUTURE EVENTS OR           
DEVELOPMENTS.                                                                   

THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY BY VLS   
SHAREHOLDERS IN EVALUATING WHETHER TO ADOPT THE MERGER AGREEMENT AND APPROVE THE
MERGER. SEE ALSO "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 1.               

RISKS RELATING TO THE MERGER

THE COSTS OF COMPLETING THE MERGER ARE  Cardia and VLS estimate that they will  
SUBSTANTIAL AND MAY ADVERSELY AFFECT    incur aggregate, direct transaction     
CARDIA'S RESULTS OF OPERATIONS          costs of approximately $50,000          
                                      associated with the merger, which will
                                       be charged to operations in the quarter
                                        in which the merger is consummated. This
                                    estimate primarily includes fees for
                                 attorneys, accountants, financial
                                   printing and other related charges.

HOLDERS OF VLS COMMON STOCK WILL HAVE   Following the merger, holders of VLS    
DIFFERENT RIGHTS AS HOLDERS OF CARDIA   common stock will become holders of     
COMMON STOCK FOLLOWING THE MERGER       Cardia common stock. Certain differences
                               exist between the rights of VLS
                                   shareholders under VLS' articles of
                                      incorporation and VLS' bylaws, and the
                                   rights of Cardia shareholders under
                                      Cardia's articles of incorporation and
                                        Cardia's bylaws. See "Comparative Rights
                                       of Cardia and VLS Shareholders" on page
   48.

THE MERGER IS TAXABLE                   The merger will be taxable. This means  
                                   that, depending on your current tax
                                       basis in the shares of VLS common stock
                                 that you own, you may recognize a
                                       taxable gain or loss in connection with
                                     the shares of Cardia common stock and
                                     cash in lieu of any fractional shares
                                       you receive in the merger. Your gain or
                                    loss will be based on the difference
                                     between your basis in your VLS shares
                                       and the fair market value of the Cardia
                                        common stock you receive in exchange for
                                        those shares. Cardia has determined that
                                   the fair market value of its common
                                      stock is $1.00. That determination is,
                                    however, subject to challenge by the
                                     Internal Revenue Service, which could
                                       result in an increase in the gain, or a
                              decrease in the loss, you will
                                       recognize. See "Material Federal Income
                             Tax Consequences" on page 20.

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THE SECURITIES YOU RECEIVE IN THE       The net book value of your VLS shares as
MERGER MAY NOT HAVE A VALUE EQUAL       of June 30, 1999 was approximately $0.51
TO OR GREATER THAN THE VALUE OF         per share. See "Comparative Per Share   
YOUR VLS SHARES                         Data VLS" on pages 14 - 15. Although net
                                        book value is not necessarily the amount
                             you would receive if VLS were
                                      liquidated, it is one approximation of
                                        the value of your shares. In the merger,
                                    you will exchange 5.32 shares of VLS
                                    common stock for one share of Cardia
                                        common stock. Cardia's common stock does
                                      not currently trade on any market and,
                                therefore, it is not possible to
                                        determine the exact fair market value of
                                 a share of Cardia common stock. A
                                      special committee of Cardia's board of
                                       directors has, however, determined that
                                   the fair market value of a share of
                                  Cardia's common stock is $1.00 per
                                        share, based on recent sales of Cardia's
                                   common stock. See "Material Federal
                                      Income Tax Consequences" on pages 20 -
                                      21. A market for Cardia's common stock
                                     may develop after consummation of the
                                      merger on the over-the-counter market.
                                     The trading price for Cardia's common
                                        stock in that market may be at, above or
                      below $1.00 per share.

 RISKS RELATING TO CARDIA'S BUSINESS

CARDIA IS AN EARLY STAGE IMPLANTABLE    Cardia is an implantable medical device 
MEDICAL DEVICE COMPANY AND DOES NOT     company in an early stage of            
HAVE AN OPERATING HISTORY ON WHICH TO   development. This is particularly       
EVALUATE CARDIA'S BUSINESS AND          significant because the implantable     
PROSPECTS                               medical device industry is a market in  
                                      which there is an increasing number of
                                     companies, intense competition, and a
                                high failure rate. Cardia has no
                                       significant operating history which you
                                    may use to evaluate its business and
                                     prospects. Cardia's prospects must be
                                 considered in light of the risks,
                              difficulties and uncertainties
                                     frequently encountered by implantable
                                    medical device companies in an early
                                     stage of development. There can be no
                                     assurance that Cardia will be able to
                                        complete its products under development,
                                        that those products will be approved for
                                      marketing, that those products will be
                                    accepted in the marketplace, or that
                                       those products can be sold at a profit.
                                     Consequently, an investment in Cardia
                                   common stock is highly speculative.
                                       Cardia does not guarantee any return on
                                  an investment in its common stock.

THERE IS NO ESTABLISHED MARKET          The closure devices Cardia is currently 
FOR CARDIA'S PRODUCTS                   developing are completely new methods of
                                     treating cardiac defects and have not
                                      been widely tested. Open heart surgery
                                   has been the standard treatment for
                                    these defects for many years. Cardia
                                      cannot assure you that it will be able
                                     to establish a market for its closure
                                     devices under development or that the
                                        market will be significant. If Cardia is
                                   not able to establish a significant
                                     market, it may not become profitable.

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NON-COMPLIANCE WITH THE                 In the United States, Cardia's closure  
EXTENSIVE REGULATIONS IMPOSED BY        devices are considered to be implantable
THE UNITED STATES FOOD AND DRUG         medical devices, and they will require  
ADMINISTRATION COULD HAVE A             clearance or approval by the United     
SIGNIFICANT NEGATIVE IMPACT ON          States Food and Drug Administration     
CARDIA'S BUSINESS                       before commercial sales can be made in  
                                       the United States. The FDA also imposes
                                     post-marketing controls on Cardia and
                                     its products. If Cardia fails to meet
                                        these extensive FDA requirements, Cardia
                                     and its employees could be exposed to
                                       significant restrictions and penalties.
                                      Failure to meet FDA requirements could
                                       also cause Cardia to experience reduced
                             revenues and possible losses.

EXPORT AND IMPORT REGULATIONS           If Cardia sells its medical devices     
COULD DELAY OR INHIBIT CARDIA'S         outside the United States or Europe, it 
ABILITY TO SELL ITS PRODUCTS IN         will be subject to United States export 
FOREIGN COUNTRIES                       requirements and foreign regulatory     
                                      requirements. Each country, other than
                                  members of the European Union, has
                                        different legal restrictions on the sale
                                  of imported medical devices. These
                                 restrictions may expose Cardia to
                                     requirements and time frames that are
                                      different from those applicable in the
                                       United States and Europe. Cardia cannot
                                        guarantee that it will be able to obtain
                                      regulatory approvals or clearances for
                              the sale of its products under
                                 development in foreign countries.

CARDIA HAS A HISTORY OF                 Prior to its spin off in early 1999 from
OPERATING LOSSES                        Applied Biometrics, Inc., Cardia's      
                                      business incurred a net operating loss
                                     of $457,866 in fiscal year 1997 and a
                                        net operating loss of $836,386 in fiscal
                                    year 1998. Through June 30, 1999 and
                                        under its separate administration of the
                                        business, Cardia has incurred a net loss
                                 of $226,753. As of June 30, 1999,
                                Cardia's accumulated deficit was
                                     therefore $1,521,007. Its losses have
                                  resulted principally from expenses
                                        incurred in research and development and
                                   general, selling and administrative
                                     expenses. Cardia has had only limited
                 revenues to date.

CARDIA'S FUTURE PROFITABILITY IS        Cardia has generated minimal revenues   
UNCERTAIN                               from the sale of its products under     
                                       development and Cardia cannot guarantee
                                that it will be able to generate
                                   significant revenues in the future.
                                      Cardia expects its operating losses to
                                   continue for the near future as the
                                   company's research and development,
                                   sales and marketing activities, and
                                        operations continue. Cardia's ability to
                                      achieve profitability depends upon its
                                      ability to obtain necessary government
                                approvals, develop its sales and
                                    marketing capacity, and successfully
                                     market and sell its products, none of
                                     which can be assured. It is uncertain
                                       when Cardia will become profitable. See
                                   "Information with Respect to Cardia
                               Business of Cardia" on page 31.

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INSURANCE REIMBURSEMENT FOR             Cardia's ability to successfully        
CARDIA'S PRODUCTS IS UNCERTAIN          commercialize the products it has under 
                                        development depends in part on obtaining
                                        adequate reimbursement for such products
                                       from government and private health care
                                      insurers (including health maintenance
                                   organizations and other third-party
                                 payors). Physicians' decisions to
                                       recommend products such as Cardia's are
                                      likely to be heavily influenced by the
                                     scope and extent of reimbursement for
                                    such products by third-party payors.
                                  Government and private third-party
                                     payors are increasingly attempting to
                                     contain health care costs by limiting
                                   both the extent of coverage and the
                                    reimbursement rate for new treatment
                                       products. In particular, services which
                                       are determined to be investigational in
                                  nature or which are not considered
                                        "reasonable and necessary" for treatment
                                        may be denied reimbursement coverage. If
                                      adequate reimbursement coverage is not
                                      available from insurers or third-party
                               payors, it is uncertain whether
                                      individuals will elect to directly pay
                                        for Cardia's products under development.
                                     If insurers or third-party payors and
                                    individuals are unwilling to pay for
                                    Cardia's products under development,
                                        then the company's potential revenue and
                                        earnings will be significantly decreased
              or eliminated.

CARDIA'S ABILITY TO PROTECT ITS         Cardia's success will partly depend on  
PROPRIETARY TECHNOLOGY IS               its ability to obtain patent protection 
UNCERTAIN                               for its products in the United States   
                                        and in other countries. In addition, the
                                     success of Cardia will also depend on
                                 its ability to preserve its trade
                              secrets and to operate without
                                    infringing the proprietary rights of
                                        third parties. There can be no assurance
                                      that Cardia's patent applications will
                                     ever be issued as patents or that the
                                        claims of any issued patents will afford
                                        meaningful protection for its technology
                              or products under development.
                                       Furthermore, others may develop similar
                                        products which avoid infringing upon, or
                                     conflicting with, Cardia's patents or
                                       patent applications. In addition, there
                                    can be no assurance that any patents
                                       issued to Cardia will not be challenged
                                      and subsequently narrowed, invalidated
                                      or circumvented. See "Information with
                                       Respect to Cardia - Business - Patents,
                                     Trademarks and Proprietary Rights" on
        page 35.

                                Cardia also relies on unpatented
                               proprietary technologies and on
                                   confidentiality agreements with its
                                    employees and consultants to protect
                                        such proprietary technologies. There can
                               be no assurance that Cardia can
                                     adequately protect its rights to such
                                    unpatented proprietary technologies,
                                  that others will not independently
                                develop substantially equivalent
                                      proprietary information or techniques,
                                    or otherwise gain access to Cardia's
                                    proprietary technologies or disclose
                                        such technologies. See "Information with
                                     Respect to Cardia Business - Patents,
                                     Trademarks and Proprietary Rights" on
        page 35.

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CARDIA'S PATENTS MAY CONFLICT           Cardia's products under development may 
WITH PATENTS GRANTED TO OTHER           also conflict with patents which have   
PARTIES                                 been or may be granted to others. As the
                                        medical device industry expands and more
                                      patents are filed and issued, the risk
                                      increases that Cardia's products under
                              development may give rise to a
                                  declaration of interference by the
                                  Patent and Trademark Office, or to
                                      claims of patent infringement by other
                                        companies, institutions, or individuals.
                                    Such entities or persons could bring
                                        legal proceedings against Cardia seeking
                                        damages or seeking to enjoin Cardia from
                                       testing, manufacturing or marketing its
                                  products under development. Patent
                                        litigation is costly, and even if Cardia
                                     prevails, the cost of such litigation
                                   could have an adverse effect on the
                                    company. If the other parties in any
                                        such actions are successful, in addition
                                    to any liability for damages, Cardia
                              could be required to cease the
                                        infringing activity or obtain a license.
                                      Such a license may not be available to
                                      Cardia on acceptable terms, if at all.
                                      If Cardia fails to obtain a license to
                                  any technology that it requires to
                                commercialize its products under
                              development, the company would
                                       experience a material adverse effect on
                                  its business, financial condition,
                                potential revenues and earnings.

TECHNOLOGICAL CHANGES MAY RESULT        Market acceptance and sales of Cardia's 
IN OBSOLESCENCE OF CARDIA'S             products under development may also be  
PRODUCTS                                adversely affected by technological     
                                        change. It is uncertain whether Cardia's
                                      competitors will succeed in developing
                                        products that are less expensive or more
                                     effective than the company's products
                                 under development. Further, it is
                                       uncertain whether such developments may
                                      render Cardia's technology or products
                                     under development less competitive or
         obsolete.

CARDIA HAS LIMITED MARKETING AND        Cardia currently has a very limited     
SALES EXPERIENCE                        sales and marketing organization. Cardia
                               is in the process of developing
                              additional sales and marketing
                               resources, including direct and
                               independent sales and marketing
                                        representation. Cardia cannot guarantee,
                                        however, that it will be able to build a
                               direct sales force or marketing
                                        organization, that, if established, such
                                       organization will be cost effective, or
                                      that the company's sales and marketing
                                       efforts will be successful. Cardia also
                                        cannot guarantee that it will be able to
                                       enter into agreements with distributors
                                  or collaborative arrangements on a
                                   timely basis or at all. Cardia also
                                     cannot guarantee that distributors or
                                  collaborators will devote adequate
                                  resources to selling the company's
                                     products under development. If Cardia
                                     fails to build an effective sales and
                                      marketing organization or to establish
                                       effective distribution or collaborative
                               relationships, the company will
                                       experience a material adverse effect on
                                      its business, financial condition, and
                                potential revenues and earnings.

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CARDIA HAS LIMITED MANUFACTURING        Cardia must manufacture its products    
EXPERIENCE                              under development in accordance with    
                                      regulatory requirements, in commercial
                                  quantities, at appropriate quality
                                       levels and at acceptable costs if it is
                                    to be successful. Cardia has not yet
                                    been required to produce its closure
                              devices in large quantities at
                                  competitive costs. There can be no
                                       assurance that the company will be able
                            to do so. If Cardia receives
                                      governmental approval to widely market
                                    its closure devices, there can be no
                                  assurance that the company will be
                                      successful in making the transition to
                                        commercial production of these products.

CARDIA HAS SIGNIFICANT PRODUCT          Cardia's business exposes the company to
LIABILITY EXPOSURE                      significant potential liability risks   
                                  inherent in the use of implantable
                                     medical devices. Cardia does not know
                                whether liability claims will be
                                     asserted against it. Cardia does have
                                    product liability insurance which it
                                  believes provides coverage for the
                                   application and use of its products
                                   under development. It is uncertain,
                                    however, whether the company will be
                                  able to maintain such insurance on
                                       acceptable terms or that such insurance
                                        coverage will be in a sufficient amount.
                                      Any insurance obtained may not provide
                                   adequate coverage against potential
                                        liabilities. A liability claim, even one
                              without merit, could result in
                                     significant legal defense costs which
                                       would increase Cardia's expenses, lower
                                      its potential earnings and even result
          in losses.

CARDIA DEPENDS ON KEY PERSONNEL         Because of the specialized scientific   
                                      nature of Cardia's business, Cardia is
                                    highly dependent upon its ability to
                                        attract and retain qualified management,
                                   scientific and technical personnel.
                                      Cardia will also depend on its ability
                                     to hire qualified marketing and sales
                                      personnel. Competition for scientific,
                                marketing and sales personnel is
                                  intense. A loss of the services of
                                    Joseph A. Marino, Chairman and Chief
                                  Executive Officer of Cardia, could
                                     adversely affect the operation of the
                                        company and its research and development
                              programs, and could impede the
                                     achievement of the company's business
                                     objectives. Cardia does not currently
                                      maintain key-man life insurance on any
                                 of its personnel. There can be no
                                  assurance that the company will be
                                 successful in hiring or retaining
                                    qualified personnel. The loss of key
                                        personnel, or the company's inability to
                                    hire and retain qualified personnel,
                                       could have a material adverse effect on
                                       Cardia's business, financial condition,
                                    and potential revenues and earnings.

THERE IS NO CURRENT PUBLIC              To date, there has been no public market
MARKET FOR CARDIA'S COMMON STOCK        for Cardia's common stock. While Cardia 
                              has agreed to use commercially
                               reasonable efforts to cause the
                                     company's common stock to be approved
                        for trading on the local
                                        over-the-counter market, there can be no
                                       assurance that an active trading market
                                       for Cardia common stock will develop or
                                      be sustained. See "Market for Cardia's
                                     Common Equity and Related Shareholder
                                     Matters - Market Information" on page
   36.

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IT IS POSSIBLE THAT CARDIA'S            The stock market has, from time to time,
COMMON STOCK PRICE WILL BE              experienced extreme price and volume    
VOLATILE                                fluctuations which have particularly    
                                       affected the market prices for emerging
                                       medical device companies and which have
                                     often been unrelated to the operating
                                    performance of such companies. These
                                       broad market fluctuations may adversely
                                   affect the market price of Cardia's
                                   common stock, if a market develops.
                                      Following periods of volatility in the
                                  market price of a company's stock,
                                      securities class action litigation has
                                      sometimes occurred against the issuing
                                        company. Such litigation could result in
                                    substantial costs and a diversion of
                                     management's attention and resources,
                                   which could have a material adverse
                                     affect on Cardia's potential revenues
                                       and earnings. Any adverse determination
                                     in such litigation could also subject
                                  Cardia to significant liabilities.

CARDIA IS SUBJECT TO                    The effect of certain provisions of the 
ANTI-TAKEOVER LAWS; CERTAIN             Minnesota Business Corporation Act and  
PROVISIONS OF CARDIA'S ARTICLES         the ability of the company's board of   
OF INCORPORATION MAY HAVE AN            directors to issue preferred stock      
ANTI-TAKEOVER EFFECT                    without shareholder approval may have   
                                      the effect of delaying or preventing a
                                     change in control or merger of Cardia
                                       which could operate to the detriment of
                                     its shareholders. See "Description of
                                       Cardia Capital Stock - Cardia Preferred
                                   Stock and Business Combinations and
                                       Control Share Acquisitions" on pages 48
                     and 50, respectively.

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COMPARATIVE PER SHARE DATA

         Set forth below are the net income and book value per common share data
for Cardia and VLS on a historical basis and for Cardia on a combined pro forma 
basis, and certain equivalent pro forma per share data for VLS. The Cardia      
combined pro forma data was derived by combining historical financial           
information of Cardia and VLS. The equivalent combined pro forma per share data 
for VLS was calculated by multiplying the Cardia pro forma per common share data
by the exchange ratio of 0.188.                                                 

       The information in the table below should be read in conjunction with
the respective audited and unaudited financial statements and related notes of  
Cardia and VLS included elsewhere in this document.                             

CARDIA, INC.

                                                                Six Months
                                            Year Ended           Ended
                                            December 31, 1998   June 30,1999

HISTORICAL PER COMMON SHARE DATA:(1)                                            
Income (loss) from continuing operations                                  
  Basic                                      $  (2.23)         $   (.33)
  Diluted                                    $  (2.23)         $   (.33)
Book Value                                    $   0.54          $   1.19  

COMBINED PRO FORMA PER COMMON                                                   
SHARE DATA:(2)                                                                
Income (loss) from continuing operations                                  
  Basic                                      $  (1.41)         $   (.25)
  Diluted                                    $  (1.41)         $   (.25)
Book Value                                    $   1.29          $   1.54  

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

(1)   The weighted average number of shares of Cardia common stock used in      
      calculating the historical per common share data for Cardia was 375,000 at
December 31, 1998 and 690,613 at June 30, 1999.                     

(2)   The weighted average number of shares of Cardia common stock, including   
     shares to be issued in the merger, used in calculating combined pro forma
      per common share data was 574,985 at December 31, 1998 and 890,598 at June
30, 1999.                                                           

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VIDEO LEARNING SYSTEMS, INC.

                                                              Six Months
                                         Year Ended          Ended
                                           December 31, 1998   June 30, 1999

HISTORICAL PER COMMON SHARE DATA:                                               
Income (loss) from continuing operations                                  
Basic                                      $   0             $   0  
Diluted                                    $   0             $   0  
Book Value                                    $    .50          $    .51  

EQUIVALENT COMBINED PRO FORMA PER COMMON                                        
SHARE DATA:                                                                   
Income (loss) from continuing operations                                  
  Basic                                      $   (.27)         $   (.05)
  Diluted                                    $   (.27)         $   (.05)
Book Value                                    $    .24          $    .29  

 PRO FORMA FINANCIAL INFORMATION

   VLS has not conducted an active business since 1989. Its net assets
primarily consist of cash and a note receivable totaling $544,881 at June 30,   
1999, which will be included on the balance sheet of Cardia following the merger
less approximately $50,000 of transaction costs. VLS has not generated operating
income since it ceased active business operations. Its only income has been in  
the form of interest and dividend income which totaled $33,667 and $14,898 for  
the year ended December 31, 1998 and the six-month period ended June 30, 1999,  
respectively. This source of income will now be included in Cardia's income     
statements in future periods to the extent these assets continue to be held in  
their current form. VLS has historically incurred selling, general and          
administrative expenses. Those expenses will be eliminated following the merger.

     A detailed presentation of the pro forma effects of the merger is not
included in this document because a limited number of pro forma adjustments are 
required, as discussed above, and those adjustments are easily determinable and 
calculable based on a review of the financial information regarding Cardia and  
VLS presented in this document.                                                 

 THE VLS SPECIAL MEETING

DATE, TIME AND PLACE OF MEETING                                                 

    The VLS special meeting will be held at the offices of Lindquist &
Vennum P.L.L.P. located at 4200 IDS Center, 80 South Eighth Street, Minneapolis,
Minnesota, on October 6, 1999 at 10:00 a.m. local time.                         

PURPOSE OF THE VLS SPECIAL MEETING                                              

    The purpose of the VLS special meeting is to approve and adopt the
merger agreement and the merger. VLS shareholders may also consider and vote on 
such other matters as may properly come before the VLS special meeting or any   
adjournments or postponements of the meeting.                                   

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RECORD DATE AND OUTSTANDING SHARES                                              

       The VLS board of directors has fixed September 14, 1999 as the record
date for the VLS special meeting. Only shareholders of record of VLS common     
stock on the record date are entitled to notice of, and to vote at, the VLS     
special meeting. As of the record date, there were 73 shareholders of record    
holding an aggregate of 1,063,750 shares of VLS common stock. Except for the    
shareholders identified under "VLS Principal Shareholders" on page 46, to the   
knowledge of VLS, no other person beneficially owned more than 5% of the        
outstanding VLS common stock as of the record date.                             

      This document was mailed to all VLS shareholders of record as of the
record date and constitutes notice of the VLS special meeting in conformity with
the requirements of the Minnesota Business Corporation Act.                     

VOTING OF PROXIES                                                               

         All properly executed proxies that are not revoked will be voted at the
VLS special meeting in accordance with the instructions contained in the proxy. 
If a shareholder signs and returns a proxy without indicating any voting        
instructions, the shares of VLS common stock that the proxy represents will be  
voted "FOR" the proposal to adopt and approve the merger agreement and approve  
the merger under the recommendation of the VLS board of directors or "FOR"      
adjournment or postponement of the VLS special meeting if an adjournment or     
postponement, in the discretion of the proxy holders, is determined to be       
necessary or desirable. A shareholder who has executed and returned a proxy may 
revoke it at any time before it is voted at the VLS special meeting by:         

(1)  executing and returning a proxy bearing a later date;    

  (2)  filing written notice of such revocation with the corporate
        secretary of VLS stating that the proxy is being revoked; or

(3)  attending the VLS special meeting and voting in person.  

         All written notices of revocation and other communications with respect
to revocation of VLS proxies should be sent to: Video Learning Systems, Inc.,   
6111 Blue Circle Drive, Minnetonka, Minnesota, 55343-9108, Attention: Secretary.
Attendance at the VLS special meeting, in and of itself, will not constitute a  
revocation of a proxy.                                                          

REQUIRED VOTE                                                                   

   Adoption and approval of the merger agreement and approval of the
merger require the affirmative vote of holders of a majority of the shares of   
VLS common stock outstanding as of the record date. Each shareholder of record  
of VLS common stock on the record date is entitled to cast one vote per share,  
exercisable in person or by properly executed proxy, on each matter properly    
submitted for the vote of the shareholders of VLS at the VLS special meeting.   

         At the record date for the special meeting, the directors and executive
officers of VLS owned approximately 21.1% of the outstanding shares of VLS      
common stock entitled to vote at such meeting. All of them have agreed to vote  
their shares for the adoption of the merger agreement and approval of the       
merger.                                                                         

QUORUM; ABSTENTIONS; BROKER NON-VOTES                                           

       The presence, in person or by properly executed proxy, of the holders
of a majority of the outstanding shares of VLS common stock entitled to vote at 
the VLS special meeting is necessary to constitute a quorum. Abstentions will be
counted for purposes of determining a quorum, but will have the effect of a vote
against                                                                         

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approval of the matters being voted upon. If a broker holding shares in street  
name returns an executed proxy that indicates that the broker does not have     
discretionary authority as to those shares to vote on one or more matters, those
shares will be considered represented at the VLS special meeting for purposes of
determining a quorum, but will have the effect of a vote against approval of the
matters being voted upon.                                                       

SOLICITATION OF PROXIES; EXPENSES                                               

       VLS will bear the cost of the solicitation of proxies and all related
costs. In addition, VLS may reimburse brokerage firms and other persons         
representing beneficial owners of shares for their expenses in forwarding       
solicitation materials to such beneficial owners. Certain directors, officers or
other employees of VLS may supplement original solicitation of proxies by mail  
with telephone, facsimile or personal solicitation, without payment of          
additional compensation.                                                        

OTHER MATTERS                                                                   

        At the date of this document, the VLS board of directors does not know
of any business to be presented at the special meeting other than as set forth  
in the notice accompanying this document. If any other matters should properly  
come before the special meeting, it is intended that the shares represented by  
proxies will be voted with respect to such matters in accordance with the       
judgment of the persons voting such proxies.                                    

 APPROVAL OF THE MERGER AND RELATED TRANSACTIONS

BACKGROUND OF THE MERGER                                                        

         The terms and conditions of the merger agreement and the merger are the
result of arms' length negotiations between representatives of Cardia and       
representatives of VLS. A summary of those negotiations follows:                

     VLS has not engaged in an active business operation since 1989. The
management of the company has explored and evaluated a number of potential      
opportunities for its business and assets since that time, including a number of
acquisition opportunities. VLS management has also considered engaging in a new 
line of business and the merits of liquidating its assets and distributing the  
proceeds to the company's shareholders. Peter R. Peterson, the Chief Executive  
Officer of VLS, believed that a merger would give VLS' shareholders an          
opportunity to participate in an active business enterprise and provide a       
mechanism for maximizing shareholder value. In May of 1999, Mr. Peterson        
contacted Joseph A. Marino, the Chief Executive Officer of Cardia, and proposed 
a merger transaction between VLS and Cardia. Mr. Marino expressed interest in   
the proposal, but no agreement on terms of a merger was reached during this     
discussion.                                                                     

        During subsequent meetings and negotiations between Mr. Marino and Mr.
Peterson in May and June of 1999, Mr. Marino proposed a merger which would      
result in VLS shareholders owning approximately 17% of the resulting company.   
Mr. Marino's proposal was based on his evaluation of the present value of the   
assets of VLS, which consisted of cash, cash equivalents, and a note receivable,
and his estimate of the both the present fair market value of VLS assets and the
potential for growth in the value of the shares of Cardia common stock. Mr.     
Marino's proposal also took into account the expense and time required to       
negotiate and consummate a merger transaction that would require the filing of a
registration statement with the Securities and Exchange Commission and the      
involvement of legal counsel and independent accountants on behalf of both      
Cardia and VLS. After considering Mr. Marino's proposal, Mr. Peterson indicated 
that it was acceptable to VLS management and that he would present the proposal 
to the VLS board of directors and, if the VLS board approved the transaction,   
the company would then submit the proposal to the VLS shareholders.             

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       Mr. Marino presented the transaction as discussed between himself and
Mr. Peterson to a special committee of the Cardia board of directors in June of 
1999. After consideration of the present value of the assets of VLS, the        
determined fair value of the Cardia common stock, the number of shares to be    
issued to VLS shareholders, the pro forma financial impact of the transaction   
and the estimated cost and time to complete the transaction, and other benefits 
and risks associated with the proposed transaction, the special committee of the
Cardia board of directors unanimously approved the transaction.                 

         Mr. Peterson presented the transaction as discussed between himself and
Mr. Marino to the VLS board of directors in June of 1999. After consideration of
the liquidation value of VLS, the number of shares of Cardia common stock to be 
received by VLS shareholders, the business and prospects of Cardia, the pro     
forma financial condition of the combined companies and other benefits and risks
associated with the proposed transaction, the VLS board unanimously approved the
transaction by written action effective as of July 1, 1999.                     

REASONS FOR THE MERGER                                                          

CARDIA'S REASONS FOR THE MERGER                               

        A special committee of Cardia's board of directors has determined that
the merger is fair to and in the best interests of Cardia and its shareholders. 
In reaching its determination, the special committee of the board of directors  
considered a number of factors, including the following:                        

*    the merger is an efficient way for Cardia to acquire cash
            necessary for Cardia to pursue its business plans and strategies
for growth;                                         

       *    the merger will enable Cardia to obtain the services of Peter R.
Peterson as a member of its board of directors; and 

        *    the merger will provide an efficient way for Cardia to expand the
   ownership and interest in the company and its business.

VLS' REASONS FOR THE MERGER                                   

       VLS' board of directors has determined that the merger is fair to and
in the best interests of VLS and its shareholders. In reaching its              
determination, the VLS board of directors considered a number of factors,       
including the following:                                                        

  *    the merger will provide holders of VLS common stock with an
              opportunity to obtain increased value through the potential growth
              of an operating business, as compared to VLS which has not engaged
    in any operational activity for approximately ten years;

  *    the merger will afford holders of VLS common stock with the
         opportunity to own stock in an active business enterprise and
             potentially participate in a market for their shares which is not
currently available to shareholders of VLS; and     

  *    the merger will offer holders of VLS common stock a greater
              diversification of risk by an investment in Cardia instead of VLS.

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         In the course of its deliberations, the VLS board of directors reviewed
a number of additional factors relevant to the merger, including, among others: 

*    the information concerning Cardia's business, prospects, 
        financial performance and condition, operations, technology,
product lines, management and competitive position; 

*    the potential market for the Cardia common stock;        

  *    the consideration that VLS shareholders will receive in the
merger;                                             

    *    the greater potential liquidity of the Cardia common stock as
compared with VLS common stock;                     

*    current industry and economic conditions;                

      *    the alternatives available to VLS compared to the consideration
      proposed to be paid to shareholders pursuant to the merger
agreement; and                                      

   *    the determination that the terms of the merger agreement are
           reasonable, including the provisions allowing VLS to respond to
          certain unsolicited inquiries regarding an acquisition of VLS.

    The VLS board of directors also considered a number of potentially
negative factors in its deliberations concerning the merger, including, but not 
limited to:                                                                     

      *    the loss of control over the future operations of VLS following
the merger;                                         

*    the other risks described above in "Risk Factors;" and   

*    the expected tax treatment of the merger.                

      The VLS board of directors believed that certain of these risks were
unlikely to occur or unlikely to have a material impact on the shareholders of  
VLS or the combined company, while others could be avoided or mitigated by VLS  
or Cardia, and that overall the risks associated with the merger were outweighed
by the potential benefits of the merger.                                        

       The foregoing discussion of information and factors considered by the
VLS board of directors is not intended to be all inclusive, but is believed to  
include all material factors considered by the VLS board of directors. In view  
of the wide variety of factors considered by the VLS board of directors, the VLS
board of directors did not find it practicable to quantify or otherwise assign  
relative weight to the specific factors considered. However, after taking into  
account all the factors set forth above, the VLS board of directors unanimously 
agreed that the merger agreement and the consummation of the merger were fair   
to, and in the best interests of VLS and its shareholders, and that VLS should  
proceed with the merger.                                                        

      A special committee of the Cardia board of directors also considered
certain potentially negative factors that may result from the merger, including:

      *    the potential dilutive effect on Cardia's common stock price if
             revenue and earnings expectations of the combined company are not
achieved;                                           

     *    the dilutive effect on Cardia's earnings per share in Cardia's
fiscal 1999; and                                    

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    *    the other risks and uncertainties discussed above under "Risk
Factors."                                           

       In analyzing the proposed merger, the special committee of the Cardia
board of directors did not view any single factor as determinative and did not  
quantify or assign weight to any of the factors. Rather, the special committee  
of the Cardia board made its determination based upon the total mix of          
information available to it.                                                    

RECOMMENDATION OF THE VLS BOARD                                                 

     The VLS board of directors has unanimously adopted and approved the
merger agreement and approved the merger, and recommends a vote "FOR" the       
adoption and approval of the merger agreement and approval of the merger by the 
VLS shareholders.                                                               

INTERESTS OF CERTAIN PERSONS IN THE MERGER                                      

      In considering the recommendation of the VLS board of directors with
respect to the merger and the merger agreement, shareholders should be aware    
that certain parties involved in, or associated with, the merger may have       
interests that could adversely affect their judgment with respect to the merger.

     As of June 30, 1999, the officers and directors of VLS beneficially
owned 224,875 shares (or approximately 21.1%) of VLS common stock. Pursuant to  
the merger agreement, the board of directors of VLS has, subject to the         
fiduciary duties of directors, agreed to use its best efforts to obtain the     
requisite shareholder approval of the merger.                                   

 Peter R. Peterson, Chairman of the Board of Directors and Chief
Executive Officer of VLS, will become a director of Cardia. Each director of    
Cardia who is not an employee may receive grants of options to purchase shares  
of Cardia common stock at the fair market value of such shares on the date of   
grant. Mr. Peterson owns 209,975 shares of VLS common stock, which represents   
approximately 19.7% of the outstanding VLS common stock.                        

         Joseph A. Marino, the Chief Executive Officer, President, Treasurer and
Chairman of the Board of Directors of Cardia, beneficially owns 75,000 shares of
common stock of VLS which represents approximately 7% of the issued and         
outstanding shares of VLS. In addition, Patrick Delaney, a partner in the law   
firm of Lindquist & Vennum P.L.L.P. which represents Cardia, beneficially owns  
27,875 shares of common stock of VLS, which represents approximately 2.6% of the
issued and outstanding shares of the company. Mr. Delaney also serves as        
Secretary of Cardia.                                                            

MATERIAL FEDERAL INCOME TAX CONSEQUENCES                                        

         The following discussion summarizes some of the material federal income
tax considerations that will generally be applicable to the holders of VLS      
common stock as a result of the merger. This discussion is not exhaustive of all
possible tax considerations and does not give a detailed description of any     
state, local or foreign tax considerations. This discussion also does not       
consider any aspect of federal income taxation that may be relevant to certain  
types of VLS shareholders who may be subject to special treatment under federal 
income tax laws.                                                                

         EACH HOLDER OF VLS COMMON STOCK IS URGED AND EXPECTED TO CONSULT HIS OR
HER OWN TAX AND FINANCIAL ADVISORS AS TO THE EFFECT OF SUCH FEDERAL INCOME TAX  
CONSEQUENCES ON HIS OR HER OWN PARTICULAR FACTS AND CIRCUMSTANCES AND ALSO AS TO
ANY STATE, LOCAL, FOREIGN OR OTHER FEDERAL TAX CONSEQUENCES ARISING OUT OF THE  
MERGER.                                                                         

    This discussion is based on the current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury Regulations now in effect 
thereunder, judicial and administrative decisions, and Internal                 

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Revenue Service rulings, all of which are subject to change, and certain factual
assumptions related to the ownership and operation of VLS and Cardia. There can 
be no assurance that the legal authorities on which this discussion is based    
will not change, perhaps retroactively, that the factual assumptions underlying 
this discussion will be accurate, or that there will not be a change in the     
circumstances of VLS or Cardia that would affect this discussion. Neither VLS   
nor Cardia plan to obtain any rulings from the IRS, or any opinions of tax      
experts, concerning federal income tax issues with respect to the merger. Thus, 
no assurance can be provided that the statements set forth in this discussion   
will not be challenged by the Internal Revenue Service or will be sustained if  
challenged.                                                                     

         The merger will be treated for federal income tax purposes as a taxable
sale of the shares of VLS common stock held by VLS shareholders. Accordingly,   
the merger will result in a VLS shareholder recognizing gain or loss with       
respect to each share of VLS common stock exchanged for Cardia common stock in  
an amount equal to the difference between the shareholder's basis in the VLS    
shares and the fair market value, as of the effective time of the merger, of the
Cardia common stock and any cash in lieu of a fractional share received in      
exchange for the VLS share. A shareholder's aggregate basis in the Cardia common
stock received would equal its fair market value on the date of the exchange,   
and the shareholder's holding period for the Cardia common stock would begin the
day after the effective time of the merger.                                     

         Cardia's common stock does not currently trade on any exchange or other
market. Cardia has determined, however, that the fair market value of a share of
its common stock is $1.00. For purposes of that determination, Cardia has taken 
into account the following facts:                                               

            *    All issuances of Cardia common stock have been at $1.00 per
share.                                    

          *    Cardia sold 625,000 shares of its common stock during the
               first quarter of 1999 at a price of $1.00 per share, with
the most recent sales occurring in March. 

           *    Grants of options to purchase Cardia common stock have had
an exercise price of $1.00 per share.     

            *    Cardia's net tangible book value (total assets less prepaid
                  expenses and intangible assets, minus total liabilities) was
        approximately $1.00 per share as of June 30, 1999.

       *    A special committee of Cardia's board of directors has
              determined that the reasonable value of the shares to be
                  issued to VLS shareholders in the merger is $1.00 per share.

        Cardia's determination of the fair market value of its common stock is
subject to interpretation by the Internal Revenue Service. For federal income   
tax purposes, the Internal Revenue Service defines fair market value as the     
price that a willing buyer would pay a willing seller, both persons having      
reasonable knowledge of all of the material facts and neither person being under
a compulsion to buy or sell. Further, the Internal Revenue Service has stated   
that sales of similar property on or about the same date may be helpful in      
determining the fair market value of the property. If the Internal Revenue      
Service determines that the fair market value of the Cardia common stock issued 
in the merger is different than $1.00 per share, the amount of gain or loss     
recognized and reported by VLS shareholders will change.                        

      The Taxpayer Relief Act of 1997 altered the taxation of capital gain
income. Under the Taxpayer Relief Act, individuals, trusts and estates that hold
certain investments for more than 18 months may be taxed at a maximum long-term 
capital gain rate of 20% on the sale or exchange of those investments.          
Individuals, trusts and estates that hold certain assets for more than one year 
but not more than 18 months may be taxed at a maximum long-term capital gain    
rate of 28% on the sale or exchange of those investments. The Taxpayer Relief   
Act also provides a maximum rate of 25% for "unrecaptured Section 1250 gain" for
individuals, trusts and estates, special rules for "qualified 5-year gain" and  
other changes to prior law. The IRS Restructuring Act of 1998, however, reduced 
the holding period requirement established by the Taxpayer Relief Act for the   
application of the 20% and                                                      

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25% capital gain tax rates to 12 months from 18 months for sales of capital     
assets after December 31, 1997 and thus eliminated the 28% rate. The Taxpayer   
Relief Act allows the Internal Revenue Service to prescribe regulations on how  
the Taxpayer Relief Act's capital gain rates will apply to sales of capital     
assets by "pass-through" entities. Again, VLS shareholders are urged and        
expected to consult with their own tax advisors with respect to the rules       
contained in the Taxpayer Relief Act and the IRS Restructuring Act and the      
effect of these rules on their own particular tax situation.                    

ACCOUNTING TREATMENT OF THE MERGER                                              

         The acquisition of VLS by Cardia will be in the form of a merger of VLS
with and into Cardia. Accounting for the merger will result in an adjustment of 
historical cost basis of the assets and liabilities of VLS. Because VLS has not 
conducted an active trade or business, for accounting purposes the merger       
transaction will be accounted for as a purchase of the net assets of VLS, which 
consist principally of cash, cash equivalents and a note receivable.            

EXPENSES                                                                        

   Cardia and VLS will pay their own expenses in connection with the
merger and the transactions contemplated thereby, including professional fees.  

APPRAISAL RIGHTS                                                                

        Although VLS' management believes that the following discussion of the
law pertaining to dissenter's rights under the Minnesota Business Corporation   
Act (the "MBCA") provides an accurate description of the material provisions of 
such law, such discussion does not purport to be complete and is qualified in   
its entirety by reference to the full text of Sections 302A.471 and 302A.473 of 
the MBCA attached to this document as a Appendix B. Any shareholder of VLS who  
wishes to exercise such dissenters' rights or who wishes to preserve his or her 
right to do so should review the following discussion and Appendix B carefully, 
because failure to comply timely and properly with the procedures specified will
result in the loss of dissenters' rights in connection with the merger.         

PROCEDURES TO PRESERVE DISSENTERS' RIGHTS                     

     Under Minnesota law, any holder of VLS common stock who follows the
procedures set forth in Section 302A.473 of the MBCA will be entitled to receive
payment in cash of the "fair value" of such shareholder's shares. As used in    
Section 302A.473, the "fair value of the shares" means the value of the shares  
of VLS immediately before the effective date of the merger.                     

       The merger agreement must be approved by the holders of a majority of
the outstanding shares of common stock of VLS.                                  

Under Section 302A.473 of the MBCA, if a corporation calls a  
shareholder meeting at which a plan of merger to which such corporation is a    
party is to be voted upon, the notice of the meeting must inform each           
shareholder of the right to dissent and must include a copy of Section 302A.471 
and Section 302A.473 of the MBCA and a brief description of the procedure to be 
followed under such sections. This document constitutes such notice to the      
shareholders of VLS, and the applicable statutory provisions of the MBCA are    
attached to this document as a Appendix B.                                      

        A shareholder who wishes to exercise dissenters' rights must file with
VLS, before the vote on the merger agreement, a written notice of intent to     
demand the fair value of the shares owned by such shareholder and must not vote 
his or her shares in favor of the merger agreement. A vote against the merger   
agreement will not in itself                                                    

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constitute such a written notice, and a failure to vote will not affect the     
validity of a timely written notice. However, the submission of a blank proxy   
will constitute a vote in favor of the merger agreement and a waiver of         
statutory dissenters' rights.                                                   

        The written notice should be executed by or on behalf of the holder of
record fully and correctly, as the holder's name appears on the holder's stock  
certificates. If the shares of VLS common stock are owned of record in a        
fiduciary capacity, such as by a trustee, guardian, or custodian, execution of  
the written notice should be made in that capacity. If the shares of VLS common 
stock are owned of record by a corporation or other organization, the written   
notice must be executed by a duly authorized legal representative, such as an   
officer. If the shares of VLS common stock are owned of record by more than one 
person, as in a joint tenancy or tenancy in common, the notice should be        
executed by or on behalf of all joint owners. An authorized agent, including one
or more joint owners, may execute a written notice on behalf of a holder of     
record; however, the agent must identify the record owner or owners and, in     
executing the written notice, must expressly disclose that the agent is agent   
for such owner or owners.                                                       

      All written notices should be sent or delivered to Paul R. Peterson,
Secretary, Video Learning Systems, Inc., 6111 Blue Circle Drive, Minnetonka,    
Minnesota 55343-9108, so as to be received prior to the vote on the merger      
agreement and the merger.                                                       

     After the merger agreement has been approved by the shareholders of
VLS, VLS must send a written notice to all shareholders who have filed with VLS 
before the vote on the merger agreement a written notice of intent to demand the
fair value of the shares owned by such shareholder and have not voted their     
shares in favor of the merger agreement. The notice from VLS must contain:      

      1.  the address to which a demand for payment and stock certificates
            must be sent in order to obtain payment and the date by which they
must be received;                                     

        2.  a form to be used to certify the date on which the shareholder, or
        the beneficial owner on whose behalf the shareholder dissents,
           acquired the shares or an interest in them and to demand payment;
and                                                   

      3.  a copy of Sections 302A.471 and 302A.473 of the MBCA and a brief
           description of the procedures to be followed under such sections.

In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit his shares within 30 days after the 
above-described written notice is given, but the dissenter retains all other    
rights of a shareholder until the merger takes effect.                          

        A shareholder may not assert dissenters' rights as to less than all of
the shares registered in the name of the shareholder. However, a record owner,  
such as a broker who holds shares of VLS common stock as a nominee for several  
beneficial owners, may exercise dissenters' rights with respect to all of the   
shares of VLS common stock held for one or more beneficial owners while not     
exercising such rights with respect to the shares of VLS common stock held for  
other beneficial owners. In such case, the written notice of intent to demand   
the fair value of the shares of VLS common stock must disclose the name and     
address of each beneficial owner on whose behalf the shareholder dissents and   
the number of shares of VLS common stock beneficially owned by each. In that    
event, the rights of the dissenter will be determined as if the shares as to    
which the shareholder has dissented and the other shares were registered in the 
names of different shareholders. If no such information is provided, the written
notice will be presumed to cover all shares of VLS common stock held in the name
of the record owner.                                                            

         A person who is the beneficial owner of shares of VLS common stock held
in a brokerage account or other nominee form and who wishes to exercise         
dissenters' rights must take all necessary steps in order that a written notice 
is timely filed by the record holder of such shares. Alternatively, such        
beneficial owner may assert                                                     

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dissenters' rights with respect to shares held on his or her behalf and will be 
treated as a dissenting shareholder under the terms of Sections 302A.471 and    
302A.473, if the beneficial owner submits a signed written consent of the record
holder to VLS at the time of or before the assertion of such rights. The written
consent of the record holder will serve to verify the beneficial owner's        
entitlement and allow the record holder to protect any security interest in the 
shares.                                                                         

       Beneficial owners of VLS common stock are urged to consult with their
brokers to determine the appropriate procedures for asserting dissenters'       
rights.                                                                         

PROCEDURES FOLLOWING AN ASSERTION OF DISSENTERS' RIGHTS       

       After the effective date of the merger, or after VLS receives a valid
demand for payment, whichever is later, VLS must remit to each dissenting       
shareholder who has not voted his or her shares in favor of the merger agreement
and has filed with VLS before the vote on the merger agreement a written notice 
of intent to demand the fair value of the shares owned by such shareholder and  
who has demanded payment and deposited his or her shares, the amount VLS        
estimates to be the fair value of the shares, plus interest ("interest"         
commences five days after the effective date of the merger up to and including  
the date of payment, calculated at a rate provided under Minnesota law for      
interest on verdicts and judgments), accompanied by:                            

     1.  VLS' closing balance sheet and statement of income for a fiscal
             year ended not more than 16 months before the effective date of the
      merger, together with the latest available interim financial
statements;                                           

    2.  An estimate by VLS of the fair value of the shares and a brief
   description of the method used to reach the estimate; and

       3.  A copy of Sections 302A.471 and 302A.473 of the MBCA, and a brief
  description of the procedure to be followed in demanding
supplemental payment.                                 

       VLS may withhold the above-described remittance from a person who was
not a shareholder on the date the merger agreement was first announced to the   
public or who is dissenting on behalf of a person who was not a beneficial owner
on that date. If the dissenter has not voted his or her shares in favor of the  
merger agreement and has filed with VLS before the vote on the merger agreement 
a written notice of intent to demand the fair value of the shares owned by such 
shareholder, VLS must forward to such dissenter the materials described in the  
preceding paragraph, a statement of the reason for withholding the remittance,  
and an offer to pay to the dissenter the amount listed in the materials if the  
dissenter agrees to accept that amount in full satisfaction. The dissenter may  
decline the offer and demand payment of the dissenter's own estimate of the fair
market value of the shares, plus interest, by written notice to VLS. Failure to 
do so entitles the dissenter only to the amount offered. If the dissenter makes 
demand, the procedures, costs, fees and expenses described below for petitioning
the court shall apply.                                                          

If VLS fails to remit payment within 60 days of the deposit of
certificates, it must return all deposited certificates and cancel all transfer 
restrictions. However, VLS may require a deposit or restrict transfer at a later
time and again give notice that contains:                                       

   1.  The address to which a demand for payment and certificates of
             certificated shares must be sent in order to obtain payment and the
date by which they must be received;                  

        2.  A form to be used to certify the date on which the shareholder, or
        the beneficial owner on whose behalf the shareholder dissents,
           acquired the shares or an interest in them and to demand payment;
and                                                   

      3.  A copy of Sections 302A.471 and 302A.473 of the MBCA and a brief
           description of the procedures to be followed under such sections.

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      If a dissenter believes that the amount remitted by VLS is less than
the fair value of the shares, plus interest, the dissenter may give written     
notice to VLS of the dissenter's own estimate of the fair value of shares, plus 
interest, within 30 days after VLS mails the remittance, and demand payment of  
the difference. Otherwise, a dissenter is entitled only to the amount remitted  
by VLS.                                                                         

       If VLS receives a demand, it must, within 60 days after receiving the
demand, either pay to the dissenter the amount demanded or agreed to by the     
dissenter after discussion with VLS or file in the appropriate court a petition 
requesting that the court determine the fair value of the shares, plus interest.
The petition must name as parties all dissenters who made a demand for payment  
and who have not reached agreement with VLS. The jurisdiction of the court is   
plenary and exclusive. The court may appoint appraisers, with powers and        
authorities the court deems proper, to receive evidence on and recommend the    
amount of the fair value of the shares. The court must determine whether the    
shareholder or shareholders in question have fully complied with the            
requirements of Section 302A.473 of the MBCA and must determine the fair value  
of the shares, taking into account any and all factors the court finds relevant,
computed by any method or combination of methods that the court, in its         
discretion, sees fit to use, whether or not used by VLS or by a dissenter. The  
fair value of the shares as determined by the court is binding on all           
shareholders, wherever located. A dissenter is entitled to judgment for the     
amount by which the fair value of the shares as determined by the court, plus   
interest, exceeds the amount, if any, remitted by VLS, but shall not be liable  
to VLS for the amount, if any, by which the amount, if any, remitted to the     
dissenter exceeds the fair value of the shares as determined by the court, plus 
interest.                                                                       

        The court must determine the costs and expenses of any appraisers in a
proceeding under the preceding paragraph, including the reasonable expenses and 
compensation of any appraisers appointed by the court, and must assess these    
costs and expenses against VLS, except that the court may assess part or all of 
those costs and expenses against a dissenter whose demand is found to be        
arbitrary, vexatious, or not in good faith.                                     

     If the court finds that VLS has failed to comply substantially with
Section 302A.473 of the MBCA, the court may assess all fees and expenses of any 
experts or attorneys as the court deems equitable. These fees and expenses may  
also be assessed against a person who has acted arbitrarily, vexatiously, or not
in good faith in bringing the proceeding and may be awarded to a party injured  
by those actions.                                                               

        FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTIONS 302A.471 AND 302A.473
OF THE MINNESOTA BUSINESS CORPORATION ACT FOR PERFECTING DISSENTERS' RIGHTS MAY 
RESULT IN THE LOSS OF THOSE RIGHTS.                                             

RESALE OF CARDIA COMMON STOCK                                                   

      The Cardia common stock issued in connection with the merger will be
freely transferable, except that shares issued to any VLS shareholder who is an 
affiliate of VLS or who becomes an affiliate of Cardia are subject to certain   
restrictions on resale, transfer or other disposition. An affiliate is defined  
generally as persons who control, are controlled by or are under common control 
with a company at the time of determination. Affiliates generally include       
directors and executive officers of VLS. Cardia common stock received by those  
shareholders who are deemed to be affiliates of VLS may be resold without       
registration as provided by Rules 144 and 145, or as otherwise permitted under  
the Securities Act of 1933. Assuming Cardia continues to be subject to, and     
complies with, the reporting requirements of the Securities Exchange Act of     
1934, Rule 145(d) allows limited resales by such affiliates without registration
if the holder: (i) has held the shares of Cardia common stock for one year and  
is not an affiliate of Cardia at the time of sale; or (ii) has held the shares  
of Cardia common stock for two years and has not been an affiliate of Cardia for
at least three months; or (iii) sells the shares in a Rule 144 brokers'         
transaction in a manner and subject to the quantity limitations of such rule.   
This document does not cover any resales of Cardia common stock received by     
affiliates of VLS, their family members or related interests.                   

   EACH SHAREHOLDER WHO MAY BE DEEMED TO BE AN AFFILIATE IS URGED TO
CONSULT INDEPENDENT COUNSEL CONCERNING APPLICABLE RESTRICTIONS ON RESALE.       

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MATERIAL TERMS OF THE MERGER AGREEMENT

 The following description of the merger agreement describes the
material terms of the merger agreement. The full text of the merger agreement is
attached as Appendix A to this document and is incorporated by reference.       
We encourage you to read the entire merger agreement.                           

STRUCTURE OF THE MERGER                                                         

      Under the merger agreement, VLS will merge with and into Cardia such
that the separate legal existence of VLS will cease. All property, rights,      
privileges, powers and franchises of VLS will vest in Cardia.                   

EFFECTIVE TIME OF THE MERGER                                                    

        The merger will become effective when the articles of merger are filed
with the Secretary of State of the State of Minnesota. If all the conditions to 
the merger contained in the merger agreement are satisfied or waived, we        
anticipate the effective time will occur on the date of the special meeting or  
as soon as practicable following the special meeting.                           

MERGER CONSIDERATION                                                            

At the effective time, each share of VLS common stock will    
automatically be converted into a fraction of a share of Cardia common stock    
equal to 200,000 shares of Cardia common stock divided by the sum of the total  
number of shares of VLS common stock outstanding immediately prior to the       
effective time of the merger such that each holder of VLS a common stock will   
have a right to receive .188 of a share of Cardia common stock. Based upon the  
merger consideration, holders of VLS common stock will own approximately 16.7%  
of the outstanding common stock of Cardia.                                      

       Cardia will not issue any fractional shares in the merger. Holders of
VLS common stock will receive a cash payment in the amount determined by        
multiplying $1.00 by the fractional share of Cardia common stock to which such  
shareholder would otherwise be entitled. Cardia will make available to the      
exchange agent any cash necessary for this purpose.                             

EXCHANGE OF SHARES                                                              

       We will appoint an exchange agent to handle the exchange of VLS stock
certificates in the merger for Cardia common stock and the payment of cash for  
fractional shares. Soon after the closing, the exchange agent will send to each 
holder of VLS common stock a letter of transmittal for use in the exchange and  
instructions explaining how to surrender VLS stock certificates to the exchange 
agent. Holders of VLS common stock that surrender their certificates to the     
exchange agent, together with a properly completed letter of transmittal, will  
receive the appropriate merger consideration. Holders of unexchanged shares of  
VLS will not be entitled to receive any dividends of other distributions which  
may be payable by Cardia after the closing until their certificates are         
surrendered.                                                                    

CONDITIONS TO THE MERGER                                                        

CONDITIONS TO THE OBLIGATIONS OF EACH PARTY                   

         The obligations of Cardia and VLS to complete the merger are subject to
the following conditions:                                                       

     *    adoption of the merger agreement and approval of the merger by
the VLS shareholders;                               

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    *    absence of any final order, decree or legal action making the
merger illegal or prohibiting the merger;           

      *    receipt of all material approvals and consents of third parties
necessary to consummate the merger;                 

 *    receipt of all permits or other authorizations required by
           applicable state securities laws for the Cardia common stock to
be issued in connection with the merger; and        

        *    the Registration Statement of which this document is a part being
declared effective under the Securities Act of 1993.

CONDITIONS TO THE OBLIGATION OF VLS                           

The obligation of VLS to complete the merger is subject to the
following additional conditions:                                                

 *    compliance by Cardia with its obligations under the merger
           agreement and the representations and warranties made by Cardia
          in the merger agreement being true as of the effective time of
       the merger as if made at that time. Any inaccuracies in the
     representations and warranties will be disregarded if the
    circumstances giving rise to all inaccuracies considered
       collectively do not constitute a material adverse effect on
Cardia; and                                         

       *    Lindquist & Vennum P.L.L.P. delivering to VLS its legal opinion.

CONDITIONS TO THE OBLIGATION OF CARDIA                        

   The obligation of Cardia to complete the merger is subject to the
following additional conditions:                                                

        *    compliance by VLS with its obligations under the merger agreement
            and the representations and warranties made by VLS in the merger
             agreement being true as of the effective time of the merger as if
      made at that time. Any inaccuracies in representations and
           warranties will be disregarded if the circumstances giving rise
           to all inaccuracies considered collectively do not constitute a
material adverse effect on VLS; and                 

     *    Duckson & Carlson, LLC delivering to Cardia its legal opinion.

  For purposes of the merger agreement, the term "Material Adverse
Effect" means an effect that is, or at the time of the effect it is probable    
that the effect will be, materially adverse (1) to the company's business,      
results of operation or financial condition, (2) to the ability of the company  
to conduct its business, as presently conducted, following the effective time,  
or the ability of Cardia to derive the benefits of owning all of the stock of   
the surviving corporation, or (3) to the company's ability to perform any of its
material obligations under the merger agreement or to consummate the merger.    

REPRESENTATIONS AND WARRANTIES                                                  

        The merger agreement contains customary representations and warranties
of VLS and Cardia relating to, among other things, aspects of the respective    
businesses of the companies and other matters. The representations and          
warranties expire at the effective time of the merger.                          

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COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER                              

AFFIRMATIVE COVENANTS OF VLS                                  

        VLS has agreed that, prior to the effective time, except to the extent
Cardia shall consent in writing, VLS will:                                      

     *    conduct its operations, to the extent commercially reasonable,
      according to its ordinary and usual course of business and
consistent with past practice;                      

 *    use commercially reasonable efforts to obtain all material
           approvals and consents of third parties necessary to consummate
  the transactions contemplated by the merger agreement;

      *    notify Cardia of the occurrence of any event that will or could
             reasonably be expected to cause VLS to fail any of the conditions
             to the obligations of each party or of Cardia as set forth above;
and                                                 

     *    call and hold a meeting of its shareholders for the purpose of
    considering and acting upon a proposal to consummate the
transactions contemplated by the merger agreement.  

AFFIRMATIVE COVENANTS OF CARDIA                               

         Cardia has agreed that, prior to the effective time, it will, except to
the extent that VLS shall consent in writing, Cardia will:                      

     *    conduct its operations, to the extent commercially reasonable,
      according to its ordinary and usual course of business and
consistent with past practice;                      

 *    use commercially reasonable efforts to obtain all material
           approvals and consents of third parties necessary to consummate
  the transactions contemplated by the merger agreement;

   *    notify VLS of the occurrence of any event that will or could
     reasonably be expected to cause Cardia to fail any of the
        conditions to the obligations of each party or of VLS as set
forth above; and                                    

        *    use commercially reasonable efforts following the merger to cause
         the Cardia common stock to be quoted in the "pink sheets" and
      approved for trading on the local over-the-counter market.

MUTUAL COVENANTS OF BOTH CARDIA AND VLS                       

         Cardia and VLS have each agreed that, prior to the effective time, they
will:                                                                           

     *    permit the other company to inspect its records and to consult
with its officers, employees, consultants, advisors,
         distributors, customers, suppliers and other companies having
business with VLS during normal business hours;     

        *    notify the other company of the occurrence of any event that will
             or could reasonably be expected to result in a failure to satisfy
certain conditions of the merger;                   

        *    use commercially reasonable efforts to have declared effective or
             approved all documents and notifications with any governmental or
regulatory bodies; and                              

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       *    use commercially reasonable efforts to take all action necessary
   to consummate the transactions in the merger agreement.

LIMITATION ON DISCUSSING OR NEGOTIATING OTHER TRANSACTION PROPOSALS             

VLS has agreed not to, directly or indirectly:                

        *    solicit, knowingly encourage, initiate, or participate in any way
         in discussions or negotiations with, or knowingly provide any
             nonpublic information to, a third party concerning an alternative
       transaction. An alternative transaction includes any tender
         offer, exchange offer, merger, consolidation, share exchange,
          business combination or similar transaction, an acquisition of
             more than 50% of the VLS common stock or a sale, lease, exchange,
           license, transfer or other disposition of more than 50% of VLS'
    assets in a single or series of related transactions; or

       *    otherwise knowingly facilitate any effort or attempt to propose,
make or implement an alternative transaction.       

 These clauses and the other provisions of the merger agreement,
however, will not prohibit VLS from, prior to the vote of the VLS shareholders  
in the merger, furnishing nonpublic information to or entering into discussions 
or negotiations with any third party that makes an unsolicited superior         
proposal, defined below, if, and only to the extent that                        

      *    VLS' board of directors reasonably and in good faith determines
           that failure to take that action would be inconsistent with its
fiduciary duties to VLS' shareholders;              

    *    prior to furnishing nonpublic information to or entering into
     discussions or negotiations with the third party, VLS (1)
        provides written notice to Cardia that it intends to furnish
           information to or enter into discussions or negotiations with a
        third party making a superior proposal, naming the person or
          entity making the superior proposal and (2) receives from such
           third party an executed confidentiality agreement with terms no
         less favorable to VLS than the confidentiality agreement with
Cardia; and                                         

        *    VLS provides Cardia with all nonpublic information to be provided
            to the third party and keeps Cardia informed, on a daily or more
           regular basis of the status, terms and conditions and all other
   material information with respect to any discussions or
negotiations.                                       

    For purposes of the merger agreement, the term "Superior Proposal"
means a proposal for an alternative transaction that the VLS board of directors 
determines, reasonably and in good faith to be more favorable to VLS'           
shareholders than the merger. This determination must be made after consultation
with VLS' financial advisors, taking into account the likelihood of consummation
of the alternative transaction, including, but not limited to, the conditions to
consummation and the consequences under the alternative transaction of any      
material adverse effects or changes in VLS.                                     

TERMINATION OF THE AGREEMENT                                                    

 The merger agreement may be terminated at any time prior to the
effective time as follows:                                                      

     *    by mutual written consent of Cardia and VLS duly authorized by
the board of directors of each Cardia and VLS;      

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        *    by Cardia or VLS if a court or an administrative, governmental or
        regulatory authority has issued a final nonappealable order,
             decree or ruling, or taken any other action, having the effect of
         permanently restraining, enjoining or prohibiting the merger;

     *    by Cardia or VLS if VLS' shareholders do not approve and adopt
       the merger agreement and the merger (however, such right to
           terminate will not be available to any company that breached in
           any material respect its obligations under the merger agreement
             in a manner that proximately contributed to the failure to obtain
that shareholder approval);                         

*    by Cardia if                                             

             -    VLS has breached its obligations with respect to alternative
transactions as discussed above;          

           -    VLS' board of directors recommends, approves or authorizes
           VLS' acceptance or execution of a letter of intent or
       definitive agreement providing for an alternative
transaction;                              

            -    VLS' board of directors has modified in a manner materially
                adverse to Cardia, or withdrawn, its recommendation of the
merger agreement; or                      

            -    a tender offer or exchange offer for any outstanding shares
           of VLS common stock is commenced and the VLS board of
                directors, within 10 days of such tender offer or exchange
                  offer is commenced, fails to recommend against acceptance or
               the tender offer by its shareholders or exchange offer or
             takes no position with respect to the acceptance of the
    tender or exchange offer by VLS' shareholders.

        *    by Cardia or VLS prior to the approval by the shareholders of VLS
if                                                  

           -    VLS' board of directors has authorized VLS to enter into a
                letter of intent or binding written agreement concerning a
                 superior proposal and has provided written notice to Cardia
of the proposal;                          

            -    Cardia does not make, within 10 business days after receipt
               of VLS' written notice of its intention to enter into the
                  letter of intent or binding agreement, an offer that the VLS
       board determines is at least as favorable to VLS'
shareholders as the superior proposal; and

             -    upon a termination under these circumstances, VLS agrees not
              to enter into such a letter of intent until at least the
             eleventh business day after Cardia has received written
              notice from VLS and to notify Cardia of its intention to
             enter into such a letter of intent or binding agreement
changes.                                  

    *    by Cardia if VLS is not in material breach of its obligations
           under the merger agreement and there has been a material breach
            by VLS of any of VLS' representations, warranties or obligations
    under the merger agreement so that the conditions of the
             obligations of Cardia to close the merger cannot be satisfied and
     the breach cannot be cured by VLS through the exercise of
reasonable efforts; or                              

    *    by VLS if Cardia is not in material breach of its obligations
       under the agreement and there has been a material breach by
    Cardia of any of Cardia's representations, warranties or
obligations                                         

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    under the merger agreement so that the conditions to the
          obligations of VLS to close the merger cannot be satisfied and
        the breach cannot be cured by Cardia through the exercise of
reasonable efforts.                                 

INFORMATION WITH RESPECT TO CARDIA

BUSINESS OF CARDIA                                                              

INTRODUCTION                                                  

         Cardia, Inc., a Minnesota corporation, was formed in October of 1998 as
a subsidiary of Applied Biometrics, Inc. to develop, manufacture and market     
transcatheter closure device products for the repair of certain cardiac defects.
These products are based, in part, on certain intellectual property rights      
Applied Biometrics acquired in November of 1997 from Bernhard Schneidt and Dr.  
Rainer Schrader. Prior to October of 1998, a division of Applied Biometrics     
engaged in the development of transcatheter closure devices.                    

        On February 11, 1999, Applied Biometrics distributed 375,000 shares of
the Company's common stock to Applied Biometrics shareholders. Concurrent with  
the distribution, Cardia sold 125,000 shares of Cardia common stock at a price  
of $1.00 per share to an officer of the company.                                

       Subsequent to the distribution, Cardia completed a rights offering of
its common stock to sell an aggregate of 500,000 shares of common stock at a    
subscription price of $1.00 per share, on the basis of one right for each share 
of Cardia stock held by a shareholder immediately after the distribution.       

PRODUCTS                                                      

    Transcatheter closure devices are an entirely new family of small,
implantable devices which are delivered through a catheter inserted into a major
blood vessel to permanently repair certain cardiac defects in children and      
adults. The procedure is performed in a cardiac catheterization laboratory and  
is intended to reduce the need for open heart surgery, which is currently the   
accepted method of repairing these defects. Cardia is currently developing these
closure devices and selling them on an experimental basis in Europe. Cardia     
hopes to develop a product family that will be capable of providing an          
effective, nonsurgical method of correcting a variety of cardiac defects. Cardia
believes its closure devices offer certain advantages over transcatheter closure
devices offered by its competitors.                                             

         Cardia is currently marketing and selling a device for the closure of a
cardiac defect known as patent ductus arteriosus. This defect is an abnormal    
passage between two major vessels of the heart and is generally corrected in    
children. Cardia is marketing and selling this device on an experimental basis  
in Europe only. That product has been implanted successfully in over 150 human  
cases.                                                                          

Cardia is also currently focusing significant development and 
regulatory approval efforts on a closure device for the correction of another   
cardiac defect known as patent foramen ovale. The foramen ovale defect is an    
abnormal passage between the right and left chambers of the heart and is        
generally corrected in adults. Cardia expects to complete enhancements to its   
adult device in the near future and intends to begin marketing and distributing 
the product in Europe after certain regulatory requirements have been met.      

 Since the purchase of its closure device technology, Cardia has
effected minimal sales of its pediatric device, and Cardia has turned its focus 
to the adult device. During 1998, the adult product was implanted successfully  
in over 30 human cases on an experimental basis. Cardia is currently collecting 
data from follow-up examinations of patients who have received Cardia's closure 
devices. Follow-up data is extremely limited to date.                           

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Cardia is aware of fractures or bends that have occurred in certain metal       
components of its own and closure device products of other manufacturers. Such  
fractures and bends, however, are not generally regarded as having significant  
potential for clinical risks. Cardia intends to develop its products in a manner
designed to avoid such problems in the future.                                  

STRATEGY                                                      

 Cardia is currently developing two transcatheter closure device
products, one for the pediatric defect market and one for the adult defect      
market. Cardia's pediatric closure device is currently being marketed on an     
experimental basis in Germany and Switzerland. Cardia is currently seeking the  
necessary regulatory approval to market this device on a broader basis in       
additional European Union countries. Cardia intends to commence the process for 
pursuing FDA approval in the United States following regulatory approval in     
Europe, if obtained.                                                            

Cardia estimates that the market for adult closure devices is 
significantly larger than the market for pediatric closure devices. Cardia,     
therefore, intends to focus most of its resources during the next twelve months 
on continuing to develop, test and pursue regulatory approval to market and sell
its adult line of closure devices in Europe and the United States.              

     Initial development and testing efforts are focused on the European
market, where Cardia has received certain certifications and has commenced the  
process for obtaining additional required certifications for its pediatric and  
adult products. These certifications are required for the general sale of       
medical devices in Europe. Cardia anticipates receiving the necessary           
certifications during the second half of 1999. Cardia is currently selling its  
pediatric and adult devices on a very limited basis in Germany and Switzerland  
in reliance on an experimental device process that is restrictive, costly and   
time consuming. If it obtains the additional required certifications, Cardia    
expects to expand its marketing and sales endeavors for its closure devices to  
other European countries. These certifications would allow Cardia to expand its 
marketing efforts in Europe and would reduce the cost and complexity of the     
marketing and sales process. There can be no assurance that Cardia will be able 
to obtain the additional required certifications.                               

       Cardia has not determined when it will commence the process to pursue
FDA approval for its products under development. It does not currently intend,  
however, to pursue FDA approval until it has completed its clinical testing and 
certification processes in Europe. There can be no assurance that Cardia will be
able to obtain FDA approval for any of its products under development.          

MARKETING, SALES AND DISTRIBUTION                             

         Cardia believes its closure devices under development will have a broad
range of applications for the closure of congenital and acquired cardiac        
defects. Cardia's pediatric closure device has the potential to reduce the need 
for open heart surgery as the method of closure in many of the nearly 14,000    
cases annually in the United States and Europe. Cardia also believes that the   
adult cardiac defect, which may be a cause of paradoxical or otherwise          
inexplicable strokes, represents an even larger market for the prevention of    
recurring embolic events. Cardia estimates that, as a result of the recent      
development of an accurate test for detecting adult cardiac defects in victims  
of paradoxical strokes, there may be more than 250,000 adult closure cases      
annually in the United States and Europe. There is, however, no current         
consensus on the size of the adult closure market.                              

       Cardia's initial full-scale marketing and sales efforts will commence
in Europe immediately following Cardia's receipt of all necessary               
certifications. Sales and distribution efforts in European countries will be    
conducted through either a direct sales force or specialized distributors,      
depending on the country. Cardia expects to use a direct sales force in the     
United States when sales are permitted.                                         

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   Cardia intends to create a market for its adult closure device by
focusing on neurologists and cardiologists. Neurologists are important to the   
process because they are often the medical professionals who first see victims  
of paradoxical strokes. If a neurologist determines, via testing, that a cardiac
defect is the cause of a paradoxical stroke and should be closed, the patient is
referred to a cardiologist. Cardia's adult closure device is implanted by a     
cardiologist in a cathlab, using standard catheterization procedures. The       
implantation procedure is minimally invasive, and the patient can usually be    
sent home within twenty-four hours. Cardia's goal is to demonstrate to          
neurologists and cardiologists that its closure device products under           
development are a safe, effective, minimally invasive alternative to open heart 
surgery.                                                                        

RESEARCH AND DEVELOPMENT                                      

       Cardia's ongoing plans for research and development for its pediatric
and adult closure devices include further improvements of the acquired          
technology and investigation into modified devices for new applications. Cardia 
will perform animal pilot trials on those devices which appear to be the most   
promising. Although the company anticipates expending substantial sums in       
connection with the development of its closure device business, Cardia expects  
that less than $100,000 will be treated for accounting purposes as research and 
development costs during 1999.                                                  

COMPETITION                                                   

       Cardia's competitors in the cardiac defect closure field are believed
to be small to medium sized companies, the most prominent of which are Nitinol  
Medical Technologies, Inc. located in Boston, Massachusetts, and AGA Medical    
Corporation and Microvena, Corp., both located in Minneapolis, Minnesota. Cardia
believes that one or more of these companies is in clinical trials with closure 
devices that would compete with Cardia's closure devices. Cardia's competitors  
may have greater resources and be able to penetrate the transcatheter closure   
device market in Europe and the United States sooner than Cardia. Although      
Cardia believes its closure devices are based on sound and competitive          
technology, there can be no assurance that Cardia's present products will be    
able to compete successfully with existing or future competitive products or    
that Cardia will be able to develop or acquire additional products or otherwise 
effectively respond to new products or technological advances developed by      
competitors. If Cardia fails to effectively penetrate markets sooner than its   
competitors or to successfully compete with existing or future products or      
technologies Cardia's anticipated revenues and earnings could be significantly  
reduced or eliminated.                                                          

GOVERNMENT REGULATION                                         

     Government regulation in the United States and other countries is a
significant factor in the development and marketing of Cardia's products and in 
Cardia's ongoing manufacturing and research and development activities. Cardia  
and its products are regulated by the FDA under a number of statutes, including 
the Federal Food, Drug and Cosmetic Act.                                        

    Under the Federal Food, Drug and Cosmetic Act, medical devices are
categorized into one of three classes, Class I, II or III, on the basis of the  
controls deemed necessary to reasonably ensure their safety and effectiveness.  
Class I devices are subject to the least extensive controls, as the safety and  
effectiveness reasonably can be assured through general controls such as        
labeling, premarket notification and adherence to the FDA's good manufacturing  
practices. For Class II devices, safety and effectiveness can be assured through
the use of special controls, such as performance standards, post-market         
surveillance, patient registries and FDA guidelines. Class III devices, which   
are life-sustaining or life-supporting implantable devices, or new devices which
have been found not to be substantially equivalent to legally marketed devices, 
require the highest level of control, generally requiring premarket approval by 
the FDA to ensure their safety and effectiveness. All companies subject to FDA  
regulation must comply with a variety of rules, including the FDA's good        
manufacturing practices regulations, and are subject to periodic inspections by 
the FDA and other applicable agencies. If the FDA believes that its regulations 
have not been fulfilled, it may implement extensive enforcement powers which    
were strengthened by the enactment of the Safe                                  

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Medical Devices Act of 1990. The FDA's powers include, but are not limited to,  
the ability to ban products from the market, prohibit the operation of          
manufacturing facilities and effect recalls of products from customer locations.

        If a manufacturer or distributor of medical devices can establish that
a proposed device is "substantially equivalent" to a legally marketed Class I or
Class II medical device or to a Class III medical device for which the FDA has  
not required a premarket approval application, the manufacturer or distributor  
may seek FDA marketing clearance for the device by filing a 510(k) notification.
Following submission of the 510(k) notification, the manufacturer or distributor
may not place the device into commercial distribution in the United States until
an order has been issued by the FDA. The FDA's target for issuing such orders is
within 90 days of submission, but the process can take significantly longer. The
order may declare the FDA's determination that the device is "substantially     
equivalent" to another legally marketed device and allow the proposed device to 
be marketed in the United States. The FDA may, however, determine that the      
proposed device is not substantially equivalent or may require further          
information, such as additional test data, before making a determination        
regarding substantial equivalence. Cardia, however, does not believe that its   
closure device products under development are substantially equivalent to       
another legally marketed device.                                                

      If a manufacturer or distributor of medical devices cannot establish
that a proposed device is substantially equivalent to another device via the    
510(k) process, the manufacturer or distributor must seek premarket approval of 
the proposed device. A premarket approval application must be submitted,        
supported by extensive data, including preclinical and clinical trial and       
follow-up data, to prove the safety and efficacy of the device. Generally, a    
company is required to obtain an investigative device exemption before it       
commences clinical testing in the United States in support of a pre-market      
approval application. The FDA monitors and oversees the use and distribution of 
such "research use only" and "investigational use only" products. Although by   
statute, the FDA has 180 days to review a premarket approval application once it
has been accepted for filing, during which time an advisory committee may also  
evaluate the application and provide recommendations to the FDA, premarket      
approval application reviews often extend over a significantly protracted time  
period, usually 12 to 24 months or longer from filing. Accordingly, there can be
no assurance the FDA review of any premarket approval application submitted by  
Cardia will not encounter prolonged delays or that the data collected and       
submitted by Cardia in its premarket approval application will support approval.

     Cardia intends to obtain Class III market clearance for its closure
devices through the FDA's investigative device exemption/premarket approval     
application process. It has not yet determined, however, when it intends to file
the first investigative device exemption application for U.S. clinical trials.  

       The FDA and the Federal Trade Commission have the power to scrutinize
labeling and promotional activities. The FDA also imposes post-marketing        
controls on Cardia and its products, and registration, listing, medical device  
reporting, post-market surveillance, device tracking and other requirements on  
medical devices. If Cardia fails to meet these pervasive FDA requirements, or   
receives adverse FDA determinations regarding Cardia's clinical and preclinical 
trials, Cardia and its employees could be subject to injunction, prosecution,   
civil fines, seizure or recall of products, prohibition of sales, or suspension 
or withdrawal of any previously granted approvals.                              

    The Federal Food, Drug and Cosmetic Act regulates Cardia's quality
control and manufacturing procedures by requiring Cardia and its contract       
manufacturers to demonstrate compliance with current good manufacturing         
practices as specified in published FDA regulations. The FDA monitors compliance
with good manufacturing practices by requiring manufacturers to register with   
the FDA, which subjects them to periodic unannounced FDA inspections of         
manufacturing facilities. The continued marketing of Cardia's products may be   
adversely affected if violations of applicable regulations are noted during FDA 
inspections of Cardia's manufacturing facilities or the facilities of its       
contract manufacturers. Such regulations are subject to change and depend       
heavily on administrative interpretations. There can be no assurance that future
changes in regulations or interpretations made by the FDA or other regulatory   
bodies, with possible retroactive effect, will not adversely affect Cardia.     

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      Sales of medical devices outside of the United States are subject to
United States export requirements and foreign regulatory requirements. Legal    
restrictions on the sale of imported medical devices vary from country to       
country. The time required to obtain approval by a foreign country may be longer
or shorter than that required for FDA approval, and the requirements may differ.
For countries in the European Union, certification procedures are available for 
medical devices, the successful completion of which allows the certified devices
both to be shipped from the United States and to be placed on the market in all 
European countries. Medical devices may not be sold in a general manner in      
Europe unless they display a mark indicating compliance with these procedures.  
There can be no assurance that Cardia will be able to obtain regulatory         
approvals or clearances for its products in foreign countries.                  

        No assurance can be given that the FDA or other regulatory authorities
will give, on a timely basis, if at all, the requisite approvals for medical    
products currently under development by Cardia or that may be developed by      
Cardia in the future. Even if approvals are received, the process of obtaining  
clearance to market medical products is costly and time consuming and can delay 
the marketing and sale of Cardia's products. Further, federal, state, foreign   
and other regulations regarding the manufacture and sale of medical devices are 
subject to change. Cardia cannot predict what impact such changes, if any, might
have on its business, financial condition or results of operations.             

MANUFACTURING AND OPERATIONS                                  

         Cardia manufactures and assembles its closure devices at its facilities
in Burnsville, Minnesota. Certain of the components of Cardia's products are    
manufactured by third-party vendors. Cardia has received certification that its 
manufacturing facilities comply with European standards for quality assurance   
and manufacturing process control.                                              

         Because Cardia is in an early stage of development, its business is not
currently dependent on one or a few major customers. It is also not currently   
dependent on a limited number of sources or availability of raw materials to    
manufacture its products under development.                                     

PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS                    

        There are several patents relating to Cardia's closure devices. A U.S.
patent, two German utility model registrations and a pending European patent    
application exist for its pediatric closure device. A German utility model      
application, three U.S. patent applications and a Patent Cooperation Treaty     
patent application have been filed for Cardia's adult closure device. It is the 
intention of Cardia to file for a European and U.S. patent, based upon the      
Patent Cooperation Treaty patent application, for its adult closure device as   
well as its other closure devices.                                              

     There can be no assurance that patents will issue on products under
development by Cardia or to be developed by Cardia in the future, that the      
patents issued to Cardia in the past or in the future will be of material       
benefit, or that Cardia will have sufficient resources to enforce its patent    
rights. Nor can there be any assurance that Cardia's products do not infringe on
patents, copyrights or other proprietary information known or claimed by others,
or that others will not successfully utilize part of or all of Cardia's         
technologies without compensation to Cardia. If Cardia is found to have         
infringed on the rights of a third party, Cardia may be unable to market its    
products without a license from such third party. There can be no assurance that
Cardia would be able to obtain such a license on satisfactory terms, or at all. 

    Cardia also relies for protection of trade secrets and proprietary
know-how on its internal security and secrecy measures and on employment and    
consulting agreements requiring employees and consultants of Cardia to observe  
the confidentiality of company information and to assign to Cardia inventions   
developed in the course of work performed for Cardia.                           

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EMPLOYEES                                                     

Cardia currently employs 6 full-time employees and 2 part-time
employees. The full-time employees are engaged in sales and marketing           
activities. The part-time employees are engaged in various activities including 
research and development, manufacturing and general administration. Cardia      
believes that its relations with its employees are good. None of Cardia's       
employees is covered by a collective bargaining agreement.                      

PROPERTIES                                                    

       Cardia leases approximately 1,000 square feet of space in Burnsville,
Minnesota, a suburb of Minneapolis. The lease provides for monthly rental       
payments of $1,250 through the expiration of the lease in September of 1999.    
Cardia is also obligated to pay real estate taxes, insurance and maintenance    
expenses associated with the leased facilities. Although Cardia believes that   
its present facilities are in good condition and adequate for its current       
operations, the company is negotiating a new lease and anticipates moving into a
4,400 square foot facility sometime in the fall of 1999.                        

LEGAL PROCEEDINGS                                             

 Cardia is not a party to any litigation and is not aware of any
threatened litigation that would have a material adverse effect on its financial
condition or results of operations.                                             

MARKET FOR CARDIA'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS               

MARKET INFORMATION                                            

       As of the date of this prospectus/proxy statement, there is no public
trading market in the United States or elsewhere for the Cardia common stock.   
Upon the consummation of the merger, the Cardia common stock is expected to be  
eligible for quotation in the "pink sheets" and approved for trading on the     
local over-the-counter market under the symbol "CRDI." There can be, and is, no 
assurance that market makers will make or maintain a market in the Cardia common
stock or that, even if a market is made and maintained in the stock or that the 
Cardia common stock will trade at prices deemed attractive or reasonable to the 
current shareholders of Cardia or shareholders of VLS that will received shares 
of Cardia common stock in connection with the merger.                           

HOLDERS                                                       

       The approximate number of holders of record of Cardia common stock at
June 30, 1999 was 79. Cardia believes that these record holders represent       
approximately 1,200 beneficial owners.                                          

DIVIDEND POLICY                                               

         Cardia has never declared or paid dividends on its common stock and has
no plans to pay dividends in the foreseeable future. Cardia currently intends to
retain any earnings for use in the operation and expansion of its business.     

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF      
OPERATIONS                                                                      

       The following discussions should be read in conjunction with Cardia's
financial statements and the notes appearing elsewhere in this document.        

MANAGEMENT'S PLAN OF OPERATION                                                  

       Cardia, Inc. was formed in October of 1998 as a subsidiary of Applied
Biometrics, Inc. to take over the development of certain in-process technology  
relating to transcatheter closure devices for cardiac defects that Applied      
Biometrics acquired in November of 1997. Cardia assumed all activity relating to
the development and marketing of the closure devices based on the in-process    
technology in October of 1998. Cardia plans to continue research and            
development, as well as conduct clinical trials for its closure devices. These  
research and development activities will include further improvements of the    
acquired technology, continued testing and improvement of the closure device    
technology Cardia has developed, and investigation of modified devices for new  
applications. Cardia will perform animal pilot trials on those devices which    
appear to be the most promising. Although the company anticipates expending     
substantial sums in connection with the development of its closure device       
business, Cardia expects that less than $100,000 will be treated for accounting 
purposes as research and development costs during 1999. Cardia currently expects
that it will be in a position to commence commercial sales of its closure       
devices in Europe following receipt of certain regulatory certifications, which 
is anticipated to be received during the second half of 1999. Although Cardia   
believes its in-process technology has substantial advantages over the          
technology used in competitive closure devices, there can be no assurance that  
Cardia will successfully complete development of its technology.                

         Cardia does not expect to make material capital investments in plant or
equipment during 1999. Cardia expects to spend between $600,000 and $700,000 on 
selling, marketing and general administrative salaries and overhead during 1999.
The majority of these expenditures will relate to Cardia's sales and marketing  
activities. These expenditures are not currently fixed costs and the amount     
spent during 1999 will depend largely on the performance and growth of Cardia's 
business during the next twelve months. Accordingly, Cardia will be able to     
adjust these expenses based on revenues and cash flows.                         

RESULTS OF OPERATIONS                                         

         REVENUES. Revenues for the six months ended June 30, 1999 were $444,003
as compared to revenues of $37,440 in the first six months of 1998. To date,    
Cardia's modest revenues have been generated by marketing its pediatric and     
adult closure devices on an experimental basis in Germany and Switzerland.      
Cardia is currently seeking the necessary regulatory approvals to market these  
devices on a broader basis in additional European Union countries. However,     
Cardia has turned its primary focus toward the development of its adult device  
and expects the majority of future revenue to be generated from the sale of this
product. Cardia does not expect to realize significant revenues until product   
development is complete and Cardia has obtained necessary regulatory approvals  
to market its products in Europe and the United States.                         

       GROSS PROFIT. Gross profit for the six months ended June 30, 1999 was
$315,992, up from $29,956 in the first six months of 1998. The increase in gross
profit in 1999 from the same period in the previous the year can be attributed  
in part to the lower costs associated with operating the business Cardia        
acquired in connection with the spin-off from Applied Biometrics, Inc. during   
the first quarter of 1999 and the revenues generated by Cardia in connection    
with sales of its transcatheter closure devices which were limited during the   
first six months of 1998.                                                       

        SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Cardia expended $524,683
in the first six months of 1999 on selling, general and administrative expenses,
up from $241,783 in the first six months of 1998. The majority of               

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these expenses are attributable to Cardia's sales and marketing activities.     
These expenditures are not currently fixed costs and the amount spent during the
remainder of 1999 will depend largely on the performance and growth of Cardia's 
business. Accordingly, Cardia will adjust these expenses based on revenues and  
cash flows. Cardia does not expect to make material capital investments in plant
or equipment during 1999. However, Cardia expects to add between four and six   
full-time employees during 1999. Those additional personnel will not be added,  
however, unless business growth justifies additional employees.                 

        RESEARCH AND DEVELOPMENT. Research and development costs accounted for
$18,062, or approximately 3.3% of total operating expenses, down from $207,427  
expended in the first six months of 1998. Cardia's on-going plans for research  
and development for its pediatric and adult closure devices include further     
improvements of the acquired technology and investigation into modified devices 
for new applications. Although the company anticipates expending substantial    
sums in connection with the development of its closure device business, Cardia  
expects that less than $100,000 will be treated for accounting purposes as      
research and development costs during 1999.                                     

        NET LOSS. Cardia recognized a loss of $226,753 in the first six months
of 1999, as compared to a loss of $419,254 recognized in the first six months of
1998.                                                                           

LIQUIDITY AND CAPITAL RESOURCES                               

   Cardia's liquidity as of June 30, 1999 consisted of approximately
$484,285 in cash, including the proceeds of the Company's rights offering which 
are reflected on the Company's financial statements for the period reported on  
herein, and $143,031 in accounts receivable. Assuming Cardia does not receive   
revenue from the sale of its closure devices, Cardia believes that this         
liquidity will be sufficient to fund operations for an estimated 6 months.      
Cardia expects that the assets of VLS, which will become assets of Cardia       
following the merger, will increase Cardia's liquidity and be sufficient to fund
operations for an estimated additional 6 months based on the same assumptions.  
Cardia intends to raise additional capital in the next 6 to 12 months through   
the issuance of equity or debt securities or through bank debt, or a combination
of these means.                                                                 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    

        Cardia's management believes that the market risk association with its
market risk sensitive instruments as of June 30, 1999 is not material, and      
therefore, disclosure is not required.                                          

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MANAGEMENT                                                                      

EXECUTIVE OFFICERS AND DIRECTORS                              

  The executive officers and directors of Cardia are or will be as
follows:                                                                        

                                                        [Enlarge/Download Table]

                                                   PRINCIPAL OCCUPATION                        
   NAME AND AGE                                   AND OTHER DIRECTORSHIPS                      
   ------------                                   -----------------------                      
                                                                                               
Joseph A. Marino         Chairman, Chief Executive Officer, President, Treasurer and Director  
(47)                     of Cardia since November 1998; Chairman of Applied Biometrics,        
                         Inc. from 1994 to June 1999 and Chief Operating Officer from 1993 to  
                         1996.                                                                 

Peter Buonomo            Vice President of Cardia since November 1998; Vice President of       
(38)                     Sales and Marketing of Applied Biometrics, Inc. from 1996 to March    
                         1999, Vice President of Marketing                                     
                         since 1995 and Director of                                            
                         Marketing from 1994 to 1995.                                          

Thomas E. Brust          Director of Cardia since November 1998; Chairman and Chief            
(40)                     Executive Officer of Micropure Medical, Inc., a medical device        
                         manufacturer, since 1992.                                             

Christopher J. Turnbull  Director of Cardia since January 1, 1999; Director of St. Paul Medical
(43)                     Inc., a disposable medical device manufacturer, since 1993; Interim   
                         President of Oxboro Medical                                           
                         International, a medical device                                       
                         manufacturer, since 1998.                                             

Peter R. Peterson(1)     Chairman and Chief Executive Officer of Video Learning Systems,       
(65)                     Inc. since 1982; Director of PPT Vision, Inc., a manufacturer,        
                         marketer and integrator of machine vision systems; Secretary and      
                         Director of Electro-Sensors, Inc., a  manufacturer and distributor of 
                         industrial production monitoring and process control systems.         
                         Mr. Peterson served as Secretary of Electro-Sensors since 1973 and    
                         served as Chairman of the Board from 1969 to 1989.  He is also        
                         President of P. R. Peterson, Inc., a venture capital firm where he has
                         served for over five years.                                           

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

(1)      Peter R. Peterson is not a current executive officer or director of    
    Cardia. It is expected, however, that Mr. Peterson, a director and
     officer of VLS, will be elected to the board of directors of Cardia
upon the completion of the merger.                            

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EXECUTIVE COMPENSATION                                        

The following table sets forth certain information regarding  
compensation to be paid during fiscal year 1999 to Cardia's Chief Executive     
Officer. No other executive officer of Cardia will receive salary in excess of  
$100,000 during 1999:                                                           

SUMMARY COMPENSATION TABLE

                                                        [Enlarge/Download Table]

                                                                                 LONG-TERM     
                                                  ANNUAL COMPENSATION       COMPENSATION AWARDS
                                                  -------------------       -------------------

                                                                                 SECURITIES    
                                                                                 UNDERLYING    
NAME AND PRINCIPAL POSITION                FISCAL YEAR             SALARY       OPTIONS (1)    
---------------------------                -----------             ------       -----------    
                                                                                               
Joseph A. Marino, Chief Executive Officer     1999                $170,000         50,000      

--------------------------                                                      
(1)      Number of shares of Cardia common stock subject to options granted     
during the year indicated.                                    

DIRECTOR COMPENSATION                                         

   Directors are not currently paid fees for attending meetings. All
directors are reimbursed for their travel expenses incurred in attending board  
meetings.                                                                       

STOCK OPTION PLAN AND RELATED INFORMATION                                       

        As of January 27, 1999, the board of directors and sole shareholder of
Cardia adopted the Cardia, Inc. 1999 Omnibus Stock Incentive Plan to provide for
the granting of stock-based incentives to officers, key employees and directors 
of Cardia. The plan permits the granting of incentive stock options meeting the 
requirements of Section 422 of the Internal Revenue Code of 1986, as amended,   
non-qualified stock options which do not meet the requirements of such section, 
stock appreciation rights, restricted stock grants and deferred stock grants.   
The plan also contains provisions that permit an automatic reload of certain    
options if the original grant includes a reload feature. Cardia has reserved    
200,000 shares of its common stock for issue in connection with awards granted  
pursuant to the plan. As of June 30, 1999, Cardia has outstanding options to    
purchase an aggregate of 132,500 shares of its common stock.                    

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  The following table sets forth certain information as to options
granted to the Chief Executive Officer of Cardia as of June 30, 1999:           

 OPTION GRANTS

                                                        [Enlarge/Download Table]

                                      PERCENT OF TOTAL                                   
                  NAME OF SECURITIES      OPTIONS                                        
                      UNDERLYING        GRANTED TO      EXERCISE OR BASE                 
                        OPTIONS         EMPLOYEES            PRICE                       
NAME                    GRANTED         IN FISCAL YEAR    DOLLAR/SHARE    EXPIRATION DATE
----                    -------         --------------    ------------    ---------------
                                                                                         
Joseph A. Marino       50,000(1)             100%            $1.10             01/27/09  

--------------------------                                                      
(1)      All of Mr. Marino's options are currently exercisable.                 

       The following table sets forth certain information as to options held
by the Chief Executive Officer of Cardia as of June 30, 1999:                   

AGGREGATE OPTION EXERCISES
 AND OPTION VALUES

                                                                [Download Table]

        NAME      EXERCISABLE  UNEXERCISABLE  EXERCISABLE  UNEXERCISABLE
        ----      -----------  -------------  -----------  -------------
                                                                        
Joseph A. Marino  50,000              0         $0(1)           --      

---------------------------------                                               
(1)      The value of the exercisable options is equal to the difference between
  the subscription price in the rights offering of $1.00 per share
        undertaken in February of 1999 by Cardia and the option exercise price
  of $1.10 per share multiplied by the number of shares subject to
options.                                                      

INDEMNIFICATION AND WAIVER OF DIRECTOR LIABILITY                                

   The Minnesota Business Corporation Act provides that officers and
directors of Cardia have the right to indemnification from Cardia for liability 
arising out of certain actions. Such indemnification may be available for       
liabilities arising in connection with the distribution and the rights offering.
Insofar as indemnification for liabilities arising under the Securities Act of  
1933, as amended, may be permitted to directors, officers or persons controlling
Cardia pursuant to such indemnification provisions, Cardia has been advised that
in the opinion of the Securities and Exchange Commission, such indemnification  
is against public policy as expressed in the Securities Act and is therefore    
unenforceable.                                                                  

       Cardia has adopted in its articles of incorporation a provision which
limits personal liability for a breach of the fiduciary duty of its directors,  
to the extend provided by the Minnesota Business Corporation Act. Such provision
eliminated the personal liability of directors for damages occasioned by breach 
of fiduciary duty, except for liability based on the director's duty of loyalty 
to Cardia, liability for acts or omissions not in good faith, or which involve  
intentional misconduct or a knowing violation of law, liability based on        
payments of improper dividends, liability based on violations of state          
securities laws, and liability for acts occurring prior to the date such        
provision was added.                                                            

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PRINCIPAL SHAREHOLDERS                                                          

         The following table sets forth certain information as of June 30, 1999,
with respect to the beneficial ownership of Cardia's common stock by (1) all    
persons known by Cardia to be the beneficial owners of more than 5% of the      
outstanding common stock of Cardia, (2) each executive officer and director of  
Cardia, and (3) all executive officers and directors of Cardia as a group.      

                                                        [Enlarge/Download Table]

                       NAME AND ADDRESS OF                                                                  
                        BENEFICIAL OWNERS                                           SHARES OWNED            
                        -----------------                                           ------------            
                                                                      NUMBER OF SHARES            PERCENTAGE
                                                                     BENEFICIALLY OWNED            OF CLASS 
                                                                     ------------------            -------- 
                                                                                                            
Cede & Co.........................................................        595,719                    59.6%  
  c/o Depository Trust Co.                                                                                  
  P.O. Box 20                                                                                               
  Bowling Green Station                                                                                     
  New York, New York 10004                                                                                  

Joseph A. Marino..................................................    330,433(1)(2)(3)               31.5%  
  13754 Frontier Court                                                                                      
  Burnsville, Minnesota 55337                                                                               

David B. Johnson..................................................    86,588(4)                       8.7%  
  Miller Johnson & Kuehn Inc.                                                                               
  5500 Wayzata Blvd., Suite 800                                                                             
  Minneapolis, Minnesota 55416                                                                              

Thomas E. Brust...................................................      10,000(1)(5)                   **   

Christopher J. Turnbull...........................................      10,000(1)(6)                   **   

Peter Buonomo.....................................................       25,000(7)                    2.4%  

Peter R. Peterson.................................................          (8)                       (9)   

All executive officers and directors as a group (4 persons)....... 375,433(2)(3)(5)(6)(7)            34.3%  

-------------------------------                                                 
**  Less than 1%.                                                               

(1)  Current director of Cardia, Inc.                                           

(2)  Includes 50,000 shares which could be purchased by Mr. Marino under stock  
     options exercisable within sixty (60) days. Also includes 2,773 shares held
by Mr. Marino's daughter, Anna M. Marino, and 2,773 shares held by Mr.
     Marino's son, Joseph A. Marino III, the beneficial ownership of all of such
shares is disclaimed.                                                 

(3)  Does not include 14,100 shares of Cardia common stock that Mr. Marino will 
acquire upon the consummation of the merger in exchange for the 75,000
   shares of VLS common stock that he owns. See "Information with Respect to
    VLS - Principal Shareholders" on page 46. Mr. Marino will own, or have the
   right to acquire through the exercise of stock options exercisable within
sixty (60) days of the date hereof, a total of 344,533 shares, or     
     approximately 27.6%, of the outstanding shares of Cardia common stock after
giving effect to the shares issued in connection with the merger and  
including the shares owned by his children.                           

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(4)  Based upon the Schedule 13G filed with the Securities and Exchange         
Commission on April 27, 1999. Includes 54,420 and 63 shares owed      
  respectively by Betty Johnson and Todd Johnson, wife and son of David B.
    Johnson. Mr. Johnson has sole voting and dispositive power with respect to
30,451 shares and shared voting and dispositive power with respect to 
56,137 shares.                                                        

(5)  Includes 10,000 shares which could be purchased by Mr. Brust under stock   
options exercisable within sixty (60) days of the date hereof.        

(6)  Includes 10,000 shares which could be purchased by Mr. Turnbull under stock
options exercisable within sixty (60) days of the date hereof.        

(7)  Includes 25,000 shares which could be purchased by Mr. Buonomo under stock 
options exercisable within sixty (60) days of the date hereof.        

(8)  Mr. Peterson will own approximately 39,475 shares of the outstanding shares
of Cardia common stock after giving effect to the shares issued in    
connection with the merger. Calculation includes shares owned by a    
  subsidiary of Electro-Sensors, Inc., of which Mr. Peterson is a director
and controlling shareholder. See "Information with Respect to VLS -   
Principal Shareholders" on page 46.                                   

(9)  Mr. Peterson will own approximately 3.2% of the outstanding shares of      
    Cardia common stock after giving effect to the shares issued in connection
with the merger. Calculation includes shares owned by a subsidiary of 
    Electro-Sensors, Inc., of which Mr. Peterson is a director and controlling
     shareholder. See "Information with Respect to VLS - Principal Shareholders"
on page 46.                                                           

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 INFORMATION WITH RESPECT TO VLS

BUSINESS OF VLS                                                                 

     Video Learning Systems, Inc. was incorporated as a Minnesota corporation on
December 7, 1982. From 1982 to 1989, VLS was engaged in the development,        
production, manufacturing and marketing of "self-help," "how-to" video tapes    
covering a variety of topics for the home video market. VLS focused its initial 
efforts on researching the video market and then became a co-producer for a     
number of video tapes, including exercise and training tapes and tapes for      
teaching preschool children. VLS ceased all operations relating to its videotape
business in approximately 1989 and has not engaged in active operations since   
that time.                                                                      

   VLS currently has no business or assets other than cash, cash equivalents
and a note receivable. It has no employees or operations of any kind. VLS'      
management shall not be a part of the management organization of Cardia, except 
for Peter R. Peterson, who is expected to become a member of Cardia's board of  
directors following the merger.                                                 

MARKET FOR VLS' COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                   

MARKET INFORMATION                                            

       As of the date of this prospectus/proxy statement, there is no public
trading market in the United States or elsewhere for the VLS common stock. Upon 
the consummation of the merger, the Cardia common stock received by holders of  
VLS common stock is expected to be eligible for quotation in the "pink sheets"  
and approved for trading on the local over-the-counter market under the symbol  
"CRDI." There can be, and is, no assurance that market makers will make or      
maintain a market in the Cardia common stock or that, even if a market is made  
and maintained in the stock, that the Cardia common stock will trade at prices  
deemed attractive or reasonable to the present shareholders of VLS.             

HOLDERS                                                       

         The approximate number of holders of record of VLS common stock at June
30, 1999 was 73. VLS believes that these recordholders represent more than 100  
beneficial owners.                                                              

DIVIDEND POLICY                                               

  VLS has no operations or significant earnings and has never paid
dividends on its common stock. Upon the consummation of the merger, there are no
restrictions that would, or are likely to, limit the ability of Cardia to pay   
dividends on its capital stock, but Cardia has no plans to pay dividends in the 
foreseeable future and intends to use earnings for business expansion purposes. 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF      
OPERATIONS                                                                      

   The following discussions should be read in conjunction with VLS'
financial statements and the notes appearing elsewhere in this document.        

OPERATIONS                                                    

      VLS was incorporated as a Minnesota corporation on December 7, 1982.
From 1982 to 1989, VLS was engaged in the development, production, manufacturing
and marketing of "self-help" and "how-to" video tapes                           

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covering a variety of topics for the home video market. VLS ceased operations in
approximately 1989 and has not engaged in any active operations since that time.

       VLS currently has no active business or significant assets other than
cash, cash equivalents and a note receivable. The company's only income during  
the last four fiscal years was attributable to certain interest and dividend    
income. VLS has no employees, facilities or operations of any kind.             

RESULTS OF OPERATIONS                                         

         REVENUES. Revenues for the quarter ended June 30, 1999 were $14,898 and
derived solely from interest and dividend income for the period. VLS has derived
no revenue from operations during the first quarter of 1999 or in the last three
fiscal years ended December 31, 1998, 1997 and 1996.                            

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. VLS expended $6,032 in
the first six months of 1999 on selling, general and administrative expenses.   
The majority of these costs are attributable to various accounting and          
administrative expenses.                                                        

         NET INCOME. VLS recognized net income of $8,866 in the first six months
of 1999.                                                                        

LIQUIDITY AND CAPITAL RESOURCES                               

         VLS' liquidity as of March 31, 1999 consisted of approximately $371,281
in cash. VLS believes that this liquidity will be adequate for its foreseeable  
financial commitments.                                                          

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    

   VLS' management believes that the market risk associated with its
market risk sensitive instruments as of June 30, 1999 is not material, and      
therefore, disclosure is not required.                                          

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PRINCIPAL SHAREHOLDERS                                                          

         The following table sets forth certain information as of June 30, 1999,
with respect to the beneficial ownership of VLS' common stock by (1) all persons
known by VLS to be the beneficial owners of more than 5% of the outstanding     
common stock of VLS, (2) each executive officer and director of VLS, and (3) all
executive officers and directors of VLS as a group.                             

                                                        [Enlarge/Download Table]

                      NAME AND ADDRESS OF                                                                     
                        BENEFICIAL OWNERS                                             SHARES OWNED            
                        -----------------                                             ------------            

                                                                                NUMBER OF           PERCENTAGE
                                                                           BENEFICIALLY SHARES       OF CLASS 
                                                                           -------------------       -------- 

                                                                                                              
Cede & Co.................................................................            309,129          29.1%  
 P.O. Box 20                                                                                                  
 Bowling Green Station                                                                                        
 New York, New York 10274                                                                                     

Peter R. Peterson.........................................................         209,975(1)(2)       19.7%  
 6111 Blue Circle Drive                                                                                       
 Minnetonka, Minnesota 55343-9108                                                                             

R & J Co..................................................................            107,028          10.0%  
 R J Steichen & Company                                                                                       
 1 Financial Plz., Suite 100                                                                                  
 120 South 6th Street                                                                                         
 Minneapolis, Minnesota 55402-1803                                                                            

Joseph A. Marino..........................................................          75,000(3)           7.0%  
 13754 Frontier Court                                                                                         
 Burnsville, Minnesota 55337                                                                                  

Van Clemens & Co..........................................................             55,447           5.2%  
 5708 Olinger Boulevard                                                                                       
 Minneapolis, Minnesota 55436-1912                                                                            

Paul R. Peterson .........................................................          14,900(1)           1.4%  
 6111 Blue Circle Drive                                                                                       
 Minnetonka, Minnesota 55343-9108                                                                             

All executive officers and directors as a group (2 persons)...............         224,875(2)          21.1%  

-----------------                                                     
(1) Member of the board of directors of VLS.                          

    (2) Includes 46,875 shares owned by a subsidiary of Electro-Sensors, Inc.,
  of which Mr. Peterson is a director and controlling shareholder.

     (3) Chief Executive Officer and member of the board of directors of Cardia.

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EXECUTIVE COMPENSATION AND OTHER MATTERS                                        

EXECUTIVE COMPENSATION                                                

 No officer of VLS received any salary or other compensation at any time
during the fiscal years ending December 31, 1998, 1997, 1996 and no officer of  
VLS will receive any salary or other compensation during 1999.                  

OPTION/SAR GRANTS                                                     

VLS has not issued any stock options or granted any stock appreciation
rights at any time during the last three years. Stock options, if any, granted  
during any period prior to three years have either been exercised or expired.   

OPTION/SAR EXERCISES                                                  

VLS has not issued any stock options or granted any stock appreciation
rights at any time during the last three years. Stock options, if any, granted  
during any period prior to three years have either been exercised or expired.   

DIRECTOR COMPENSATION                                                 

Directors of VLS are not paid any compensation.                       

COMPARISON OF RIGHTS OF HOLDERS OF CARDIA COMMON STOCK
 AND HOLDERS OF VLS COMMON STOCK

DESCRIPTION OF CARDIA CAPITAL STOCK                                             

     The following summary of the material terms of the capital stock of
Cardia is not complete and is subject to and qualified in its entirety by       
reference to Cardia's articles of incorporation and bylaws, copies of which are 
included as exhibits to documents incorporated by reference to the registration 
statement of which this proxy statement/prospectus is a part.                   

CARDIA COMMON STOCK                                           

      Cardia is authorized to issue 10,000,000 shares of common stock, par
value $.01 per share. There are currently 1,000,081 shares of Cardia common     
stock issued and outstanding and approximately 79 holders of record of Cardia   
common stock. The holders of Cardia common stock are entitled to one vote for   
each share of common stock held on all matters submitted to a vote of           
shareholders. The holders of Cardia common stock do not have cumulative voting  
rights in the election of directors. The holders of Cardia common stock are     
entitled to receive ratably such dividends, if any, as may be declared by the   
Cardia board of directors out of legally available funds, subject to the rights 
of the holders of any outstanding Cardia preferred stock to receive preferential
dividends. In the event of liquidation, dissolution or winding up of Cardia, the
holders of Cardia common stock are entitled to share ratably in all assets of   
Cardia available for distribution to shareholders after payment of all          
obligations of Cardia and the aggregate liquidation preference (including all   
accrued and unpaid dividends) of any outstanding Cardia preferred stock.        

      The holders of Cardia common stock have no preemptive, subscription,
redemptive or conversion rights. The outstanding shares of Cardia common stock  
are, and the Cardia common stock to be issued in the merger will be, validly    
issued, fully paid and nonassessable.                                           

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CARDIA PREFERRED STOCK                                        

         The board of directors of Cardia have the discretion to issue 1,000,000
shares of preferred stock, par value $.01 per share. No shares of preferred     
stock are currently issued and outstanding. The board of directors of Cardia has
the authority to prescribe for each series of Cardia preferred stock it         
establishes, the number of shares in that series, the dividend rate, and the    
voting rights, conversion privileges, redemption, sinking fund and liquidation  
rights, if any, and any other rights, preferences, qualifications and           
limitations of a particular series. The issuance of Cardia common stock could   
decrease the amount of earnings and assets available for distribution to the    
holders of Cardia common stock or adversely affect the rights and powers,       
including the voting rights, of the holders of Cardia common stock.             

      Under certain circumstances, Cardia preferred stock could be used to
create voting impediments or deter persons seeking to effect a takeover or      
otherwise gain control of Cardia in a transaction which holders of some or a    
majority of Cardia common stock may deem to be in their best interests. Such    
shares of Cardia preferred stock could be sold in public or private transactions
to purchasers who might support the Cardia board of directors in opposing a     
takeover bid that the Cardia board of directors determines not to be in the best
interests of Cardia and its shareholders. In addition, the Cardia board of      
directors could authorize holders of a class or series of preferred stock to    
vote, either separately as a class or together with the holders of Cardia common
stock, on any merger, sale, or exchange of assets by Cardia or any other        
extraordinary corporate transaction. The ability to issue such Cardia preferred 
stock might have the effect of discouraging an attempt by another person or     
entity, through the acquisition or a substantial number of shares of Cardia     
common stock, to acquire control of Cardia with a view to imposing a merger,    
sale of all or any part of the assets or a similar transaction, because the     
issuance of new shares could be used to dilute the stock ownership of such      
person or entity.                                                               

  Cardia has no present plans to issue any Cardia preferred stock.

TRANSFER AGENT AND REGISTRAR                                  

         The transfer agent and registrar for the Cardia common stock is Norwest
Bank Minnesota, N.A.                                                            

COMPARATIVE RIGHTS OF CARDIA AND VLS SHAREHOLDERS                               

   Upon the consummation of the merger, the shareholders of VLS will
become shareholders of common stock of Cardia. Both VLS and Cardia are          
incorporated in the State of Minnesota and governed by the Minnesota Business   
Corporation Act. The rights of the shareholders of Cardia and VLS are also      
governed by their respective articles of incorporation and bylaws. The following
is a brief summary of certain differences between the rights of Cardia          
shareholders and the rights of VLS shareholders. The summary set forth below is 
not intended to be complete description of all of the differences between the   
rights of shareholders of VLS and the rights of shareholders of Cardia and is   
qualified by reference to Minnesota law, the articles and bylaws of VLS, and the
articles and bylaws of Cardia.                                                  

PERCENTAGE OF VOTING STOCK AND INFLUENCE OVER AFFAIRS         

      Upon completion of the merger, the percentage ownership of Cardia by
each former VLS shareholder will be substantially less than that shareholder's  
current percentage ownership of VLS. Accordingly, former VLS shareholders will  
have significantly smaller voting influence over the affairs of Cardia than they
currently enjoy over the affairs of VLS.                                        

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PRESENCE OF CARDIA PREFERRED STOCK                            

     Cardia's articles of incorporation provide that shares of preferred
stock may be issued with terms, preferences and rights determined by its board  
of directors without stockholder approval. See "Description of Cardia Capital   
Stock - Cardia Preferred Stock." VLS is not authorized to issue preferred stock,
but is allowed to issue multiple classes of common stock with such terms,       
preferences and rights as the board of directors of VLS may determine from time 
to time. Currently, there is only one class of VLS common stock and all holders 
thereof have equal rights in all respects.                                      

CLASSIFICATION, REMOVAL AND ELECTION OF DIRECTORS             

    Cardia's bylaws provide for a classified board of directors, under
which directors are elected to three-year terms, with one-third of the directors
being elected each year. VLS' articles and bylaws do not similarly classify its 
board of directors, and directors are elected each year for a one-year term.    
Both Cardia's and VLS' bylaws provide for newly created directorships resulting 
from an increase in the authorized number of directors and any vacant           
directorships may be filled by a majority of the directors then in office.      

        VLS' bylaws provide that directors may be removed from office, with or
without cause, by the affirmative vote of the majority of the other directors.  
The Minnesota Business Corporation Act enables a majority of Cardia's board of  
directors to remove directors from office in a similar manner.                  

         The provisions of Cardia's articles regarding directors will be subject
to the terms of the certificate of designation or other instrument creating any 
class or series of preferred stock giving the holders of such class or series of
preferred stock the right, voting separately as a class, to elect one or more   
directors (such as is often required by the terms of preferred stock in the     
event that dividend payments are in arrears for a period of time). See "Cardia  
Capital Stock - Cardia Preferred Stock."                                        

         These provisions of Cardia's articles regarding classification, removal
and nomination of directors afford some assurance of stability in the           
composition of Cardia's board of directors, but may discourage or deter attempts
by individuals to take control of Cardia by electing their own slate of         
directors. To the extent that potential acquirors of Cardia stock are deterred  
by the classified board, such provision also may deter certain mergers, tender  
offers or other future takeover attempts which some or a majority of holders of 
Cardia common stock may deem to be in their best interests. In addition, the    
classified board would delay shareholders who do not favor the policies of      
Cardia's board of directors from removing a majority of the board of directors  
for two years, unless they can obtain the requisite vote.                       

SHAREHOLDER VOTE REQUIRED FOR CERTAIN TRANSACTIONS            

      Neither Cardia's nor VLS' governing documents contain any provisions
that would require greater than a majority of its respective shareholders to    
approve mergers, consolidations, sales of a substantial amount of assets or     
other similar transactions.                                                     

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RIGHT TO CALL SPECIAL MEETING OF SHAREHOLDERS                 

   Under the bylaws of VLS, a special meeting of shareholders may be
called by certain officers, two or more directors or shareholders holding at    
least 10% of the voting power of all shares of capital stock entitled to vote.  
Cardia is subject to a similar provision of the Minnesota Business Corporation  
Act for calling a special meeting of shareholders.                              

  ADVANCE NOTICE OF SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS

Under Cardia's and VLS' bylaws, advance notice is required of 
shareholder proposals or director nominations to be considered at a meeting of  
the shareholders.                                                               

ACTION BY WRITTEN CONSENT                                     

   Minnesota law provides that any action of a Minnesota corporation
permitted or required by law to be taken by shareholders at a meeting may be    
taken without a meeting and without prior notice if a written consent is signed 
by all of the holders of outstanding voting stock of the corporation.           

LIABILITY OF DIRECTORS AND OFFICERS                           

      Cardia's articles and bylaws generally exempt directors and officers
from personal liability to the corporation or its shareholders from monetary    
damages for breach of fiduciary duty as a director to the fullest extent        
permitted by Minnesota law. VLS' articles and bylaws contain similar provisions.

AMENDMENT OF GOVERNING DOCUMENTS                              

Minnesota law provides that an amendment to the articles of   
incorporation requires the affirmative vote of the holders of a majority of the 
shares present and entitled to vote unless a larger affirmative vote is required
by the corporation's articles. Neither Cardia's nor VLS' articles of            
incorporation contain any provisions that require a larger affirmative vote in  
order to amend their articles.                                                  

    The Cardia and VLS bylaws provide that the Cardia and VLS board of
directors have the power to make, amend, alter and repeals the bylaws upon the  
majority vote of their boards of directors, subject to the power of their       
respective shareholders to enact, change or repeal such bylaws; provided,       
however, that the VLS bylaws do not permit its board of directors to adopt,     
amend or repeal any bylaws fixing a quorum for meetings of shareholders,        
prescribing procedures for removing directors or filling vacancies in the board,
or fixing the number of directors (except as may be done to increase the number 
of directors) or their classification, qualifications or terms of office.       

BUSINESS COMBINATIONS AND CONTROL SHARE ACQUISITIONS          

       Cardia is governed by Sections 302A.671 and 302A.673 of the Minnesota
Business Corporation Act. In general, Section 302A.671 provides that the shares 
of a corporation acquired in a "control share acquisition" have no voting rights
unless voting rights are approved in a prescribed manner. A control share       
acquisition is an acquisition, of beneficial ownership of shares that would,    
when added to all other shares beneficially owned by the acquiring person,      
entitle the acquiring person to have voting power of 20% or more in the election
of directors. In general, Section 302A.673 prohibits a public Minnesota         
corporation from engaging in a "business combination" with an "interested       
shareholder" for a period of four years after the date of the transaction in    
which the person became an interested shareholder, unless the business          
combination is approved in a prescribed manner. A business combination includes 
any merger, asset sale or other transaction resulting in a financial benefit to 
the interested                                                                  

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shareholder. An interested shareholder is a person who is the beneficial owner  
of 10% or more of the corporation's voting stock or who is an affiliate or      
associate of the corporation and at any time within four years prior to the date
in question was the beneficial owner of 10% or more of the corporation's voting 
stock. These provisions of the Minnesota law could delay, defer or prevent a    
change in control of Cardia.                                                    

 INDEPENDENT ACCOUNTANTS

       The financial statements of Cardia included herein as of December 31,
1998 have been audited by PricewaterhouseCoopers LLP, independent public        
accountants, as set forth in their report thereon included in this document and 
registration statement.                                                         

     The financial statements of VLS included herein for the years ended
December 31, 1998 and 1997 have been audited by Casey, Menden, Faust & Nelson,  
P.A., independent public accountants, as set forth in their report thereon      
included in this document and registration statement.                           

 LEGAL MATTERS

        The validity of the Cardia common stock to be issued in the merger has
been passed upon for Cardia by Lindquist & Vennum P.L.L.P., Minneapolis,        
Minnesota. Patrick Delaney, a partner in Lindquist & Vennum, is the Secretary of
Cardia and a shareholder of VLS.                                                

REPRESENTATIVES OF INDEPENDENT PUBLIC ACCOUNTANTS OF VLS

     Representatives of Casey, Menden, Faust & Nelson, P.A. expect to be
present at the VLS special meeting. While these representatives have stated that
they do not plan to make a statement at the meeting, they will be available to  
respond to appropriate questions from shareholders in attendance.               

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INDEX TO FINANCIAL STATEMENTS - CARDIA, INC.

                                                        [Enlarge/Download Table]

                                                                                                               PAGE

                                                                                                                   
Report of Independent Accountants...............................................................................F-2

Balance Sheets as of December 31, 1997 and 1998, and June 30, 1999 (unaudited)..................................F-3

Statements of Operations for the period ended December 31, 1997, the year ended December 31, 1998,                 
     and the six month periods ended June 30, 1998 and 1999 (unaudited).........................................F-4

Statement of Advances by Parent and Shareholders' Equity for the period ended December 31, 1997,                   
     the year ended December 31, 1998, and the six month period ended June 30, 1999 (unaudited).................F-5

Statements of Cash Flows for the period ended December 31, 1997, the year ended December 31, 1998,                 
     and the six month periods ended June 30, 1998 and 1999 (unaudited).........................................F-6

Notes to Financial Statements...................................................................................F-7

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 REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors                                                       
and Shareholders of                                                         
Cardia, Inc.                                                                

In our opinion, the accompanying balance sheets and the related statements of   
operations, of advances by parent and shareholders' equity and of cash flows    
present fairly, in all material respects, the financial position of Cardia, Inc.
(the Company; formerly the Transcatheter Closures Business of Applied           
Biometrics, Inc.) as of December 31, 1998 and 1997 and the results of its       
operations and its cash flows for the year ended December 31, 1998 and the      
period from November 2, 1997 (inception) to December 31, 1997, in conformity    
with generally accepted accounting principles. These financial statements are   
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our  
audits of these statements in accordance with generally accepted auditing       
standards which require that we plan and perform the audit to obtain reasonable 
assurance about whether the financial statements are free of material           
misstatement. An audit includes examining, on a test basis, evidence supporting 
the amounts and disclosures in the financial statements, assessing the          
accounting principles used and significant estimates made by management, and    
evaluating the overall financial statement presentation. We believe that our    
audits provide a reasonable basis for the opinion expressed above.              

/s/ PricewaterhouseCoopers LLP                                                  
PRICEWATERHOUSECOOPERS LLP                                                      
Minneapolis, Minnesota                                                          
March 18, 1999                                                                  

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CARDIA, INC.                                                                    
BALANCE SHEETS                                                                  

                                                        [Enlarge/Download Table]

                                                           DECEMBER 31,             JUNE 30  
                                                                                     1999    
ASSETS                                                 1997            1998       (UNAUDITED)
                                                                                             
Current assets:                                                                              
   Cash and cash equivalents                       $        --     $       500   $   484,285 
   Accounts receivable                                      --          92,917       143,031 
   Inventories                                              --          50,888        38,200 
   Prepaid expenses and other current asset                 --          11,285         1,274 
                                                   -----------     -----------   ----------- 
         Total current assets                               --         155,590       666,790 

Property and equipment, net                                 --          27,371       104,143 
Intangible assets                                      100,000          83,332        74,998 
                                                   -----------     -----------   ----------- 
          Total assets                             $   100,000     $   266,293   $   845,931 
                                                   ===========     ===========   =========== 

LIABILITIES AND STOCKHOLDERS' EQUITY                                                         

Current liabilities:                                                                         
   Trade accounts payable                          $        --     $    63,651   $    22,692 
   Accrued expenses                                         --              --          (421)
                                                   -----------     -----------   ----------- 
       Total current liabilities                            --          63,651        22,271 

Commitments and contingencies                                                                

Shareholders' equity:                                                                        

Preferred Stock (1,000,000 shares                                                            
   authorized, no shares outstanding                                                         
   at June 30, 1999)                                        --              --            -- 

Common Stock (10,000,000 shares                                                              
   authorized, 1,000,081 shares                                                              
   outstanding at June 30, 1999                             --              --        10,000 

Additional paid in capital                                  --              --     2,334,667 
Advances from Applied Biometrics, Inc.                 557,866       1,496,894            -- 
Accumulated deficit                                   (457,866)     (1,294,252)   (1,521,007)
                                                   -----------     -----------   ----------- 
       Total shareholders' equity                      100,000         202,642       823,660 
                                                   -----------     -----------   ----------- 
       Total liabilities and shareholders' equity  $   100,000     $   266,293   $   845,931 
                                                   ===========     ===========   =========== 

See accompanying notes to the financial statements. 

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CARDIA, INC.                                                                    
STATEMENTS OF OPERATIONS                                                        

                                                        [Enlarge/Download Table]

                                      FOR THE PERIOD FROM                                             
                                       NOVEMBER 2, 1997                              FOR THE SIX      
                                        (INCEPTION) TO        YEAR ENDED         MONTH PERIOD ENDED   
                                       December 31, 1997   December 31, 1998          June 30,        
                                                                                 1998         1999    
                                                                                    (unaudited)       
                                                                                                      
Net sales                                 $      --            $ 167,240      $  37,440     $ 444,003 
Cost of sales                                    --               33,652      $   7,484     $ 128,011 
                                          ---------            ---------      ---------     --------- 
       Gross profit                              --              133,588         29,956       315,992 

Operating expenses:                                                                                   
   Selling, general and administrative       16,409              564,826        241,783       524,683 
   Research and development                                      405,148        207,427        18,064 
   Acquisition of in-process research                                                                 
     and development                        441,457                                  --               
                                          ---------            ---------      ---------     --------- 
                                            457,866              969,974        449,210       542,747 
                                          ---------            ---------      ---------     --------- 
       Net loss                           $(457,866)           $(836,386)     $(419,254)    $(226,755)
                                          =========            =========      =========     ========= 

Net loss per share                                                                                    
   Basic and Fully Diluted                $   (1.22)           $   (2.23)     $   (1.12)    $   (0.33)

Weighted Average Shares                                                                               
   Outstanding                              375,000              375,000        375,000       690,613 

See accompanying notes to the financial statements. 

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CARDIA, INC.                                                                    
STATEMENT OF ADVANCES BY PARENT AND SHAREHOLDERS' EQUITY                        

                                                        [Enlarge/Download Table]

                                                               ADVANCES                                
                                                 ADDITIONAL  FROM APPLIED                              
                                   COMMON         PAID-IN     BIOMETRICS,    ACCUMULATED   SHAREHOLDER 
                                   STOCK          CAPITAL        INC.          DEFICIT        EQUITY   
                                ------------  -------------  -------------  -------------  ------------

                                                                                                       
November 2, 1997 (inception)    $        --   $        --    $        --    $        --    $        -- 

Purchase of the Transcatheter                                                                          
       Closure Product Line                                      557,866             --        557,866 
Net Loss                                                              --       (457,866)      (457,866)
                                                             -----------    -----------    ----------- 

Balances at December 31, 1997                                    557,866       (457,866)       100,000 

Advances by Applied                                                                                    
       Biometrics, Inc.                                          939,028             --        939,028 
Net Loss                                                              --       (836,386)      (836,386)
                                                             -----------    -----------    ----------- 

Balances at December 31, 1998                                $ 1,496,894    $(1,294,252)   $   202,642 
                                                             ===========    ===========    =========== 

Advances by                                                                                            
       Applied Biometrics, Inc.                                                                        
       (unaudited)                                               222,773             --        222,773 

Distribution of interest in                                                                            
       Cardia from Applied                                                                             
       Biometrics, Inc.                                                                                
       (unaudited)                    3,750     1,715,917     (1,719,667)            --             -- 

Sale of Common Stock                                                                                   
       (unaudited)                    6,250       618,750             --             --        625,000 

Net loss (unaudited)                     --            --             --       (226,755)      (226,755)
                                -----------   -----------    -----------    -----------    ----------- 

Balance at June 30, 1999                                                                               
       (unaudited)              $    10,000   $ 2,334,667    $        --    $(1,521,007)   $   823,660 
                                ===========   ===========    ===========    ===========    =========== 

See accompanying notes to financial statements. 

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CARDIA, INC.                                                                    
STATEMENTS OF CASH FLOWS                                                        

                                                        [Enlarge/Download Table]

                                                    FOR THE PERIOD FROM                        FOR THE SIX MONTH    
                                                     NOVEMBER 2, 1997                             PERIOD ENDED      
                                                      (INCEPTION) TO        YEAR ENDED              JUNE 30,        
                                                     DECEMBER 31, 1997   DECEMBER 31, 1998     1998          1999   
                                                                                                   (UNAUDITED)      
                                                                                                                    
Cash flows from operating activities:                                                                               
    Net loss                                            $(457,866)          $(836,386)      $(419,258)    $(226,753)

Adjustments to reconcile net loss to net cash                                                                       
from operating activities:                                                                                          
  Non-cash acquisition of in-process research                                                                       
    and development                                       441,457                  --              --            -- 
  Depreciation and amortization                                --              19,709           8,334        13,090 
Cash flows provided by (used for) changes in:                                                                       
  Accounts receivable                                          --             (92,917)        (21,942)      (50,114)
  Inventories                                                  --             (50,888)        (40,000)       12,688 
  Prepaid expenses and other current assets                    --             (11,285)             --        10,011 
  Accounts payable                                             --              63,651          16,826        41,380 
                                                        ---------           ---------       ---------     --------- 
    Net cash flows used for operating activities          (16,409)           (908,116)       (456,040)     (282,458)
                                                        ---------           ---------       ---------     --------- 

Cash flows from investing activities:                                                                               
  Cash expended for purchase of product line              (31,457)                 --              --            -- 
  Purchase of property and equipment                           --             (30,412)         (5,225)      (81,528)
                                                        ---------           ---------       ---------     --------- 
    Net cash flows used for investing activities          (31,457)            (30,412)         (5,225)      (81,528)
                                                        ---------           ---------       ---------     --------- 

Cash flows from financing activities:                                                                               
   Proceeds from issuance of common stock                      --                  --              --       625,000 
  Cash received from Applied Biometrics, Inc.              47,866             939,028         461,265       222,771 
                                                        ---------           ---------       ---------     --------- 
    Net cash flows provided by financing activities        47,866             939,028         461,265       847,771 
                                                        ---------           ---------       ---------     --------- 

Net increase in cash                                           --                 500              --       483,785 

Cash and cash equivalents:                                                                                          
  Cash, beginning of period                                    --                  --              --           500 
                                                        ---------           ---------       ---------     --------- 
  Cash, ending of period                                $      --           $     500       $      --     $ 484,285 
                                                        =========           =========       =========     ========= 

See accompanying notes to the financial statements. 

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CARDIA, INC.                                                                    
NOTES TO FINANCIAL STATEMENTS                                                   

1. ORGANIZATION AND OPERATIONS                                                  

BACKGROUND                                                                      

Cardia, Inc. (Cardia or the Company) was formed in October of 1998 as a         
subsidiary of Applied Biometrics, Inc. (ABI). Prior to that time, the entity was
operated as the Transcatheter Closures Business (the Business) of ABI. Cardia   
was formed to develop, manufacture, and market Transcatheter Closure Devices    
(TCD's) which are based on intellectual property rights ABI acquired in November
1997.                                                                           

TCD's are a new generation of implantable device technologies which are         
delivered through a catheter to permanently repair certain cardiac defects in   
children and adults.                                                            

In December 1998, the Board of Directors of ABI approved a plan to distribute   
ABI's interest in the Company as a dividend to the shareholders of ABI (the     
Distribution). Under the plan, ABI shareholders received one share of Cardia for
every 11.563 shares of ABI common stock. The Distribution to shareholders       
occurred on February 2, 1999, with a total distribution of 375,000 shares.      

ACQUISITION OF TECHNOLOGY                                                       

ABI acquired the rights to the TCD technology in an acquisition consummated in  
November 1997. The purchase price for the acquired technology was approximately 
$542,000 and was comprised of 85,000 shares of ABI stock and $32,000 of related 
acquisition costs. The acquired technologies consisted of a pediatric product   
which has been subsequently market released internationally on a limited basis  
and rights to another product with therapeutic applications to adults which     
required substantial additional development. The purchase price allocation      
included approximately $100,000 to capitalizable intangible assets related to   
the developed product and $442,000 to in- process research and development which
was charged to expense in 1997 as the underlying research and development       
projects had not reached technological feasibility and had no alternative future
use.                                                                            

The purchase agreement also requires the payment of royalties equal to 3% of the
net sales price of Vessel/Septal Occluder devices sold, payable on a quarterly  
basis for a period of six years.                                                

BASIS OF PRESENTATION                                                           

The accompanying financial statements include the specifically identifiable net 
assets of the transcatheter closure operations of ABI and the results of        
operations of that business from the point of ABI's acquisition of the          
underlying technology in November 1997.                                         

Costs related to functions performed by ABI have been charged to the Business.  
Such costs allocated by the parent include certain general and administrative   
costs such as personnel costs, legal costs and costs of the finance function.   
These allocations of costs were determined in a manner which management         
considers to reflect the incremental costs of providing these services. The     
terms of these transactions and allocations of costs were                       

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determined between related parties and may therefore differ from terms which    
would have occurred between wholly unrelated parties or had the Business        
operated as a completely autonomous entity since inception.                     

The Business' financing requirements have been funded by Applied Biometrics,    
Inc. No interest expense has been allocated or charged to the Business for      
financing provided by ABI.                                                      

The financial information included herein may not necessarily be indicative of  
the financial position, results of operations or cash flows of the Business in  
the future or what the financial position, results of operations or cash flows  
would have been if the Business had been a separate, independent company during 
the periods presented.                                                          

INTERIM FINANCIAL DATA (UNAUDITED)                                              

The financial information presented as of June 30, 1999 and for each of the     
six-month periods ended June 30, 1999 and 1998, including related information   
set forth in the notes to financial statements, is unaudited. In the opinion of 
management, this financial information reflects the adjustments necessary for a 
fair presentation of the financial information for such periods. These          
adjustments consist of normal, recurring items. The results of operations for   
the six-month period ended June 30, 1999 should not necessarily be taken as     
indicative of the results of operations that may be expected for the entire     
year.                                                                           

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                   

ORGANIZATION                                                                    

The Company operates in one industry segment and is engaged in the development, 
manufacturing and marketing of Transcatheter Closure Devices.                   

FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS                                  

The Business' financial instruments consist of short-term trade receivables and 
payables for which the current carrying amounts approximate fair market value.  

USE OF ESTIMATES                                                                

The preparation of financial statements in accordance with generally accepted   
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the        
financial statements and the reported amounts of revenues and expenses during   
the reporting period. Actual results could differ from these estimates.         

CASH AND CASH EQUIVALENTS                                                       

Cash equivalents are highly liquid marketable securities with original          
maturities of three months or less.                                             

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INVENTORY                                                                       

Inventory is stated at the lower of cost (first-in-first-out basis) or market.  

PROPERTY AND EQUIPMENT                                                          

Property and equipment is stated at cost with depreciation computed using the   
straight-line method over the estimated useful lives of the assets. Expenditures
for additions and improvements are capitalized while repair and maintenance     
costs are expensed as incurred.                                                 

INTANGIBLE ASSETS                                                               

The cost of acquired intangible assets is capitalized and amortized on a        
straight-line basis over an estimated useful life of six years. The             
recoverability of unamortized intangible assets is assessed on an ongoing basis 
by comparing discounted future cash flows from the related product to net book  
value.                                                                          

REVENUE RECOGNITION                                                             

Revenue is recognized upon shipment of goods to customers.                      

CONCENTRATION OF CREDIT RISK                                                    

The Company does not believe it is subject to a concentration of credit risk.   

RESEARCH AND DEVELOPMENT                                                        

The costs of research and development are expensed as incurred.                 

INCOME TAXES                                                                    

Income taxes are accounted for using the liability method. The liability method 
requires the recognition of deferred tax assets and liabilities for differences 
between the financial reporting and income tax bases of the Company's assets and
liabilities.                                                                    

NET LOSS PER SHARE                                                              

Earnings (loss) per share is computed by dividing net loss by the               
weighted-average number of shares of common stock outstanding during the year.  
For periods prior to the spin-off of Cardia from ABI, weighted-average shares   
outstanding have been determined as if the distribution of shares in the        
spin-off had occurred as of the inception of the Company. Common stock          
equivalents, consisting of shares which might be issued upon exercise of stock  
options are not included in weighted-average common shares for purposes of      
determining diluted earnings per share in years where losses are reported since 
their inclusion would be antidilutive. Pro forma loss per share is as follows:  

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                                                             1997         1998
Pro forma:                                                                      
    Basic and diluted loss per share                     $   (1.22)   $   (2.23)
   Shares used in computing pro forma loss per share      375,000      375,000

RECENT ACCOUNTING PRONOUNCEMENTS                                                

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,     
"Accounting for Derivative Instruments and Hedging Activities." This standard   
establishes accounting and reporting standards for derivative instruments and   
hedging activities. The Company must adopt this standard no later than fiscal   
year 2001. Management believes that adoption of SFAS No. 133 will not have a    
material effect on the Company's financial statements.                          

3. PROPERTY AND EQUIPMENT                                                       

The cost of property and equipment and the estimated useful lives are as        
follows:                                                                        

                                                                [Download Table]

                                ESTIMATED                          
                               USEFUL LIFE      1997       1998    

                                                                   
Furniture and fixtures          5 years      $  --      $    7,496 
Machinery and equipment         5 years         --          22,916 
                                            ----------  ---------- 
                                                --          30,412 
Less accumulated depreciation                   --          (3,041)
                                            ----------  -----------
                                            $   --      $   27,371 
                                            ==========  ========== 

4.  INTANGIBLE ASSETS                                                           

                                                                [Download Table]

Intangible assets are comprised as follows:   ESTIMATED                          
                                             USEFUL LIFE     1997        1998    

                                                                                 
Intangible assets                             6 years     $  100,000  $  100,000 
Less accumulated amortization                                 --         (16,668)
                                                          ----------  -----------
                                                          $  100,000  $   83,332 
                                                          ==========  ========== 

5. STOCK OPTION PLAN                                                            

On January 27, 1999, the Board of Directors and sole shareholder of the Company 
adopted the Cardia, Inc. 1999 Omnibus Stock Incentive Plan to provide for the   
granting of stock-based incentives to officers, key employees and directors of  
the Company. The Company has reserved 200,000 shares of its common stock for    
issue in connection with awards granted pursuant to the plan. Subsequent to     
December 31, 1998, the Company issued options to purchase an aggregate of       
132,500 shares of its common stock at exercise prices varying from $1.00 to     
$1.10 per share.                                                                

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6. INCOME TAXES                                                                 

The Business has not been allocated any tax benefit on the results of its       
operations since inception. As the Business was part of the consolidated tax    
return of ABI until spin-off as a separate company in February 1999, no losses  
prior to that date are available for carryforward to future periods.            

At the spin-off date, the Company will have available net temporary differences 
to offset taxable income in future periods. For tax purposes, all acquired      
technology of the Business is capitalized and amortized over a life of 15 years.
Such future tax benefits approximate $140,000.                                  

7. SUBSEQUENT EVENTS - CAPITALIZATION AND FINANCING                             

The Distribution of 375,000 shares of the Company's common stock to ABI         
shareholders occurred on February 11, 1999. At that date, Cardia had authorized 
10,000,000 shares of its $0.01 par value common stock. Concurrent with the      
Distribution, the Company sold 125,000 shares of Cardia common stock at a price 
of $1 per share to an officer of the Company.                                   

Subsequent to the Distribution, the Company completed a rights offering of its  
common stock to sell an aggregate of 500,000 shares of common stock at a        
subscription price of $1 per share, on the basis of one right for each share of 
Cardia stock held by a shareholder immediately after the Distribution.          

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INDEX TO FINANCIAL STATEMENTS - VIDEO LEARNING SYSTEMS, INC.

                                                        [Enlarge/Download Table]

                                                                                                               PAGE

                                                                                                                   
Independent Auditors' Report...................................................................................F-13

Balance Sheets as of December 31, 1997 and 1998, and June 30, 1999 (unaudited).................................F-14

Statements of Income for the years ended December 31, 1997 and 1998, and for the six month period                  
ended June 30, 1999 (unaudited)................................................................................F-15

Statements of Shareholders' Equity for the years ended December 31, 1997 and 1998, and for the six month period    
ended June 30, 1999 (unaudited)................................................................................F-16

Statements of Cash Flows for the years ended December 31, 1997 and 1998, and for the six month period              
ended June 30, 1999 (unaudited)................................................................................F-17

Notes to Financial Statements..................................................................................F-18

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INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board                                                   
of Directors of Video Learning Systems, Inc.                                    
Minnetonka, Minnesota                                                           

   We have audited the accompanying balance sheets of Video Learning
Systems, Inc. as of December 31, 1998 and 1997, and the related statements of   
income, shareholders' equity and cash flows for the years then ended. These     
financial statements are the responsibility of the Company's management. Our    
responsibility is to express an opinion on these financial statements based on  
our audits.                                                                     

        We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting 
the amounts and disclosures in the financial statements. An audit also includes 
assessing the accounting principles used and significant estimates made by      
management, as well as evaluating the overall financial statement presentation. 
We believe that our audits provide a reasonable basis for our opinion.          

    In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Video Learning      
Systems, Inc. as of December 31, 1998 and 1997, and the results of its          
operations and its cash flows for the years then ended in conformity with       
generally accepted accounting principles.                                       

                                       /s/ Casey, Menden, Faust & Nelson, P.A.

July 7, 1999                                                                    

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VIDEO LEARNING SYSTEMS, INC.
BALANCE SHEETS

ASSETS
------

                                                        [Enlarge/Download Table]

                                                                                 June 30, 
                                                          1997        1998         1999   
                                                       ---------   ---------    --------- 
                                                                               (unaudited)
                                                                                          
Current assets:                                                                           
     Cash                                              $ 322,706   $ 389,922    $ 366,823 
     Refundable income taxes                                  --       4,458        4,458 
     Note receivable, current portion                     44,301      47,503       79,631 
     Accounts receivable - interest                           --          --          153 
                                                       ---------   ---------    --------- 
         Total current assets                            367,007     441,883      451,065 
                                                       ---------   ---------    --------- 

     Video production costs                              519,619     519,619      519,619 
         Less: accumulated amortization                 (519,619)   (519,619)    (519,619)
                                                       ---------   ---------    --------- 
         Video production costs, net                          --          --           -- 
                                                       ---------   ---------    --------- 

     Other assets:                                                                        
         Note receivable, net of current portion         200,019     152,516       97,051 
                                                       ---------   ---------    --------- 

              Total other assets                         200,019     152,516       97,051 
                                                       ---------   ---------    --------- 

                                                       $ 567,026   $ 594,399    $ 548,116 
                                                       =========   =========    ========= 


                      LIABILITIES AND SHAREHOLDERS' EQUITY                                
                      ------------------------------------                                

Current liabilities:                                                                      
     Accounts payable                                  $     235   $     235    $   3,235 
     Accounts payable - related party                     58,149      58,149           -- 
                                                       ---------   ---------    --------- 

              Total current liabilities                   58,384      58,384        3,235 
                                                       ---------   ---------    --------- 
Commitments and contingent liabilities                        --          --           -- 

Shareholders' equity:                                                                     
     Common stock, no par value, authorized                                               
         10,000,000 shares; 1,063,750 shares issued                                       
         and outstanding in 1998 and 1997                706,434     706,434      706,434 
     Contributed capital                                  18,000      18,000       18,000 
     Retained earnings (deficit)                        (215,792)   (188,419)    (179,553)
                                                       ---------   ---------    --------- 

              Total shareholders' equity               $ 508,642     536,015      544,881 
                                                       ---------   ---------    --------- 

                                                       $ 567,026   $ 594,399    $ 548,116 
                                                       =========   =========    ========= 

See accompanying notes to financial statements

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VIDEO LEARNING SYSTEMS, INC.

STATEMENTS OF INCOME

                                                        [Enlarge/Download Table]

                                                                           For the    
                                                                          Six Months  
                                                                            Ended     
                                                                           June 30,   
                                                 1997          1998          1999     
                                              -----------   -----------   ----------- 
                                                                          (unaudited) 
                                                                                      
Income:                                                                               
     Royalty income                           $        --   $        --   $        -- 
                                              -----------   -----------   ----------- 

         Total income                                  --            --            -- 
                                              -----------   -----------   ----------- 

Cost of sales:                                                                        
     Royalties                                         --            --            -- 
                                              -----------   -----------   ----------- 

         Total cost of sales                           --            --            -- 
                                              -----------   -----------   ----------- 

              Gross profit                             --            --            -- 

Selling, general and administrative expenses        5,831         6,294         6,032 
                                              -----------   -----------   ----------- 

         Operating income (loss)                   (5,831)       (6,294)       (6,032)
                                              -----------   -----------   ----------- 

Other income:                                                                         
     Interest income                               27,834        27,530        12,088 
     Dividend income                                5,845         6,137         2,810 
                                              -----------   -----------   ----------- 

         Total other income                        33,679        33,667        14,898 
                                              -----------   -----------   ----------- 

     Income before income taxes                    27,848        27,373         8,866 

Income tax expense (benefit)                           --            --            -- 
                                              -----------   -----------   ----------- 

         Net income                           $    27,848   $    27,373   $     8,866 
                                              ===========   ===========   =========== 

         Weighted average outstanding shares    1,063,750     1,063,750     1,063,750 
                                              ===========   ===========   =========== 
         Net income per share                 $      .026   $      .026   $      .008 
                                              ===========   ===========   =========== 

See accompanying notes to financial statements

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VIDEO LEARNING SYSTEMS, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

                                                        [Enlarge/Download Table]

                                                                 Retained                 
                              Number of   Common    Contributed  Earnings    Shareholders'
                                Shares     Stock      Capital    (Deficit)       Equity   
                              ---------  ---------   ---------   ---------     ---------  

                                                                                          
Balance at                                                                                
   January 1, 1997            1,063,750  $ 706,434   $  18,000   $(243,640)    $ 480,794  

     Net income                      --         --          --      27,848        27,848  
                              ---------  ---------   ---------   ---------     ---------  

Balance at                                                                                
   December 31, 1997          1,063,750    706,434      18,000    (215,792)      508,642  

     Net income                      --         --          --      27,373        27,373  
                              ---------  ---------   ---------   ---------     ---------  

Balance at                                                                                
   December 31, 1998          1,063,750    706,434      18,000    (188,419)      536,015  

     Net income (unaudited)          --         --          --       8,866         8,866  
                              ---------  ---------   ---------   ---------     ---------  

Balance at                                                                                
   June 30, 1999 (unaudited)  1,063,750  $ 706,434   $  18,000   $(179,553)    $ 544,881  
                              =========  =========   =========   =========     =========  

See accompanying notes to financial statements

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VIDEO LEARNING SYSTEMS, INC.

STATEMENTS OF CASH FLOWS

                                                                [Download Table]

                                                                          For the 
                                                                        Six Months
                                                                          Ended   
                                                                         June 30, 
                                                 1997        1998         1999    
                                               ---------   ---------    --------- 
                                                                       (unaudited)
                                                                                  
Cash flows from operating activities:                                             
   Net Income                                  $  27,848   $  27,373    $   8,866 
   Adjustments to reconcile net income to net                                     
       cash provided by operating activities:                                     
       Net change in:                                                             
           Interest receivable                       838          --         (153)
           Refundable income taxes                    --      (4,458)          -- 
           Accounts payable                           --          --        3,000 
           Accounts payable - related party       58,149          --      (58,149)
                                               ---------   ---------    --------- 

       Net cash from operating activities:        86,835      22,915      (46,436)
                                               ---------   ---------    --------- 

Cash flows from investing activities:                                             
   Loans made                                   (244,320)         --           -- 
   Collection of loans                           137,000      44,301       23,337 
                                               ---------   ---------    --------- 

       Net cash from investing activities       (107,320)     44,301       23,337 
                                               ---------   ---------    --------- 

           Net increase (decrease) in cash       (20,485)     67,216      (23,099)

Cash at beginning of year                        343,191     322,706      389,922 
                                               ---------   ---------    --------- 

Cash at end of year                            $ 322,706   $ 389,922    $ 366,823 
                                               =========   =========    ========= 

Supplemental cash flow information                                                
   Interest paid                               $      --   $      --    $      -- 
   Income taxes paid                           $      --   $   4,408    $      -- 

See accompanying notes to financial statements

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VIDEO LEARNING SYSTEMS, INC.

 NOTES TO FINANCIAL STATEMENTS

Organization and Operations                                                     

           Video Learning Systems, Inc. ("the Company") was incorporated under
the laws of the State of Minnesota on December 7, 1982. The Company is currently
evaluating various business opportunities. Previously, the Company was engaged  
in the marketing of video tapes to the home video market.                       

Summary of Significant Accounting Policies                                      

Basis of Accounting                                     

         The Company uses the accrual method of accounting for
financial reporting purposes.                           

Use of Estimates in Preparation of Financial Statements 

               The preparation of the accompanying financial statements in
         conformity with generally accepted accounting principles requires
          management to make certain estimates and assumptions that directly
        affect the results of reported assets, liabilities, revenue, and
 expenses. Actual results may differ from these estimates.

Cash and Cash Equivalents                               

              For the purpose of the statement of cash flows the Company
     considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.

Video Production Costs                                  

              On December 31, 1994, the Company amortized the balance of
            video production costs since no revenues had been generated over the
          last four years. Video production costs are stated at the lower of
            cost, amortized cost or estimated realizable value determined on the
           individual - film - forecast computation method. The carrying value
       of each video was compared on a periodic basis to its estimated
   future revenue and, if appropriate, was adjusted to its net
realizable value.                                       

Property and Equipment                                  

              Property and equipment are stated at cost. Depreciation is
            provided by accelerated methods for both financial reporting and tax
purposes.                                               

Net Income Per Share                                    

               Net income per share computations are based on the weighted
   average number of common shares outstanding during the year
including common stock equivalents, if dilutive.        

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VIDEO LEARNING SYSTEMS, INC.

 NOTES TO FINANCIAL STATEMENTS

 (continued)

Interim Financial Data (Unaudited)                                              

                The financial information presented for the six month period
           ended June 30, 1999, including related information set forth in the
      notes to financial statements, is unaudited. In the opinion of
       management, this financial information reflects the adjustments
          necessary for a fair presentation of the financial information for
          such period. These adjustments consist of normal, recurring items.
         The results of operations for the six month period ended June 30,
            1999 should not necessarily be taken as indicative of the results of
operations that may be expected for the entire year.    

                Interim financial information for the six month period ended
        June 30, 1998 is not included in these financial statements. The
            Company did not prepare interim financial statements in 1998, and it
      is not currently practicable to produce such interim financial
           statements without undue expense. The Company does not believe such
            information is material to an understanding of its current financial
condition.                                              

Concentrations of Credit Risk                                                   

The Company's financial instruments that are exposed to 
concentrations of credit risk consist primarily of cash and money market funds. 
The Company maintains its cash and money market funds at two brokerage          
institutions in Minneapolis, Minnesota. Cash accounts are insured by SIPC up to 
$100,000 and overall each brokerage institution insures accounts up to          
$25,000,000. Brokerage institutions do not protect accounts from market loss.   

Note Receivable                                                                 

           In January and February 1997, the Company received notes receivable
- related party totaling $245,000. These notes were paid-off by the assignment  
of another note receivable from an outstate Corporation in June, 1997. The note 
will be repaid in monthly installments of $5,000 and at an annual interest rate 
of 7%. The President of the Company has personally guaranteed the note          
receivable. The unpaid principal on the note was $200,019 and $244,320 at       
December 31, 1998 and 1997, respectively.                                       

Accounts Payable - Related Party                                                

         Accounts payable - related party was $58,149 at both December 31,
1998 and 1997 and was paid-off in full on March 5, 1999.                        

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VIDEO LEARNING SYSTEMS, INC.

 NOTES TO FINANCIAL STATEMENTS

 (continued)

Income Taxes                                                                    

Income tax expense was $0 for 1998 and $0 for 1997.     

          The Company is in a net operating loss carryforward position as of
December 31, 1998. Consequently a reconciliation of the statutory and state     
income tax rates to the actual rates is not applicable.                         

         The Company has a net operating loss carryforward at December 31,
1998 as follows:                                                                

                 Expiration Date              Federal                State

                          2009                $ 17,000               $  97,000
                                              -----------            ---------

                                              $ 17,000               $  97,000
                                              ===========            =========

        During the period of inception to May 1986, the Company was an S
Corporation whereby each shareholder reported its distributive share of the S   
Corporation loss or income on its income tax return. As a result of the change  
in status to a C Corporation, certain tax deductions are available to the       
Company. These net "prepaid" taxes have been treated as contributed capital.    
Prepaid and deferred income taxes result from timing differences in the         
recognition of items of income and expenses for tax and for financial statement 
purposes.                                                                       

            The Company has implemented the provisions of Statement of Financial
Standards No. 109, "Accounting for Income Taxes," which was issued by the       
Financial Accounting Standards Board in 1992. A deferred tax asset and valuation
allowance have been recognized relating to the future benefit of the net        
operating loss carryforward as follows:                                         

                                               1999         1998        1997
                                              ---------    ---------   ---------

     Current deferred tax asset              $  10,947    $ 18,904    $ 25,800

          Tax benefit of net operating loss      (1,031)     (6,789)     (6,896)
                                              ----------   ---------   ---------

     Current deferred tax asset                  9,916      12,115      18,904

      Less: Valuation allowance                  (9,916)    (12,115)    (18,904)
                                              ----------   ---------   ---------

                                              $      --    $      --   $      --
                                              =========    =========   =========

Commitments and Contingent Liabilities                                          

    During 1986, the Company acquired all assets and assumed all
liabilities of the dissolved E & E joint venture. The Company has agreed to pay 
the previous joint venture partner a royalty of 40% of funds collected          

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VIDEO LEARNING SYSTEMS, INC.

 NOTES TO FINANCIAL STATEMENTS

 (continued)

from future sales of the Preschool Express videos and 50% of any amounts        
obtained in the eventual sale of the master tapes produced by the joint venture.

    During 1988, the Company acquired all assets and assumed all
liabilities of the dissolved Karate Martial Arts joint venture. The Company has 
agreed to pay the previous joint venture partner a royalty based on one-sixth of
the royalties collected on the Karate Master video.                             

        No royalty expenses were incurred under these agreements for the
years ending December 31, 1998 and 1997.                                        

Distribution Agreement                                                          

        In January 1992, Video Learning Systems, Inc. signed a letter of
agreement with another company to turn the Becoming Beautiful, Preschool        
Express, Stanford Health and Kathy Smith videos over to them for distribution.  
This company will place these videos with distributors, honoring the Video      
Learning Systems, Inc. Video School House Agreement and absorb all costs        
involved. This company will also pay Video Learning Systems, Inc. 35% of gross  
royalties and revenues generated.                                               

            No revenues were generated under this agreement for the years ending
December 31, 1998 and 1997.                                                     

Reclassifications                                                               

         Certain accounts in the prior-year financial statements have been
reclassified for comparative purposes to conform with the presentation in the   
financial statements. These reclassifications had not net income effect.        

Subsequent Event                                                                

     On July 7, 1999, the assigned note receivable from an outside
Corporation was replaced by a demand note directly payable to the Company. The  
terms of the note are similar to the assigned note receivable except that the   
payments will increase from $5,000 per month to $10,000 per month starting      
January 1, 2000.                                                                

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VIDEO LEARNING SYSTEMS, INC.

 NOTES TO FINANCIAL STATEMENTS

 (continued)

Restatement of 1997 Financial Information                                       

            During 1998 additional information was obtained that resulted in the
following restatements:                                                         

                                       Balance Sheet
                                         ---------------------------------------
          Accounts
                                      Payable -     Income      Retained
                                      Related        Taxes      Earnings
                                        Party        Payable     (Deficit)
                                       ---------    ---------     ----------

As previously stated at                                                         
            December 31, 1997          $      --    $   2,500     $(160,143)

            Restatement adjustment        58,149       (2,500)      (55,649)
                                      ---------    ---------     ---------

Restated balance at December 31, 1997    $  58,149    $      --     $(215,792)  
                                      =========    =========     =========

                             Statement of Income
                            ----------------------------------
                              Interest              Income tax
                              Income                 Expense
As previously stated at                                                         
    December 31, 1997      $   85,983              $   2,500

Restatement adjustment                  (58,149)                (2,500)         
                            -------------           ----------

Restated balance at                                                             
     December 31, 1997      $   27,834              $       --
                            =============           ==========

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                                                                      APPENDIX A

                                                                  EXECUTION COPY

AGREEMENT AND PLAN OF MERGER

 BETWEEN

CARDIA, INC.

 AND

VIDEO LEARNING SYSTEMS, INC.

Dated as of July 1, 1999

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                                                        [Enlarge/Download Table]

                                                                                                       PAGE

                                                                                                           
ARTICLE 1      THE MERGER; CONVERSION OF SHARES.........................................................A-4

         1.1   The Merger...............................................................................A-4
         1.2   Effective Time...........................................................................A-4
         1.3   Conversion of Shares.....................................................................A-4
         1.4   Dissenters' Rights.......................................................................A-4
         1.5   Exchange of VLS Common Stock.............................................................A-5
         1.6   Articles of Incorporation of the Surviving Corporation...................................A-6
         1.7   Bylaws of the Surviving Corporation......................................................A-6
         1.8   Directors and Officers of the Surviving Corporation......................................A-6

ARTICLE 2      CLOSING..................................................................................A-6

         2.1   Time and Place...........................................................................A-6
         2.2   Filings at the Closing...................................................................A-6

ARTICLE 3      REPRESENTATIONS AND WARRANTIES OF VLS....................................................A-7

         3.1   Organization.............................................................................A-7
         3.2   Authorization............................................................................A-7
         3.3   Capitalization...........................................................................A-7
         3.4   Financial Statements.....................................................................A-7
         3.5   Absence of Undisclosed Liabilities.......................................................A-7
         3.6   Consents and Approvals...................................................................A-8
         3.7   Compliance with Laws.....................................................................A-8
         3.8   Litigation...............................................................................A-8
         3.9   Promissory Note..........................................................................A-8
         3.10  Taxes....................................................................................A-8
         3.11  Minute Books.............................................................................A-8
         3.12  No Finders...............................................................................A-8
         3.13  Proxy Statement..........................................................................A-8
         3.14  Material Omissions.......................................................................A-9

ARTICLE 4      REPRESENTATIONS AND WARRANTIES OF CARDIA.................................................A-9

         4.1   Organization.............................................................................A-9
         4.2   Authorization............................................................................A-9
         4.3   Capitalization..........................................................................A-10
         4.4   Consents and Approvals..................................................................A-10
         4.5   Reports and Financial Statements........................................................A-10
         4.6   Registration Statement..................................................................A-11
         4.7   No Finders..............................................................................A-11
         4.8   Litigation..............................................................................A-11
         4.9   Taxes...................................................................................A-11
         4.10  Material Omissions......................................................................A-11

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ARTICLE 5      COVENANTS...............................................................................A-11

         5.1   Conduct of Business of VLS..............................................................A-11
         5.2   Conduct of Business of Cardia...........................................................A-11
         5.3   No Solicitation.........................................................................A-12
         5.4   Access and Information..................................................................A-13
         5.5   Approval of Stockholders; Proxy Statement; Registration Statement.......................A-13
         5.6   Consents................................................................................A-14
         5.7   Expenses................................................................................A-14
         5.8   Further Actions.........................................................................A-14
         5.9   Certain Notifications...................................................................A-15
         5.10  OTC Trading.............................................................................A-15

ARTICLE 6      CLOSING CONDITIONS......................................................................A-15

         6.1   Conditions to Obligations of Cardia and VLS.............................................A-15
         6.2   Conditions to Obligations of Cardia.....................................................A-15
         6.3   Conditions to Obligations of VLS........................................................A-16

ARTICLE 7      TERMINATION AND ABANDONMENT.............................................................A-16

         7.1   Termination.............................................................................A-16

ARTICLE 8      MISCELLANEOUS...........................................................................A-17

         8.1   Amendment and Modification..............................................................A-17
         8.2   Waiver of Compliance; Consents..........................................................A-17
         8.3   Investigation; Survival of Representations and Warranties...............................A-17
         8.4   Notices.................................................................................A-18
         8.5   Assignment..............................................................................A-18
         8.6   Governing Law...........................................................................A-18
         8.7   Counterparts............................................................................A-19
         8.8   Knowledge...............................................................................A-19
         8.9   Interpretation..........................................................................A-19
         8.10  Publicity...............................................................................A-19
         8.11  Entire Agreement........................................................................A-19
         8.12  Severability............................................................................A-19
         8.13  Specific Performance....................................................................A-20

EXHIBITS:                                                                       

   Exhibit A:  Duckson & Carlson LLC Opinion Matters [Not Provided].
     Exhibit B:  Lindquist & Vennum PLLP Opinion Matters [Not Provided].

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AGREEMENT AND PLAN OF MERGER

      THIS AGREEMENT (the "Agreement") is dated as of July 1, 1999, by and
between Cardia, Inc., a Minnesota corporation ("Cardia") and Video Learning     
Systems, Inc., a Minnesota corporation ("VLS").                                 

         WHEREAS, the respective Boards of Directors of Cardia and VLS have each
approved the merger of VLS with and into Cardia (the "Merger") upon the terms   
and subject to the conditions set forth herein; and                             

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

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

 ARTICLE 1
THE MERGER; CONVERSION OF SHARES

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

         1.2 EFFECTIVE TIME. As soon as practicable after each of the conditions
set forth in Article 6 have been satisfied or waived on the Closing Date (as    
defined in Section 2.1), Cardia will file, or cause to be filed, with the       
Secretary of State of the State of Minnesota Articles of Merger for the Merger, 
which Articles shall be in the form required by and executed in accordance with 
the applicable provisions of the MBCA. The Merger shall become effective at the 
time such filing is made or, if agreed to by Cardia and VLS, such later time or 
date set forth in the Articles of Merger (the "Effective Time").                

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

      (a) The holders of shares of common stock of VLS, $.01 par value per
share ("VLS Common Stock"), will receive an aggregate of 200,000 shares of the  
common stock of Cardia ("Cardia Common Stock"), $.01 par value per share (the   
"Merger Consideration"). Each share of VLS Common Stock outstanding immediately 
prior to the Effective Time will represent only the right to receive a fraction 
of a share of Cardia Common Stock equal to the Merger Consideration divided by  
the total number of shares of VLS Common Stock outstanding immediately prior to 
the Effective Time (the "Per Share Merger Consideration").                      

       (b) Each share of any other class of capital stock of VLS (other than
VLS Common Stock) or right to receive any class of capital stock of VLS shall be
canceled without payment of any consideration therefor and without any          
conversion thereof.                                                             

     (c) Each share of common stock of Cardia, par value $.01 per share,
issued and outstanding immediately prior to the Effective Time shall remain     
outstanding and shall not be converted into any other security.                 

   1.4 DISSENTERS' RIGHTS. The parties acknowledge that, pursuant to
Section 302A.471 of the MBCA, the holders of VLS Common Stock shall have        
dissenters' rights in connection with the Merger.                               

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1.5 EXCHANGE OF VLS COMMON STOCK.                             

    (a) At or prior to the Effective Time, Cardia shall cause Cardia's
stock transfer agent, or such other agent as is mutually agreed to by the       
parties, to act as exchange agent (the "Exchange Agent") hereunder. As promptly 
as practicable after the Effective Time, Cardia shall cause the Exchange Agent  
to mail to each holder of record of a certificate or certificates that          
immediately prior to the Effective Time represented outstanding shares of VLS   
Common Stock ("VLS Certificates") a form letter of transmittal (which shall     
specify that delivery shall be effective, and risk of loss and title to the VLS 
Certificate(s) shall pass, only upon delivery of the VLS Certificate(s) to the  
Exchange Agent) and instructions for such holder's use in effecting the         
surrender of the VLS Certificates in exchange for certificates representing     
shares of Cardia Common Stock and cash in lieu of any fractional shares.        

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

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

        (d) All certificates evidencing shares of Cardia Common Stock that are
issued upon the surrender for exchange of VLS Certificates, together with any   
cash paid for fractional shares pursuant to Section 1.5(f) hereof, shall be     
deemed to have been issued in full satisfaction of all rights pertaining to the 
shares of VLS Common Stock represented by the surrendered VLS Certificates.     

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

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        (f) No fractional shares of Cardia Common Stock and no certificates or
scrip therefor, or other evidence of ownership thereof, shall be issued in      
connection with the Merger. No dividend or other distribution of Cardia shall   
relate to any fractional share, and such fractional share interests shall not   
entitle the owner thereof to vote or to any rights of a shareholder of Cardia.  
All fractional shares of Cardia Common Stock to which a holder of VLS Common    
Stock immediately prior to the Effective Time would otherwise be entitled, at   
the Effective Time, shall be aggregated if and to the extent multiple VLS       
Certificates of such holder are submitted together to the Exchange Agent. If a  
fractional share results from such aggregation, then (in lieu of such fractional
share) the Exchange Agent shall pay to each holder of shares of VLS Common Stock
who otherwise would be entitled to receive such fractional share of Cardia      
Common Stock an amount of cash (without interest) determined by multiplying     
$1.00 by the fractional share of Cardia Common Stock to which such holder would 
otherwise be entitled. Cardia will make available to the Exchange Agent any cash
necessary for this purpose.                                                     

        (g) In the event any VLS Certificates shall have been lost, stolen, or
destroyed, the Exchange Agent shall issue in respect of such lost, stolen, or   
destroyed VLS Certificates, upon the making of an affidavit of that fact by the 
holder thereof, such shares of Cardia Common Stock, cash for fractional shares, 
if any, and dividends or other distributions, if any, as may be required        
pursuant to this Article 1; provided, however, that Cardia may, in its          
discretion and as a condition precedent to the issuance thereof, require the    
owner of such lost, stolen, or destroyed VLS Certificate to deliver a bond in   
such sum as Cardia may reasonably direct as indemnity against any claim that may
be made against Cardia or the Exchange Agent with respect to such VLS           
Certificate alleged to have been lost, stolen, or destroyed.                    

 1.6 ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION. The
Articles of Incorporation of Cardia, as in effect immediately prior to the      
Effective Time, shall be the Articles of Incorporation of the Surviving         
Corporation until thereafter amended in accordance with applicable law.         

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

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

 ARTICLE 2
 CLOSING

  2.1 TIME AND PLACE. Subject to the satisfaction or waiver of the
provisions of Article 6, the closing of the Merger (the "Closing") shall take   
place at 1:00 p.m., local time, on the day after the Required VLS Stockholder   
Vote (as defined in Section 3.2) is obtained, or as soon thereafter as, and in  
any event no later than the second business day after, all conditions to Closing
have been satisfied or waived, or on such other date and/or at such other time  
as Cardia and VLS may mutually agree. The date on which the Closing actually    
occurs is herein referred to as the "Closing Date." The Closing shall take place
at the offices of Lindquist & Vennum P.L.L.P. in Minneapolis, or at such other  
place or in such other manner (e.g., by facsimile exchange of signature pages   
with originals to promptly follow by overnight delivery) as the parties hereto  
may agree.                                                                      

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

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 ARTICLE 3
 REPRESENTATIONS AND WARRANTIES OF VLS

  VLS hereby makes the following representations and warranties to
Cardia:                                                                         

      3.1 ORGANIZATION. VLS is an entity duly organized, validly existing,
and in good standing under the laws of the state of Minnesota and has all       
requisite corporate power and authority to own, lease, and operate its          
properties and to carry on its business as now being conducted. VLS is duly     
qualified and in good standing to do business in each jurisdiction in which the 
property owned, leased, or operated by it or the nature of the business         
conducted by it makes such qualification necessary, except where the failure to 
be so qualified or in good standing would not have a VLS Material Adverse       
Effect. "VLS Material Adverse Effect" means an effect that is or is reasonably  
expected to be materially adverse: (i) to the business, results of operation, or
financial condition of VLS or (ii) to VLS' ability to perform any of its        
material obligations under this Agreement or to consummate the Merger. VLS has  
heretofore delivered or made available to Cardia or its advisers complete and   
accurate copies of the Articles of Incorporation and Bylaws of VLS, as currently
in effect. As of the date hereof, VLS does not, directly or indirectly, own or  
control or have any material equity, partnership, or other similar ownership    
interest in any corporation, partnership, joint venture, or other business      
association or entity.                                                          

        3.2 AUTHORIZATION. VLS has all necessary corporate power and authority
to execute and deliver this Agreement and, subject to obtaining the necessary   
approval of its stockholders, to consummate the transactions contemplated       
hereby. The execution and delivery by VLS of this Agreement and the consummation
by VLS of the transactions contemplated hereby, have been duly and validly      
authorized and approved by VLS' Board of Directors. No other corporate          
proceedings on the part of VLS, other than a meeting of VLS' stockholders (the  
"VLS Stockholders' Meeting"), are necessary to authorize this Agreement, and,   
subject to obtaining the approval and adoption of this Agreement and approval of
the Merger by a majority of the shares of VLS Common Stock outstanding as of the
record date of VLS Stockholders' Meeting (the "Required VLS Stockholder Vote"), 
no other corporate action on the part of VLS is necessary to consummate the     
transactions contemplated hereby. The Merger has been declared advisable by the 
Board of Directors of VLS. This Agreement has been duly and validly executed and
delivered by VLS and, assuming due execution and delivery by the other parties  
hereto, constitutes the valid and binding obligation of VLS, enforceable against
VLS in accordance with its terms, subject to bankruptcy, insolvency and similar 
laws, and rules of law governing specific performance, injunctive relief, or    
other equitable remedies.                                                       

       3.3 CAPITALIZATION. As of the close of business on June 30, 1999, the
authorized capital stock of VLS consisted of 10,000,000 shares of VLS Common    
Stock, no par value per share, of which 1,063,750 were issued and outstanding.  
All issued and outstanding shares of VLS Common Stock have been validly issued, 
are fully paid and nonassessable, and have not been issued in violation of and  
are not currently subject to any preemptive rights. As of the close of business 
on June 30, 1999, there were no outstanding or authorized subscriptions,        
options, warrants, calls, rights, convertible securities, commitments,          
restrictions, arrangements, or any other agreements of any character to which   
VLS was a party that, directly or indirectly, (a) obligated VLS to issue any    
shares of capital stock or any securities convertible into, or exercisable or   
exchangeable for, or evidencing the right to subscribe for, any shares of       
capital stock, (b) called for or related to the sale, pledge, transfer, or other
disposition or encumbrance by VLS of any shares of its capital stock, or (c)    
related to the voting or control of such capital stock.                         

    3.4 FINANCIAL STATEMENTS. The audited balance sheets for the years
ended December 31, 1996, 1997 and 1998 and the related income statements and    
statements of cash flows of VLS for the periods then ended (the "Financial      
Statements") have been furnished to Cardia and fully and fairly represent the   
financial condition and results of operations as of the dates and for the       
periods covered by the Financial Statements.                                    

        3.5 ABSENCE OF UNDISCLOSED LIABILITIES. Neither VLS nor any Subsidiary
has any liabilities or obligations of any nature (whether absolute, accrued,    
contingent or otherwise) of the type required to be reflected on or reserved    
against in, or disclosed in the notes to, a balance sheet prepared in accordance
with                                                                            

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generally accepted accounting principles except liabilities or obligations that 
will be accrued or reserved against in the audited balance sheet of VLS as of   
December 31, 1998 or referred to in the notes thereto.                          

       3.6 CONSENTS AND APPROVALS. The execution and delivery by VLS of this
Agreement and the consummation by VLS of the transactions contemplated hereby   
will not: (a) violate any provision of the Articles of Incorporation or Bylaws  
of VLS; (b) violate in any material way any material statute, rule, regulation, 
order, or decree of any federal, state, local, or foreign governmental or       
regulatory body or authority (each a "Governmental Body") or any nongovernmental
self-regulatory agency by which VLS or any of its properties or assets may be   
bound; (c) require any filing by VLS of any permit, consent, authorization or   
approval from any Governmental Body or any nongovernmental self-regulatory      
agency; or (d) result in any violation or breach of, or constitute a default    
under, result in the loss of any material benefit under, or give rise to any    
right of termination, cancellation, increased payments, or acceleration under,  
or result in the creation of any lien, attachment, encumbrance or other claim   
("Lien") on any of the properties or assets of VLS under any of the terms,      
conditions, or provisions of any material note, bond, mortgage, indenture,      
license, franchise, permit, authorization, agreement, or other instrument or    
obligation to which VLS is a party, or by which it or any of its properties or  
assets may be bound.                                                            

     3.7 COMPLIANCE WITH LAWS. VLS is not in default or violation in any
material respect of any applicable federal, state, local, or foreign laws,      
ordinances, regulations, published interpretations, judgments, decrees,         
injunctions, permits, licenses, certificates, governmental requirements, orders,
or other similar items of any court or other Governmental Body (and including   
those of any nongovernmental self-regulatory agency and including environmental 
laws or regulations), except for such defaults or violations that would not have
a VLS Material Adverse Effect.                                                  

       3.8 LITIGATION. As of the date of this Agreement, there are no legal,
regulatory or other proceedings pending or threatened against VLS.              

     3.9 PROMISSORY NOTE. The promissory note dated June 20, 1997 in the
original principal amount of $268,770.02 executed by KR1, Inc. d/b/a Firstat    
Nursing of Atlanta, and made payable to VLS (the "Note") has a current          
outstanding principal balance of $200,019 as of December 31, 1998 and accrues   
interest at a rate of seven percent (7%) per annum. The Note is personally      
guaranteed by Kenneth J. Rickert, Jr. (the "Guaranty"). The Note and Guaranty   
are owned by VLS and are not subject to any liens, claims, defenses,            
counterclaims, encumbrances or set-offs. KR1, Inc. is not currently in default  
with respect to any of its obligations under the Note.                          

         3.10 TAXES. (i) VLS has filed all state, local, United States, foreign,
or other tax reports and returns required to be filed by any of them, (ii) VLS  
has duly paid, or accrued on their books of account, all taxes (including       
estimated taxes) shown as due on such reports and returns (or such extension    
requests), or assessed against them, other than taxes being contested in good   
faith in proper proceedings, and (iii) the liabilities and reserves for taxes   
reflected on VLS 1998 audited balance sheet will be adequate to cover all taxes 
payable by VLS for all taxable periods and portions thereof ending on or before 
the dates thereof. No tax audits are pending against and no claims for taxes    
have been received in writing by VLS. VLS has not, with regard to any assets or 
property held, acquired or to be acquired, filed a consent to the application of
Section 341(f)(2) of the Code.                                                  

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

       3.11 MINUTE BOOKS. VLS has previously made available to Cardia or its
representatives all of its                                                      

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minutes of meetings of and corporate actions or written consents by the         
stockholders, Board of Directors, and committees of the Board of Directors of   
VLS since January 1, 1996.                                                      

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

     3.13 PROXY STATEMENT. The Proxy Statement/Prospectus (as defined in
Section 5.5 hereof) and any amendments or supplements thereto will comply as to 
form in all material respects with all applicable laws, and none of the         
information supplied by VLS specifically for inclusion or incorporation therein 
or in any amendments or supplements thereto, or in any schedules required to be 
filed with the SEC in connection therewith, will, at the date the Proxy         
Statement/Prospectus (or any amendment or supplement thereto) is first mailed to
stockholders, or at the time of the VLS Stockholders' Meeting, contain any      
untrue statement of a material fact or omit to state any material fact required 
to be stated therein or necessary in order to make the statements therein, in   
light of the circumstances under which they were made, not misleading; provided,
however, that no representation or warranty is made by VLS with respect to      
information supplied by Cardia specifically for inclusion in the Proxy          
Statement/Prospectus.                                                           

       3.14 MATERIAL OMISSIONS. No representation or warranty by VLS in this
Agreement, nor any statement, certificate or schedule furnished to or to be     
furnished by VLS pursuant to this Agreement contains or will contain any untrue 
statement of material fact or omits or will omit a material fact necessary to   
make the statements contained herein or therein not misleading in light of the  
circumstances.                                                                  

 ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF CARDIA

     Cardia hereby makes the following representations and warranties to
VLS:                                                                            

   4.1 ORGANIZATION. Cardia is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Minnesota. Cardia 
has all requisite corporate power and authority to own, lease, and operate its  
properties and to carry on its business as now being conducted, except where the
failure to be so organized, existing or in good standing or to have such        
corporate power and authority would not, individually or in the aggregate, have 
a Cardia Material Adverse Effect (as defined below). Cardia is duly qualified   
and in good standing to do business in each jurisdiction in which the property  
owned, leased, or operated by it or the nature of the business conducted by it  
makes such qualification necessary, except where the failure to be so qualified 
or in good standing would not have a Cardia Material Adverse Effect. "Cardia    
Material Adverse Effect" means an effect that is or is reasonably expected to   
be, materially adverse (i) to the business, results of operation, or financial  
condition of Cardia, (ii) to Cardia's ability to conduct such business, as      
presently conducted, following the Effective Time, or (iii) to Cardia's ability 
to perform any of its material obligations under this Agreement or to consummate
the Merger. Cardia has heretofore delivered or made available to VLS or its     
advisers complete and accurate copies of the Articles of Incorporation and      
Bylaws of Cardia, as currently in effect. As of the date hereof, Cardia does    
not, directly or indirectly, own or control or have any material equity,        
partnership, or other similar ownership interest in any corporation,            
partnership, joint venture, or other business association or entity that is     
material to Cardia.                                                             

 4.2 AUTHORIZATION. Cardia has all necessary corporate power and
authority to execute and deliver this Agreement and to consummate the           
transactions contemplated hereby. The execution and delivery by Cardia of this  
Agreement and the other agreements contemplated hereby to which Cardia is a     
party, and the consummation by Cardia of the transactions contemplated hereby   
and thereby, have been duly and validly authorized and approved by the Board of 
Directors of Cardia, and no other corporate proceedings on the part of Cardia,  
and no vote, consent or approval of Cardia's shareholders, are necessary to     
authorize this Agreement or to consummate the transactions contemplated hereby. 
This Agreement has been duly and validly executed and delivered by Cardia and,  
assuming due execution and delivery by VLS, constitutes the valid and binding   
obligation of Cardia, enforceable against it in accordance with its terms,      
subject to laws of general application relating to                              

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bankruptcy, insolvency, and the relief of debtors and rules of law governing    
specific performance, injunctive relief, or other equitable remedies.           

       4.3 CAPITALIZATION. As of June 30, 1999, the authorized capital stock
of Cardia consisted of 10,000,000 shares of Common Stock with a par value of    
$.01 per share, of which there were 1,000,081 shares issued and outstanding and 
1,000,000 shares of Preferred Stock with a par value of $.01 per share, of which
there were no shares issued and outstanding. All issued and outstanding shares  
of Cardia Common Stock are, and the shares of Cardia Common Stock to be issued  
and delivered in the Merger pursuant to Article 1 hereof shall be, at the time  
of issuance and delivery, validly issued, fully paid, nonassessable, and free of
preemptive rights. The shares of Cardia Common Stock to be issued and delivered 
in the Merger pursuant to Article 1 hereof shall be registered under the 1933   
Act. As of the close of business on June 30, 1999, except for options to        
purchase an aggregate total of 132,500 shares of Cardia Common Stock that were  
granted pursuant to Cardia's 1999 Omnibus Stock Incentive Plan, there were not  
any outstanding or authorized subscriptions, options, warrants, calls, rights,  
convertible securities, commitments, restrictions, arrangements, or any other   
agreements of any character to which Cardia was a party that, directly or       
indirectly, (a) obligated Cardia to issue any shares of capital stock or any    
securities convertible into, or exercisable or exchangeable for, or evidencing  
the right to subscribe for, any shares of capital stock, (b) called for or      
related to the sale, pledge, transfer, or other disposition or encumbrance by   
Cardia of any shares of its capital stock, or (c) related to the voting or      
control of such capital stock.                                                  

  4.4 CONSENTS AND APPROVALS. The consummation of the transactions
contemplated hereby and thereby will not: (a) violate any provision of the      
Articles of Incorporation or Bylaws of Cardia; (b) violate in any material way  
any material statute, rule, regulation, order, or decree of any Governmental    
Body or any nongovernmental self-regulatory agency by which Cardia or any of its
properties or assets may be bound; (c) require any filing by Cardia of any      
permit, consent, authorization or approval from any Governmental Body or any    
nongovernmental self-regulatory agency; or (d) result in any violation or breach
of, or constitute (with or without due notice or lapse of time or both) a       
default under, result in the loss of any material benefit under, or give rise to
any right of termination, cancellation, increased payments, or acceleration     
under, or result in the creation of any Lien on any of the properties or assets 
of Cardia under, any of the terms, conditions, or provisions of any material    
note, bond, mortgage, indenture, license, franchise, permit, agreement, or other
instrument or obligation to which Cardia is a party, or by which it or any of   
its properties or assets may be bound, except, in the case of clauses (b), (c)  
and (d), for any such filings, permits, consents or approvals or violations,    
breaches, defaults, or other occurrences that could not reasonably be expected  
to prevent or delay consummation of any of the transaction contemplated hereby  
in any material respect, or otherwise prevent Cardia from performing its        
obligations under this Agreement in any material respect, and would not have a  
Cardia Material Adverse Effect.                                                 

   4.5 REPORTS AND FINANCIAL STATEMENTS. Cardia has filed all forms,
reports, registration statements, and other documents required to be filed by it
with the SEC since February 11, 1999 (such forms, reports, registration         
statements and other documents, together with any amendments thereto, are       
referred to as the "Cardia SEC Filings"). As of their respective dates, the     
Cardia SEC Filings (i) complied as to form in all material respects with the    
applicable requirements of the 1933 Act and the 1934 Act, as the case may be,   
and (ii) did not contain any untrue statement of a material fact or omit to     
state a material fact required to be stated therein or necessary to make the    
statements made therein, in light of the circumstances under which they were    
made, not misleading. The audited financial statements included or incorporated 
by reference in the Cardia SEC Filings, including but not limited to Cardia's   
audited financial statements at and for the year ended December 31, 1998 (the   
"Cardia December 31, 1998 Financials"), and the unaudited interim financial     
statements at and for periods commencing on or after January 1, 1999 included or
incorporated by reference in the forms, reports, registration statements and    
other documents filed by Cardia with the SEC (i) were prepared in accordance    
with generally accepted accounting principles (except, in the case of unaudited 
statements, as permitted by Form 10-QSB filed with the SEC) applied on a        
consistent basis during the periods involved (except as may be indicated therein
or in the notes thereto) subject, in the case of unaudited interim financial    
statements, to the absence of notes and to year-end adjustments, (ii) complied  
as of their respective dates in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect    
thereto, and (iii) fairly present in all material respects the consolidated     
financial position of Cardia as of the dates thereof and the income, cash flows,

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and changes in shareholders' equity of Cardia for the periods involved, except  
as otherwise noted therein and subject, in the case of unaudited statements, to 
normal year-end audit adjustments.                                              

       4.6 REGISTRATION STATEMENT. The Registration Statement (as defined in
Section 5.5 hereof) and any amendments or supplements thereto will comply as to 
form in all material respects with the 1933 Act, and none of the information    
supplied by Cardia specifically for inclusion or incorporation therein or in any
amendments or supplements thereto, or in any schedules required to be filed with
the SEC in connection therewith, will, at the time the Registration Statement   
becomes effective, at the date the Proxy Statement/Prospectus (or any amendment 
or supplement thereto) is first mailed to VLS' stockholders or at the time of   
the VLS Stockholders' Meeting, or at the Effective Time, contain any untrue     
statement of a material fact or omit to state any material fact required to be  
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, provided, however,
that no representation or warranty is made by Cardia with respect to information
supplied by or on behalf of VLS or any affiliate of VLS specifically for        
inclusion in the Registration Statement.                                        

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

       4.8 LITIGATION. As of the date of this Agreement, there are no legal,
regulatory or other proceedings pending or threatened against Cardia.           

 4.9 TAXES. Except for such matters that would not have a Cardia
Material Adverse Effect, (i) Cardia has filed, or has obtained extensions to    
file (which extensions have not expired without filing), all state, local,      
United States, foreign, or other tax reports and returns required to be filed by
it, (ii) Cardia has duly paid, or accrued on its books of account, all taxes    
(including estimated taxes) shown as due on such reports and returns (or such   
extension requests), or assessed against it, other than taxes being contested in
good faith in proper proceedings, and (iii) the liabilities and reserves for    
taxes which are reflected on the Cardia Balance Sheets are adequate to cover all
taxes payable by Cardia for all taxable periods and portions thereof ending on  
or before the dates thereof. To Cardia's knowledge, no tax audits are pending   
against and no claims for taxes have been received in writing by Cardia, other  
than audits and claims that would not have a Cardia Material Adverse Effect.    
Cardia has not, with regard to any assets or property held, acquired or to be   
acquired by it, filed a consent to the application of Section 341(f)(2) of the  
Code.                                                                           

     4.10 MATERIAL OMISSIONS. No representation or warranty by Cardia in
this Agreement, nor any statement, certificate or schedule furnished to or to be
furnished by Cardia pursuant to this Agreement contains or will contain any     
untrue statement of material fact or omits or will omit a material fact         
necessary to make the statements contained herein or therein not misleading in  
light of the circumstances.                                                     

 ARTICLE 5
 COVENANTS

5.1 CONDUCT OF BUSINESS OF VLS. Except as contemplated by this
Agreement, unless Cardia shall otherwise consent in writing (such consent not to
be unreasonably withheld or delayed), during the period from the date of this   
Agreement to the Effective Time, VLS will (i) conduct its respective operations,
to the extent commercially reasonable, according to its ordinary and usual      
course of business and consistent with past practice, and (ii) promptly advise  
Cardia of any material change in its properties, liabilities or financial       
condition.                                                                      

   5.2 CONDUCT OF BUSINESS OF CARDIA. Except as contemplated by this
Agreement, unless VLS shall otherwise consent in writing (such consent not to be
unreasonably withheld or delayed), during the period from the date of this      
Agreement to the Effective Time, Cardia will (i) conduct its operations, to the 
extent commercially reasonable, according to its ordinary and usual course of   
business and consistent with past practice, and (ii) use commercially reasonable
efforts to preserve substantially intact its business organization, to keep     

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available the services of its officers and employees and to maintain            
satisfactory relationships with licensors, licensees, suppliers, contractors,   
distributors, consultants, customers, and others having material business       
relationships with it.                                                          

   5.3 NO SOLICITATION. VLS shall not, and shall cause its officers,
directors, employees, representatives, agents, or affiliates (including, but not
limited to any investment banker, attorney or accountant retained by VLS) not   
to, directly or indirectly, solicit, knowingly encourage, initiate, or          
participate in any way in discussions or negotiations with, or knowingly provide
any nonpublic information to, any corporation, partnership, person, or other    
entity or group (other than Cardia or any affiliate or agent of Cardia)         
concerning any proposed Alternative Transaction (as defined below), or otherwise
knowingly facilitate any effort or attempt to propose, make or implement an     
Alternative Transaction. For purposes of this Agreement, "Alternative           
Transaction" shall mean any of the following involving VLS: (i) any tender      
offer, exchange offer, merger, consolidation, share exchange, business          
combination or similar transaction; (ii) any transaction or series of related   
transactions pursuant to which any person or entity (or its shareholders), other
than Cardia or any of its affiliates (a "Third Party") acquires shares (or      
securities exercisable for or convertible into shares) representing more than   
50% of the outstanding shares of any class of capital stock of VLS; or (iii) any
sale, lease, exchange, licensing, transfer or other disposition pursuant to     
which a Third Party acquires control of more than 50% of the assets (including, 
but not limited to, Intellectual Property assets) of VLS (determined by         
reference to the fair market value of such assets), in a single transaction or  
series of related transactions. VLS will immediately terminate all discussions  
with Third Parties concerning any proposed Alternative Transaction, and will    
request that such Third Parties promptly return any confidential information    
furnished by VLS in connection with any proposed Alternative Transaction. VLS   
will not waive any provision of any confidentiality, standstill or similar      
agreement entered into with any third party regarding any proposed Alternative  
Transaction, and prior to the Closing shall enforce all such agreements in      
accordance with their terms. VLS will promptly communicate to Cardia the name of
the person or entity submitting, and the terms and conditions of, any proposal  
or inquiry that it receives after the date hereof in respect of any proposed    
Alternative Transaction or a reasonably detailed description of any such        
information requested from it after the date hereof or of any such negotiations 
or discussions being sought to be initiated or continued with VLS after the date
hereof in respect of a proposed Alternative Transaction.                        

The foregoing notwithstanding, this Agreement shall not prohibit the Board of   
Directors of VLS from                                                           

      (i) prior to the Required VLS Stockholder Vote, furnishing nonpublic
information to or entering into discussions or negotiations with, any person or 
entity that makes an unsolicited Superior Proposal (as defined below), if, and  
only to the extent that:                                                        

         (a) the Board of Directors reasonably and in good faith determines that
failure to take such action would be inconsistent with the fiduciary duties of  
the Board of Directors to its stockholders under applicable law;                

  (b) prior to first furnishing nonpublic information to, or first
entering into any substantive discussions and negotiations with, such person or 
entity after the date hereof, VLS (i) provides written notice to Cardia to the  
effect that it intends to furnish information to, or enter into discussions or  
negotiations with, a person or entity making a Superior Proposal, and naming and
identifying the person or entity making the Superior Proposal, and (ii) receives
from such person or entity an executed confidentiality agreement with terms no  
less favorable to VLS than the Confidentiality Agreement (as defined below)     
entered into with Cardia; and                                                   

        (c) VLS provides Cardia with all non-public information to be provided
to such person or entity which Cardia has not previously received from VLS, and 
VLS keeps Cardia informed, on a daily or more regular basis if the context      
requires or Cardia so requests, of the status, terms and conditions and all     
other material information with respect to any such discussions or negotiations;
and                                                                             

   (ii) to the extent applicable, complying with Rule 14e-2 or 14d-9
promulgated under the 1934 Act with regard to a proposed Alternative            
Transaction.                                                                    

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Nothing in this Section shall (x) permit VLS to terminate this Agreement (except
as specifically provided in Article 7 hereof), or (y) permit VLS to enter into  
any agreement providing for an Alternative Transaction (other than as           
specifically provided in Article 7 hereof, or the confidentiality agreement as  
provided, and in the circumstances and under the conditions set forth, above)   
for as long as this Agreement remains in effect.                                

For purposes of this Agreement, a "Superior Proposal" shall mean a proposal for 
an Alternative Transaction that the Board of Directors of VLS has reasonably and
in good faith determined (with the advice of its financial advisors and taking  
into account all legal, financial and regulatory aspects of the likelihood of   
the consummation of such Alternative Transaction, including, but not limited to,
the conditions to consummation and the consequences under such Alternative      
Transaction proposal of any material adverse effects or changes in VLS) to be   
more favorable to VLS' stockholders than the transactions contemplated by this  
Agreement.                                                                      

         5.4 ACCESS AND INFORMATION. VLS and Cardia shall afford each other, and
to their respective accountants, officers, directors, employees, counsel, and   
other representatives, reasonable access during normal business hours upon      
reasonable prior notice, from the date hereof through the Effective Time, to all
of its properties, books, contracts, commitments, and records, and, during such 
period, VLS and Cardia shall furnish promptly to each other all information     
concerning its businesses, prospects, properties, liabilities, results of       
operations, financial condition, research and development, intellectual         
property, officers, employees, consultants, advisers, distributors, customers,  
suppliers, and others having material dealings with it as the other may         
reasonably request, and reasonable opportunity to contact and obtain information
from such officers, employees, consultants, advisers, distributors, customers,  
suppliers, and others having dealings with it as the other may reasonably       
request.                                                                        

        5.5 APPROVAL OF STOCKHOLDERS; PROXY STATEMENT; REGISTRATION STATEMENT.

        (a) VLS shall use commercially reasonable efforts to promptly, subject
to applicable law or SEC regulations, take all action necessary in accordance   
with the MBCA and VLS' Articles of Incorporation and Bylaws to cause a special  
meeting of VLS' stockholders (the "VLS Stockholders Meeting") to be duly called 
and held as soon as reasonably practicable following the date upon which the    
Registration Statement (as defined below) becomes effective for the purpose of  
voting upon the Merger and the adoption and approval of this Agreement and at   
such Meeting to submit this Agreement and the Merger to a vote of the           
stockholders. The stockholder vote or consent required for adoption and approval
of this Agreement and the approval of the Merger shall be no greater than that  
set forth in the MBCA and VLS' Articles of Incorporation as previously provided 
to Cardia. Accordingly, VLS represents and warrants that the affirmative vote of
the holders of record of a majority of the shares of VLS Common Stock           
outstanding on the record date for VLS Stockholders Meeting is all that is      
necessary to obtain stockholder adoption and approval of this Agreement and     
approval of the Merger. VLS shall use commercially reasonable efforts to obtain 
the adoption and approval by VLS' stockholders of this Agreement and the        
approval by VLS' stockholders of the Merger, unless such action is inconsistent 
with the fiduciary duties of the Board of Directors to its stockholders imposed 
by applicable law. In accordance therewith, VLS and Cardia will prepare and     
file, as soon as reasonably practicable, a proxy statement/prospectus to be     
included as part of the Registration Statement (such proxy statement/prospectus,
together with notice of meeting, form of proxy, and any letter or other         
materials to VLS' stockholders included therein are referred to in this         
Agreement as the "Proxy Statement/Prospectus"). Cardia shall furnish to VLS all 
information concerning Cardia and its subsidiaries, officers, directors and     
shareholders, and shall take such other action and otherwise cooperate, as VLS  
may reasonably request in connection with any such action. VLS shall use        
commercially reasonable efforts to cause the definitive Proxy                   
Statement/Prospectus to be mailed to the stockholders of VLS as soon as         
reasonably practicable after the Registration Statement shall have become       
effective, with the date of mailing as mutually determined by VLS and Cardia.   
The Proxy Statement/Prospectus shall include the recommendation of VLS' Board of
Directors in favor of the Merger, unless such action is inconsistent with the   
fiduciary duties of the Board of Directors to its stockholders imposed by       
applicable law. Unless and until this Agreement is validly terminated pursuant  
to Article 7, nothing herein shall limit or eliminate in any way VLS' obligation
to call, give notice of, convene and hold the VLS Stockholders Meeting and at   
such meeting submit this Agreement and the Merger to a vote of VLS' stockholders
(and not postpone or adjourn such meeting or the vote by VLS' stockholders upon 
this Agreement and the Merger to another date without Cardia's approval, not to 
be unreasonably withheld if and only to the extent such postponement or         
adjournment is required by law or by SEC regulation).                           

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     (b) Cardia shall, with the cooperation of VLS, prepare and file, as
soon as reasonably practicable following completion of the SEC's review and     
comment on the Proxy Statement/Prospectus, a registration statement under the   
1933 Act registering the shares of Cardia Common Stock to be issued in the      
Merger (the "Registration Statement"), which Registration Statement shall       
include the Proxy Statement/Prospectus. Cardia will use commercially reasonable 
efforts to have the Registration Statement declared effective by the SEC as     
promptly thereafter as practicable. Cardia shall also take any action required  
to be taken under state blue sky or securities laws in connection with the      
issuance of Cardia Common Stock pursuant to the Merger. VLS shall furnish to    
Cardia all information concerning VLS and its Subsidiaries and the holders of   
its capital stock, and shall take such other action and otherwise cooperate, as 
Cardia may reasonably request in connection with any such action.               

         (c) Cardia shall notify VLS promptly (i) of the receipt of the comments
of the SEC, (ii) of any request by the SEC for amendments or supplements to the 
Registration Statement, (iii) of the time when the Registration Statement has   
become effective or any supplement or amendment has been filed, or the issuance 
of any stop order and (iv) of the suspension of the qualification of the Cardia 
Common Stock issuable in connection with the Merger for offering or sale in any 
jurisdiction and shall supply VLS with copies of all correspondence with the SEC
with respect to the Registration Statement.                                     

(d) If at any time prior to the Effective Time, any event or  
circumstance relating to VLS or VLS' officers or directors should occur and be  
discovered by VLS that is required to be described in an amendment or supplement
to the definitive Proxy Statement/Prospectus or the Registration Statement, VLS 
shall promptly inform Cardia. If at any time prior to the Effective Time, any   
event or circumstance relating to Cardia or any of its subsidiaries or their    
respective officers or directors should occur and be discovered by Cardia that  
is required to be described in an amendment or supplement to the definitive     
Proxy Statement/Prospectus or the Registration Statement, Cardia shall promptly 
inform VLS. Whenever any event occurs that should be described in an amendment  
of, or supplement to, the definitive Proxy Statement/Prospectus or the          
Registration Statement, VLS or Cardia, as the case may be, shall, upon learning 
of such event, promptly notify the other and consult and cooperate with the     
other in connection with the preparation of a mutually acceptable amendment or  
supplement. The parties shall promptly file such amendment or supplement with   
the SEC and mail such amendment or supplement as soon as practicable after it is
cleared by the SEC. No amendment or supplement to the Proxy Statement/Prospectus
or the Registration Statement will be made by Cardia or VLS without the approval
of the other party (such approval not to be unreasonably withheld or delayed).  

   5.6 CONSENTS. VLS will, at its cost and expense, use commercially
reasonable efforts to obtain all material approvals and consents of all third   
parties necessary on the part of VLS to consummate the transactions contemplated
hereby. Cardia will, at its cost and expense, use commercially reasonable       
efforts to obtain all material approvals and consents of all third parties      
necessary on the part of Cardia to consummate the transactions contemplated     
hereby. VLS and Cardia agree to cooperate with each other in connection with    
obtaining such approvals and consents.                                          

       5.7 EXPENSES. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement, the transactions           
contemplated hereby, the Proxy Statement/Prospectus, and the Registration       
Statement will be paid by the party incurring such costs and expenses, except   
that VLS and Cardia will share equally the cost of printing and filing with the 
SEC the Proxy Statement/Prospectus and the Registration Statement.              

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

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        5.9 CERTAIN NOTIFICATIONS. VLS shall promptly notify Cardia in writing
of the occurrence of any event that will or could reasonably be expected to     
result in the failure by VLS to satisfy any of the conditions specified in      
Article 6. Cardia shall promptly notify VLS in writing of the occurrence of any 
event that will or could reasonably be expected to result in the failure by     
Cardia to satisfy any of the conditions specified in Article 6.                 

      5.10 OTC TRADING. Following the Merger, Cardia will use commercially
reasonable efforts to cause the Cardia Common Stock to be quoted in the "pink   
sheets" and approved for trading on the local over-the-counter market.          

 ARTICLE 6
CLOSING CONDITIONS

 6.1 CONDITIONS TO OBLIGATIONS OF CARDIA AND VLS. The respective
obligations of each party to consummate the Merger shall be subject to the      
fulfillment at or prior to the Closing of the following conditions, any or all  
of which may be waived, in whole or in part, to the extent permitted by         
applicable law:                                                                 

         (a) NO INJUNCTION. Neither Cardia nor VLS shall be subject to any final
order, decree, or injunction of a court of competent jurisdiction within the    
United States that is then in effect that has the effect of making the Merger   
illegal or otherwise prohibiting the consummation of the Merger.                

        (b) STOCKHOLDER APPROVAL. The Required VLS Stockholder Vote shall have
been obtained, in accordance with the MBCA and VLS' Articles of Incorporation   
and Bylaws.                                                                     

       (c) REGISTRATION STATEMENT. The Registration Statement (as amended or
supplemented) shall have become effective under the 1933 Act and shall not be   
subject to any "stop order," and no action, suit, proceeding, or investigation  
by the SEC to suspend the effectiveness thereof shall have been initiated and be
continuing.                                                                     

    (d) BLUE SKY LAWS. Cardia shall have received all permits or other
authorizations required under applicable state blue sky laws for the issuance of
shares of Cardia Common Stock pursuant to the Merger.                           

       (e) THIRD-PARTY CONSENTS. All approvals and consents of third parties
referred to in Section 5.6 shall have been obtained.                            

       6.2 CONDITIONS TO OBLIGATIONS OF CARDIA. The obligations of Cardia to
consummate the Merger shall be subject to the fulfillment at or prior to the    
Closing of the following additional conditions, any or all of which may be      
waived by Cardia, in whole or in part, to the extent permitted by applicable    
law:                                                                            

  (a) REPRESENTATIONS AND WARRANTIES TRUE. Each representation and
warranty of VLS contained in this Agreement shall be true and correct on the    
Closing Date as though such representations and warranties were made on such    
date, except that those representations and warranties that address matters only
as of the date hereof or another particular date shall remain true and correct  
as of such date, and except in any case for any inaccuracies that have not had a
VLS Material Adverse Effect. Cardia shall have received a certificate to the    
foregoing effect signed by the Chief Executive Officer of VLS or other          
authorized officer of VLS reasonably satisfactory to Cardia.                    

        (b) PERFORMANCE. VLS shall have performed and complied in all material
respects with all covenants required by this Agreement to be performed or       
complied with by it at or prior to the Closing, and Cardia shall have received a
certificate to such effect signed by the Chief Executive Officer of VLS or other
authorized officer of VLS reasonably satisfactory to Cardia.                    

       (c) LEGAL OPINION. Cardia shall have received an opinion of Duckson &
Carlson LLC as to the                                                           

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matters set forth on EXHIBIT A.                                                 

6.3 CONDITIONS TO OBLIGATIONS OF VLS. The obligation of VLS to
consummate the Merger shall be subject to the fulfillment at or prior to the    
Closing of the following additional conditions, any or all of which may be      
waived by VLS, in whole or in part, to the extent permitted by applicable law:  

  (a) REPRESENTATIONS AND WARRANTIES TRUE. Each representation and
warranty of Cardia contained in this Agreement shall be true and correct on the 
Closing Date as though such representations and warranties were made on such    
date, except that those representations and warranties that address matters only
as of the date hereof or another particular date shall remain true and correct  
as of such date, and except in any case for any inaccuracies that have not had, 
or would not reasonably be expected to have a Cardia Material Adverse Effect.   
VLS shall have received a certificate to the foregoing effect signed by the     
Chief Executive Officer or other authorized officer of Cardia reasonably        
satisfactory to VLS.                                                            

  (b) PERFORMANCE. Cardia shall have performed and complied in all
material respects with all material covenants required by this Agreement to be  
performed or complied with by it at or prior to the Closing, and VLS shall have 
received a certificate to such effect signed by the Chief Executive Officer or  
other authorized officer of Cardia reasonably satisfactory to VLS.              

      (c) LEGAL OPINION. VLS shall have received an opinion of Lindquist &
Vennum P.L.L.P. as to the matters set forth on EXHIBIT B.                       

 ARTICLE 7
 TERMINATION AND ABANDONMENT

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

         (a) by mutual written consent duly authorized by the Board of Directors
of Cardia and the Board of Directors of VLS;                                    

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

       (c) by either Cardia or VLS if, at the VLS Stockholder's Meeting, the
requisite vote of the stockholders of VLS for approval and adoption of this     
Agreement and the Merger is not obtained, except that the right to terminate    
this Agreement under this Section 7.1(c) will not be available to any party     
whose failure to perform any material obligation under this Agreement has been  
the proximate cause of, or resulted in, the failure to obtain the requisite vote
of the stockholders of VLS;                                                     

    (d) by Cardia if either (i) VLS has breached its obligations under
Section 5.3 in any material respect, (ii) the Board of Directors of VLS has     
recommended, approved, or authorized VLS' acceptance or execution of a letter of
intent or definitive agreement providing for an Alternative Transaction, as     
defined in Section 5.3, (iii) the Board of Directors of VLS has modified in a   
manner materially adverse to Cardia, or withdrawn, its recommendation of this   
Agreement or (iv) a tender offer or exchange offer for any outstanding shares of
VLS Common Stock is commenced, and the Board of Directors of VLS, within ten    
(10) business days after such tender offer or exchange offer is so commenced,   
either fails to recommend against acceptance of such tender offer or exchange   
offer by its stockholders or takes no position with respect to the acceptance of
such tender offer or exchange offer by its stockholders;                        

        (e) by VLS or Cardia prior to the Required VLS Stockholder Vote if (i)
the Board of Directors of                                                       

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VLS has complied with, and continues to comply with, all requirements and       
procedures of Section 5.3 in all material respects and has authorized, subject  
to complying with the terms of this Agreement, VLS to enter into a letter of    
intent or binding written agreement concerning a transaction that constitutes a 
Superior Proposal and VLS notifies Cardia in writing that it intends to enter   
into such agreement, attaching the most current version of such agreement to    
such notice, (ii) Cardia does not make, within ten (10) business days after     
receipt of VLS' written notice of its intention to enter into a letter of intent
or binding agreement for a Superior Proposal, any offer that the Board of       
Directors of VLS reasonably and in good faith determines, after consultation    
with its financial and legal advisors, is at least as favorable to the          
stockholders of VLS as the Superior Proposal and during such ten business- day  
period VLS reasonably considers and discusses in good faith all proposals       
submitted by Cardia and, without limiting the foregoing, meets with, and causes 
its financial advisors and legal advisors to meet with, Cardia and its advisors 
from time to time as requested by Cardia to reasonably consider and discuss in  
good faith Cardia's proposals;                                                  

(f) by Cardia if (i) Cardia is not in material breach of its  
obligations under this Agreement and (ii) there has been a material breach by   
VLS of any of its representations, warranties, or obligations under this        
Agreement such that the conditions in Section 6.2 will not be satisfied         
("Terminating VLS Breach"); provided, however, that, if such Terminating VLS    
Breach is curable by VLS through the exercise of reasonable efforts, then for so
long as VLS continues to exercise reasonable efforts, Cardia may not terminate  
this Agreement under this Section 7.1(f); or                                    

    (g) by VLS if (i) VLS is not in material breach of its obligations
under this Agreement and (ii) there has been a material breach by Cardia of any 
of its representations, warranties, or obligations under this Agreement such    
that the conditions in Section 6.3 will not be satisfied ("Terminating Cardia   
Breach"); provided, however, that, if such Terminating Cardia Breach is curable 
by Cardia through the exercise of commercially reasonable efforts, then for so  
long as Cardia continues to exercise commercially reasonable efforts, VLS may   
not terminate this Agreement under this Section 7.1(g).                         

 ARTICLE 8
 MISCELLANEOUS

 8.1 AMENDMENT AND MODIFICATION. Subject to applicable law, this
Agreement may be amended, modified, or supplemented only by written agreement of
Cardia and VLS at any time prior to the Effective Time with respect to any of   
the terms contained herein; provided, however, that, after the approval of this 
Agreement by the stockholders of VLS, no amendment may be made which would      
reduce the amount or change the type of consideration into which each share of  
VLS Common Stock shall be converted upon consummation of the Merger or which    
would otherwise require stockholder approval under applicable law unless such   
stockholder approval shall have been obtained.                                  

     8.2 WAIVER OF COMPLIANCE; CONSENTS. Any failure of Cardia or VLS to
comply with any obligation, covenant, agreement, or condition herein may be     
waived by VLS or Cardia, respectively, only by a written instrument signed by an
officer of the party granting such waiver, but such waiver or failure to insist 
upon strict compliance with such obligation, covenant, agreement, or condition  
shall not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure. Whenever this Agreement requires or permits consent by or on     
behalf of any party hereto, such consent shall be given in writing.             

    8.3 INVESTIGATION; SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
respective representations and warranties of Cardia and VLS contained herein or 
in any certificates or other documents delivered prior to or at the Closing     
shall not be deemed waived or otherwise affected by any investigation made by   
any party hereto. The representations, warranties and agreements in this        
Agreement and in any certificate delivered pursuant hereto shall terminate at   
the Effective Time, except that the agreements set forth in Article 1 and       
Sections 5.5(b), 5.6, 5.8, 5.9, 5.10, and this Article 8 shall survive the      
Effective Time.                                                                 

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

(a) If to Cardia, to it at:                 

Cardia, Inc.              
13754 Frontier Court      
Burnsville, MN 55337      
 Attention: Joseph A. Marino
FAX: (612) 997-2200       

with a copy to:                             

 Lindquist & Vennum P.L.L.P.
4200 IDS Center           
80 South 8th Street       
Minneapolis, MN   55402   
Attention: Patrick Delaney
FAX:  (612) 371-3207      

(b) If to VLS, to it at:                    

Electro Sensors           
6111 Blue Circle Drive    
Minnetonka, MN 55343-9108 
  Attention: Peter R. Peterson
FAX: (612) 930-0130       

with a copy to:                             

Duckson & Carlson LLC     
    10 South 5th Street, Suite 300
Minneapolis, MN 55402     
     Attention: Todd Bassinger, Esq.
FAX: (612) 317-9746       

       8.5 ASSIGNMENT. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their        
respective successors and permitted assigns, but neither this Agreement nor any 
of the rights, interests, or obligations hereunder shall be assigned by any of  
the parties hereto without the prior written consent of the other parties.      
Except for the provisions of Article 1 (the "Third Party Provisions"), this     
Agreement is not intended to confer upon any other person, except the parties   
hereto, any rights or remedies hereunder, and no third person shall be a third  
party beneficiary of this Agreement. The Third Party Provisions may be enforced 
by the beneficiaries thereof.                                                   

        8.6 GOVERNING LAW. This Agreement shall be governed by the substantive
laws of the State of Minnesota (regardless of the laws that might otherwise     
govern under applicable Minnesota principles of conflicts of law). The parties  
hereby (i) agree and consent to be subject to the jurisdiction of any state or  
federal court in the state of Minnesota with respect to all actions and         
proceedings arising out of or relating to this Agreement; (ii) agree that all   
claims with respect to any such action or proceeding may be heard and determined
in such court;                                                                  

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(iii) irrevocably waive any defense of an inconvenient forum to the maintenance 
of any action or proceeding in such court; (iv) consent to service of process by
mailing or delivering such service to the party at its respective principal     
business address; and (v) agree that a final judgment in any such action or     
proceeding from which there is no further appeal shall be conclusive and may be 
enforced in any other jurisdiction by suit on the judgment or in any manner     
provided by law.                                                                

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

8.8 KNOWLEDGE. As used in this Agreement or the instruments,  
certificates or other documents required hereunder, the term "knowledge" of a   
party hereto shall mean actual knowledge of the directors or executive officers 
of such party.                                                                  

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

         8.10 PUBLICITY. Upon execution of this Agreement by Cardia and VLS, the
parties shall jointly issue a press release, as agreed upon by them. The parties
intend that all future statements or communications to the public or press      
regarding this Agreement or the Merger will be mutually agreed upon by them.    
Neither party shall, without such mutual agreement or the prior consent of the  
other, issue any statement or communication to the public or to the press       
regarding this Agreement, or any of the terms, conditions, or other matters with
respect to this Agreement, except as required by law or the rules of the SEC or 
the NASD and then only (a) upon the advice of such party's legal counsel; (b) to
the extent required by law or the rules of the SEC or the NASD; and (c)         
following prior notice to, and consultation with, the other party (which notice 
shall include a copy of the proposed statement or communication to be issued to 
the press or public). The foregoing shall not restrict Cardia's or VLS'         
communications with their employees or customers in the ordinary course of      
business. Each party shall exercise in good faith all reasonable efforts to     
agree with the other party regarding the nature, form and extent of such        
disclosure.                                                                     

   8.11 ENTIRE AGREEMENT. This Agreement, including the exhibits and
schedules hereto and the Confidentiality Agreement referred to herein, embodies 
the entire agreement and understanding of the parties hereto in respect of the  
subject matter contained herein. This Agreement and the Confidentiality         
Agreement supersede all prior agreements and the understandings between the     
parties with respect to such subject matter, whether written or oral.           

        8.12 SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public    
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of   
the transactions contemplated by this Agreement is not affected in any manner   
materially adverse to any party. Upon such determination that any term or other 
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in                                                              

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good faith to modify this Agreement so as to effect the original intent of the  
parties as closely as possible in a mutually acceptable manner in order that the
transactions contemplated by this Agreement be consummated as originally        
contemplated to the fullest extent possible.                                    

      8.13 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event any provision of this Agreement was not         
performed in accordance with the terms hereof and that the parties shall be     
entitled to specific performance of the terms hereof, in addition to any other  
remedy at law or in equity.                                                     

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

            CARDIA, INC.

                        By: /s/ Joseph A. Marino
                                            ------------------------------------
                                      Joseph A. Marino, Chairman and
                               Chief Executive Officer

                            VIDEO LEARNING SYSTEMS, INC.

                         By: /s/ Peter R. Peterson
                                            ------------------------------------
                                    Peter R. Peterson, President

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                                                                      APPENDIX B

M.S. SS. 302A.471                                                               

MINNESOTA STATUTES
CORPORATIONS
 CHAPTER 302A. BUSINESS CORPORATIONS
SHARES; SHAREHOLDERS

302A.471. RIGHTS OF DISSENTING SHAREHOLDERS                                     

        SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation
may dissent from, and obtain payment for the fair value of the shareholder's    
shares in the event of, any of the following corporate actions:                 

        (a) An amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting shareholder in that   
it:                                                                             

(1) alters or abolishes a preferential right of the shares;   

        (2) creates, alters, or abolishes a right in respect of the redemption
of the shares, including a provision respecting a sinking fund for the          
redemption or repurchase of the shares;                                         

        (3) alters or abolishes a preemptive right of the holder of the shares
to acquire shares, securities other than shares, or rights to purchase shares or
securities other than shares;                                                   

        (4) excludes or limits the right of a shareholder to vote on a matter,
or to cumulate votes, except as the right may be excluded or limited through the
authorization or issuance of securities of an existing or new class or series   
with similar or different voting rights; except that an amendment to the        
articles of an issuing public corporation that provides that section 302A.671   
does not apply to a control share acquisition does not give rise to the right to
obtain payment under this section;                                              

(b) A sale, lease, transfer, or other disposition of all or   
substantially all of the property and assets of the corporation, but not        
including a transaction permitted without shareholder approval in section       
302A.661, subdivision 1, or a disposition in dissolution described in section   
302A.725, subdivision 2, or a disposition pursuant to an order of a court, or a 
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the shareholders in accordance with   
their respective interests within one year after the date of disposition;       

         (c) A plan of merger, whether under this chapter or under chapter 322B,
to which the corporation is a party, except as provided in subdivision 3;       

     (d) A plan of exchange, whether under this chapter or under chapter
322B, to which the corporation is a party as the corporation whose shares will  
be acquired by the acquiring corporation, if the shares of the shareholder are  
entitled to be voted on the plan; or                                            

     (e) Any other corporate action taken pursuant to a shareholder vote
with respect to which the articles, the bylaws, or a resolution approved by the 
board directs that dissenting shareholders may obtain payment for their shares. 

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SUBD. 2. BENEFICIAL OWNERS. (a) A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of  
the shareholder, unless the shareholder dissents with respect to all the shares 
that are beneficially owned by another person but registered in the name of the 
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter     
shall be determined as if the shares as to which the shareholder has dissented  
and the other shares were registered in the names of different shareholders.    

   (b) The beneficial owner of shares who is not the shareholder may
assert dissenters' rights with respect to shares held on behalf of the          
beneficial owner, and shall be treated as a dissenting shareholder under the    
terms of this section and section 302A.473, if the beneficial owner submits to  
the corporation at the time of or before the assertion of the rights a written  
consent of the shareholder.                                                     

         SUBD. 3. RIGHTS NOT TO APPLY. (a) Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment 
under this section does not apply to a shareholder of the surviving corporation 
in a merger, if the shares of the shareholder are not entitled to be voted on   
the merger.                                                                     

      (b) If a date is fixed according to section 302A.445, subdivision 1,
for the determination of shareholders entitled to receive notice of and to vote 
on an action described in subdivision 1, only shareholders as of the date fixed,
and beneficial owners as of the date fixed who hold through shareholders, as    
provided in subdivision 2, may exercise dissenters' rights.                     

     SUBD. 4. OTHER RIGHTS. The shareholders of a corporation who have a
right under this section to obtain payment for their shares do not have a right 
at law or in equity to have a corporate action described in subdivision 1 set   
aside or rescinded, except when the corporate action is fraudulent with regard  
to the complaining shareholder or the corporation.                              

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M.S. SS. 302A.473                                                               

MINNESOTA STATUTES
CORPORATIONS
 CHAPTER 302A. BUSINESS CORPORATIONS
SHARES; SHAREHOLDERS

302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS                           

         SUBDIVISION 1. DEFINITIONS. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.                       

      (b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action referred to in section 302A.471, subdivision 1 or   
the successor by merger of that issuer.                                         

   (c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action       
referred to in section 302A.471, subdivision 1.                                 

        (d) "Interest" means interest commencing five days after the effective
date of the corporate action referred to in section 302A.471, subdivision 1, up 
to and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.                                  

         SUBD. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting
at which any action described in section 302A.471, subdivision 1 is to be voted 
upon, the notice of the meeting shall inform each shareholder of the right to   
dissent and shall include a copy of section 302A.471 and this section and a     
brief description of the procedure to be followed under these sections.         

        SUBD. 3. NOTICE OF DISSENT. If the proposed action must be approved by
the shareholders, a shareholder who is entitled to dissent under section        
302A.471 and who wishes to exercise dissenters' rights must file with the       
corporation before the vote on the proposed action a written notice of intent to
demand the fair value of the shares owned by the shareholder and must not vote  
the shares in favor of the proposed action.                                     

         SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the  
corporation shall send to all shareholders who have complied with subdivision 3 
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:                                                         

   (1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by     
which they must be received;                                                    

     (2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;                                 

        (3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the     
shares or an interest in them and to demand payment; and                        

         (4) A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.                          

    (b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with  
any restrictions on transfer of uncertificated shares within 30 days after      

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the notice required by paragraph (a) was given, but the dissenter retains all   
other rights of a shareholder until the proposed action takes effect.           

    SUBD. 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action
takes effect, or after the corporation receives a valid demand for payment,     
whichever is later, the corporation shall remit to each dissenting shareholder  
who has complied with subdivisions 3 and 4 the amount the corporation estimates 
to be the fair value of the shares, plus interest, accompanied by:              

         (1) The corporation's closing balance sheet and statement of income for
a fiscal year ending not more than 16 months before the effective date of the   
corporate action, together with the latest available interim financial          
statements;                                                                     

        (2) An estimate by the corporation of the fair value of the shares and
a brief description of the method used to reach the estimate; and               

(3) A copy of section 302A.471 and this section, and a brief  
description of the procedure to be followed in demanding supplemental payment.  

        (b) The corporation may withhold the remittance described in paragraph
(a) from a person who was not a shareholder on the date the action dissented    
from was first announced to the public or who is dissenting on behalf of a      
person who was not a beneficial owner on that date. If the dissenter has        
complied with subdivisions 3 and 4, the corporation shall forward to the        
dissenter the materials described in paragraph (a), a statement of the reason   
for withholding the remittance, and an offer to pay to the dissenter the amount 
listed in the materials if the dissenter agrees to accept that amount in full   
satisfaction. The dissenter may decline the offer and demand payment under      
subdivision 6. Failure to do so entitles the dissenter only to the amount       
offered. If the dissenter makes demand, subdivisions 7 and 8 apply.             

     (c) If the corporation fails to remit payment within 60 days of the
deposit of certificates or the imposition of transfer restrictions on           
uncertificated shares, it shall return all deposited certificates and cancel all
transfer restrictions. However, the corporation may again give notice under     
subdivision 4 and require deposit or restrict transfer at a later time.         

         SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares   
plus interest, the dissenter may give written notice to the corporation of the  
dissenter's own estimate of the fair value of the shares, plus interest, within 
30 days after the corporation mails the remittance under subdivision 5, and     
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.                                             

        SUBD. 7. PETITION; DETERMINATION. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after    
discussion with the corporation or file in court a petition requesting that the 
court determine the fair value of the shares, plus interest. The petition shall 
be filed in the county in which the registered office of the corporation is     
located, except that a surviving foreign corporation that receives a demand     
relating to the shares of a constituent domestic corporation shall file the     
petition in the county in this state in which the last registered office of the 
constituent corporation was located. The petition shall name as parties all     
dissenters who have demanded payment under subdivision 6 and who have not       
reached agreement with the corporation. The corporation shall, after filing the 
petition, serve all parties with a summons and copy of the petition under the   
rules of civil procedure. Nonresidents of this state may be served by registered
or certified mail or by publication as provided by law. Except as otherwise     
provided, the rules of civil procedure apply to this proceeding. The            
jurisdiction of the court is plenary and exclusive. The court may appoint       
appraisers, with powers and authorities the court deems proper, to receive      
evidence on and recommend the amount of the fair value of the shares. The court 
shall determine whether the shareholder or shareholders in question have fully  
complied with the requirements of this section, and shall determine the fair    
value of the shares, taking into account any and all factors the court finds    
relevant, computed by                                                           

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any method or combination of methods that the court, in its discretion, sees fit
to use, whether or not used by the corporation or by a dissenter. The fair value
of the shares as determined by the court is binding on all shareholders,        
wherever located. A dissenter is entitled to judgment in cash for the amount by 
which the fair value of the shares as determined by the court, plus interest,   
exceeds the amount, if any, remitted under subdivision 5, but shall not be      
liable to the corporation for the amount, if any, by which the amount, if any,  
remitted to the dissenter under subdivision 5 exceeds the fair value of the     
shares as determined by the court, plus interest.                               

         SUBD. 8. COSTS; FEES; EXPENSES. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable      
expenses and compensation of any appraisers appointed by the court, and shall   
assess those costs and expenses against the corporation, except that the court  
may assess part or all of those costs and expenses against a dissenter whose    
action in demanding payment under subdivision 6 is found to be arbitrary,       
vexatious, or not in good faith.                                                

  (b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of  
any experts or attorneys as the court deems equitable. These fees and expenses  
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party     
injured by those actions.                                                       

     (c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.

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Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘424B3’ Filing		Date		First		Last			Other Filings
		1/1/00		77
		10/6/99		1		20
Filed on:		9/15/99		1		2
		9/14/99		1		21
		7/7/99		69		77
		7/1/99		1		82
		6/30/99		4		88			10QSB
		4/27/99		48
		3/31/99		50					10QSB,  NT 10-Q
		3/18/99		58
		3/5/99		75
		2/11/99		7		88
		2/2/99		63					SB-2/A
		1/27/99		45		66
		1/1/99		44		88
		12/31/98		4		88			10KSB40
		6/30/98		4		75
		12/31/97		4		85
		11/2/97		58		62
		6/20/97		86
		12/31/96		50		85
		1/1/96		87
		12/31/94		74
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