PRODUCTION SERVICES AGREEMENT

PRODUCTION SERVICES AGREEMENT

This production services agreement (this “Agreement”) is dated as of December 6, 2006 (“Effective Date”), and is between MEDICALCV, INC. (“Buyer”), and MINNETRONIX, INC., a Minnesota corporation (“Seller”).

WHEREAS, Seller is in the business of contract design and manufacturing of electronic, software, and mechanical assemblies and has the capability to manufacture Buyer’s product(s) described in exhibits (“Exhibits”) attached hereto (“Product” or “Products”) as well as to provide design, engineering, sustaining, manufacturing, test, and support services related to such Products (“Services”); and

WHEREAS, Buyer is in the business of manufacturing, distributing and selling medical devices and wishes to enter into a relationship during which Seller will provide Products and Services to Buyer; and

WHEREAS, Buyer and Seller desire to establish the terms of sale for all Products and Services now or hereafter purchased by Buyer from Seller during the term of this Agreement.

NOW, THEREFORE, Buyer, and Seller hereby agree as follows:

ARTICLE 1
AGREEMENT SCOPE

1.1           Application of Agreement . Buyer and Seller agree that all sales of Products and Services from Seller to Buyer made during the term of this Agreement shall be subject to the terms of this Agreement and that this Agreement supersedes any prior understandings, agreements, or representations by or between the parties, written or oral, which may have related to the subject matter hereof, unless otherwise agreed to in writing and signed by both parties as an amendment (“Amendment”) to this Agreement.

1.2           Products and Services . Each Product and additional required terms specific to the Product shall be defined in an Exhibit. Such Exhibits shall contain a description of a certain Product or Products being ordered, additional terms of sale and purchase, and unit pricing that shall apply to the Products specified in the Exhibits (“Price”). The parties may, from time to time, add new products by executing supplementary Exhibits. Services included in the Price shall be specified in the Exhibits.

1.3           Specifications . Complete specifications required to inspect, manufacture, test, and ship the Products and the Components (as defined in Section 4.1) in a manner acceptable to Buyer, including part numbers, revisions, bills of material and any other specifications applicable to Products ordered pursuant to this Agreement (“Specifications”) will be supplied by Buyer or Buyer’s agent and agreed upon in writing by Seller, or will be otherwise established and accepted by Buyer and Seller via Seller’s Engineering Change Order (“ECO”) process. Neither Seller nor the Product shall be expected or required to perform outside of the Specifications.

1.4           Engineering Change Orders . Prior to Seller’s production release of any “major revision” to a Product assembly or sub-assembly (i.e., any change that may affect the form, fit or function of the Product), Seller will request Buyer’s consent to such major revision by issuing an ECO to Buyer. Buyer must approve such ECO before Minnetronix may release such major revision to production. Buyer’s execution of an ECO shall be deemed to constitute Buyer’s approval of the production release of the revision subject to such ECO, together with all Components and Specifications that are incorporated into the assembly or sub-assembly that is the subject of such ECO. Seller will provide all documentation reasonably requested by Buyer in connection with its review of any ECO presented by Seller.

1.5           Inconsistencies in Documents . In the event of any inconsistency or conflict between any of the documents described above and/or Purchase Orders (as defined below in Section 3.1) issued pursuant to this Agreement, the following order of priority, listed here from the highest priority (a) to the lowest priority (f), in interpretation shall apply:

(a)                                   Amendments or other modifications made to this Agreement.

(b)                                  Exhibits to this Agreement.

(c)                                   Product Specifications agreed to via Seller’s ECO process.

(d)                                  Product Specifications provided to and agreed upon by Seller with the Purchase Order.

(e)                                   Purchase Order (exclusive of any terms and conditions).

(f)                                     This Agreement.

ARTICLE 2
TERM AND TERMINATION

2.1           Term . This Agreement shall commence upon the Effective Date and shall continue for a period of two years thereafter, and shall automatically renew for additional periods of one year unless it is terminated as provided herein.

2.2           Termination for Cause . In the event of a breach of a material term of this Agreement by either party, the other party may, upon not less than sixty (60) days prior written notice to the party in breach, terminate this Agreement unless the breach is cured prior to the end of the notice period. A breach of a material term shall include, without limitation, the following:

(a)                                   Components and/or Products delivered to Buyer by Seller do not conform to the applicable Specification at the time of such delivery, and Seller does not operate in good faith to reasonably cure such non-conformance;

(b)                                  Buyer fails to make payment to Seller for Products on a timely basis;

(c)                                   Buyer fails to accept delivery of Products according to the agreed upon delivery schedule; or

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(d)                                  Seller fails to make deliveries of Products within fifteen (15) days of delivery date due to reasons within Seller’s sole control.

Notwithstanding the foregoing, if Seller or Buyer ceases to conduct its operations in the normal course of business (including an inability to meet its obligations as they mature), or if any proceeding under the bankruptcy or insolvency laws are brought by or against Seller or Buyer or if a receiver is appointed to or applied for by Seller or Buyer, the other party may terminate this Agreement and/or any Purchase Orders upon such event without liability, except for deliveries previously made or for Products ordered and covered by this Agreement which are completed or in process at the time of termination and subsequently delivered in accordance with the terms of this Agreement.

2.3           Buyer’s Termination for Convenience . Buyer may upon twelve (12) months written notice to Seller terminate this Agreement for Buyer’s convenience; provided that such termination shall not affect any outstanding Purchase Orders. The Agreement shall be non-cancelable by Buyer for convenience for a period of 24 months after the Effective Date, and in no event may Buyer deliver written notice of termination for convenience prior to the first anniversary of the Effective Date. Notwithstanding the foregoing, nothing in this Agreement shall be deemed to require Buyer to purchase Products exclusively from Seller.

2.4           Seller’s Termination for Convenience . Seller may discontinue supply of any Product under this Agreement by giving Buyer twelve (12) months prior written notice; provided that such termination shall not affect any outstanding Purchase Orders; and provided further, that Buyer shall have the option to purchase up to a “lifetime” supply of the Product at the then-current Product revision level for delivery within such twelve (12) month period. The Agreement shall be non-cancelable by Seller for convenience for a period of 24 months after the Effective Date, and in no event may Seller deliver written notice of termination for convenience prior to the first anniversary of the Effective Date. Notwithstanding the foregoing, nothing in this Agreement shall be deemed to require Seller to manufacture Products for Buyer except to the extent Seller has accepted a Purchase Order for Products placed by Buyer hereunder.

2.5           Effect of Termination . All provisions of this Agreement which, by their terms or intent, are designed to survive the expiration or termination of this Agreement, shall so survive the expiration and/or termination of this Agreement, including, without limitation, Sections 9.1 - 9.4, 10.1 - 10.4, 11.10 and 11.15. A party’s right to terminate this Agreement shall be without prejudice to any other remedies available to such party at law or in equity. In the event of notification of termination of the Agreement, Buyer’s and Seller’s obligations under this Agreement shall continue without interruption through the date of termination.

ARTICLE 3
ORDERS, DELIVERY, AND ACCEPTANCE

3.1           Purchase Orders . Buyer will order Products by issuing Seller properly authorized written, emailed, or facsimile documents specifying, and/or attaching items including: Products, Components, description, applicable part numbers, quantity, revision, delivery schedule, destination, shipping method, Specifications, special acceptance criteria (if any), unit price, and total authorized cost of the order (“Purchase Order”). The parties shall agree in writing on the

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Purchase Order, and the Specifications contained thereon, in accordance with Section 1.3, prior to the commencement of any work related to such Purchase Orders. Provided that such Purchase Order and Specifications are acceptable to Seller, Seller shall manufacture for Buyer, assemblies and subassemblies, as identified in Purchase Orders. Commencement of work related to this Agreement or related to Purchase Orders is done so under the terms of this Agreement. Any additional or different terms from Buyer sent together with Purchase Orders or otherwise sent to Seller or from Seller to Buyer shall be excluded unless signed by both parties as an Amendment or an Exhibit to this Agreement.

3.2           Packaging . Seller shall prepare and pack Products in accordance with Buyer’s Specifications and in compliance with all applicable legal requirements for such Products. Costs for preparation, and Product packaging are included in the Price unless not specified as part of the Product part number ordered by Buyer. Costs for crating, palletizing, and/or bulk packaging are not included in the Price.

3.3           Shipping . Shipping terms are FOB Seller’s facility.  Seller shall select freight carrier of its choosing unless otherwise specified by Buyer.

3.4           Delivery . The Purchase Order shall specify requested delivery dates. Seller shall use its commercially reasonable efforts to ship products with appropriate lead-time such that Products arrive at Buyer’s dock on or before the requested dates.

3.5           Acceptance . The acceptance criteria for the Product shall be “conformance to the Specifications at the time of delivery”. In the event that there are additional acceptance criteria by Buyer, they must be specified on the Purchase Order at the time of the initial order in accordance with Section 3.1. Buyer may reject any nonconforming delivery within a reasonable time following delivery, with Seller to bear the costs arising from such rejection to the extent required under applicable law.

ARTICLE 4
COMPONENTS AND CONFIGURATION MANAGEMENT

4.1           Configuration Control . Seller will maintain source control on all parts, materials, subassemblies, and components used in connection with the manufacture of Products (“Components”), unless otherwise specified. Buyer will have access to bill of material (“BOW) data, inventory status, and production status as reasonably requested.

4.2           Product Revisions . Seller uses a product revision format that indicates different levels of product release. All revisions have a format of [major revision]-[minor revision]. Major revisions (i.e., changes that may affect the form, fit or function of the Product) are less than “1” ( e.g. , .01, .02, .5, etc.) prior to production release and are “001” or greater ( e.g. , 001, 002, etc.) after production release. Minor revisions start with alpha characters beginning at “a” after each major revision change and are incremented for each minor revision change ( e.g. , a, b, c, etc.). All Products provided at a revision less than 001-a ( e.g. , .01-a, .01-b, .5-a, etc.) shall be considered prototypes or pre-production units (“Engineering Units”). All Products provided at a revision level of 001-a or higher ( e.g. , 001-a, 001-b, 002-a, etc.) shall be considered production units (“Production Units”).

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4.3           Component Scheduling . Seller shall maintain scheduling control over Components ordering and their delivery scheduling according to Seller’s production scheduling processes. Seller will issue purchase orders, or otherwise place orders, for all Components to support Buyer’s Purchase Orders throughout the term of the Agreement. Seller will commit to longer-term buys on an exception basis as reasonably requested by Buyer provided that all such requests are issued in writing to Seller by Buyer.

4.4           Components and other Parts Purchases . Seller agrees to sell sub-assemblies, Components, and other parts, from its inventory to Buyer, upon Buyer’s reasonable request. Seller will quote a price, including any minimum quantity, to Buyer for such Components upon request by Buyer. All such sales are subject to the terms of this Agreement.        .

4.5           Product Orders . Forecasts and Schedule Changes.

(a)           Buyer will provide Purchase Order(s) representing a firm commitment for Products to be delivered as specified on the Purchase Order. In addition, Buyer shall provide forecasts to Seller, which reflect Buyer’s estimate of its Product(s) volume requirements over a 12-month period.

(b)           Seller will make reasonable efforts to accommodate Purchase Order change requests, which may include requests to change order quantities and delivery dates, subject to Component availability and capacity at Seller’s sole discretion. Aggressive schedule increases will be accommodated to the best of Seller’s ability according to the terms of this Agreement. Purchase Orders may be used to make best effort purchasing decisions. Excess or scrap Components that occur as a result of Seller’s best effort purchasing decisions are Buyer’s responsibility in the event of an order cancellation, Product change undertaken in accordance with Section 1.4, or production delay to the extent caused or requested by Buyer.

ARTICLE 5
QUALITY SYSTEMS, REGULATORY, AND AGENCIES

5.1           Quality Systems Requirements . Seller will establish and maintain formal quality systems and processes that are compliant with the FDA’s Quality System Regulation (“QSR”) and ISO 13485. Such systems and processes will be provided and maintained by Seller. Any and all special quality system requirements for the Products shall be provided by or agreed to by Buyer via Specifications for the Product or as subsequently changed via Seller’s Engineering Change Order process, in writing, at the time of Purchase Order. Seller will inform Buyer and obtain prior approval for any changes to be made that can affect the quality of the Products.

5.2           Buyer Audit Rights . Seller agrees that Buyer or any of its duly authorized representatives shall have access to and the right to reasonably perform routine audits on any pertinent design, manufacturing, or quality systems or processes, and associated documentation provided that Buyer shall provide Seller with 5 working days prior written notification. Such audits shall occur at most once every 12-month period and require 2 business days or less to complete; provided, however, that this limitation shall not apply in the event of an audit or inspection required by the FDA or any other governmental or regulatory agency. Buyer and Seller shall incur all of its’ own costs in connection with routine audits.

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5.3           Quality System Records . Seller shall keep records including Device Master Records on the Products in accordance with the QSR and ISO 13485 standards for the period specified in the Exhibits.

5.4           Traceability . Seller will provide lot or serial traceability to selected Components for Product as agreed to by Buyer and Seller in accordance with Section 5.1.

5.5           Corrective and Preventive Action . A corrective and preventive action system will be managed and maintained by Seller as necessary to meet the requirements of the QSR and ISO 13485 or otherwise as a Seller of Products to Buyer in accordance with Section 5.1.

5.6           Regulatory Responsibility . Buyer shall be responsible for all FDA and other applicable international ( e.g. , MDD, CMDCAS, etc.) regulatory reporting and registration, regulatory submissions, Product performance monitoring, complaint handling, and field service with respect to the Products.  Buyer shall promptly notify Seller of any customer complaints related to the work performed by Seller. Seller agrees to cooperate, support and investigate such matters as requested by Buyer. Seller shall be responsible for maintaining FDA registration for the facility that manufactures the Products.

5.7           Agencies . If Buyer seeks regulatory or safety agency approval for its Product, into which Seller’s Product is incorporated, Seller agrees to cooperate and fully support Buyer as requested. Seller will cooperate with agency inspections ( e.g. , UL, CSA, etc.) relating specifically to the Products.

5.8           Inquiries . If any governmental agency contacts Buyer or Seller to inquire about or investigate any Product manufactured by Seller, Buyer or Seller shall use its best efforts to give notice thereof to the other party within 24 hours of receipt of such contact.

ARTICLE 6
RETURNED PRODUCT AND REPAIRS

6.1           Returned Product . All Products that Buyer deems to be non-conforming shall be returned to Seller after acquiring and including a Seller’s Return Material Authorization (RMA) number and paperwork indicating the details of the unit being returned with a serial or lot number and a description of the problem. An RMA number is available on request from the Minnetronix Quality Department.

(a)           Shipping .  Buyer shall pay for freight for Product return to Seller and Seller shall pay for freight for Product shipment back to Buyer. Seller shall use a shipping method of the same or better expediency to that which Buyer returned Product to Seller.

(b)           Decontamination .  Buyer agrees to supply Seller with a Certificate of Decontamination along with all returned Product certifying that it is free of all toxic and biohazard materials. If no such certificate is provided, Seller will perform decontamination services as needed.

6.2           Repairs . In-warranty repairs shall be performed in accordance with Section 10.4. Seller agrees to perform out-of warranty depot repair; upgrade, and troubleshooting services as

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requested by Buyer. All repairs, troubleshooting, field upgrades, and field service work performed by Buyer will be at Buyer’s sole expense, unless Buyer is entitled to recover such expenses from Seller under Section 10.2.

ARTICLE 7
DESIGN, PROCUREMENT, ASSEMBLY, AND TEST RESPONSIBILITY

7.1           Design Responsibility; Disclaimers . Buyer shall be solely responsible for the design of the Products and for their safety and efficacy for the indications and intended uses. Buyer shall bear any financial or other responsibility for Product deficiencies discovered by Buyer or Seller. It is Buyer’s sole responsibility to review, validate, and approve the Product design, any Engineering Units Seller provides, and to ensure that any resulting product is tested, manufactured, packaged, labeled (including adequate warnings), sold and/or used in a safe, careful, and effective manner. Buyer is also responsible for obtaining and maintaining any necessary approvals, including FDA, UL, CE, CSA, or FCC approvals, if required. Any and all Engineering Units that Seller delivers are provided “as is”. Any Engineering Units provided by Seller may not meet regulatory standards for medical equipment or software and are not intended for human use unless specifically manufactured for that purpose and expressly indicated as such by Seller to Buyer. Every design necessarily involves individualized professional judgments, the results of which cannot be guaranteed. Notwithstanding the foregoing, nothing in this Section 7.1 is intended to limit, and in no event shall this Section 7.1 be deemed to modify, the express obligations of Seller set forth in Sections 10.2 and 10.4.

7.2           Procurement, Assembly and Test Responsibility . Seller’s procurement, assembly and test responsibility is limited to providing a Product that is “built to print” according to written Specifications provided to Seller by Buyer (and agreed upon by Seller) or as otherwise agreed to by Buyer via Seller’s Engineering Change Order process. Seller agrees to perform additional Services as may be needed from time to time as requested by Buyer.

7.3           Product Changes, Support and Sustaining Engineering . As requested by Buyer, Seller agrees to provide technical support and sustaining engineering services required to develop, design, engineer, test, support, and implement Product or process changes.

ARTICLE 8
PAYMENT AND OTHER CONSIDERATION

8.1           Invoices; Payment Terms .

(a)           Seller shall issue invoices to Buyer as Products are shipped from Seller’s plant for the price of shipped units and shipping costs, with a credit of any applicable prepayment, downpayment, deposit or allowance for Buyer-supplied products as established in Exhibits or Amendments. For Services performed, Seller shall issue invoices to Buyer once per month.

(b)           Buyer shall deliver payment in full to Seller within thirty (30) calendar days after the later of (i) the invoice date, or (ii) the shipment date. A late fee will be assessed to any overdue invoices. Such late fee shall be the lesser of (a) 1.5%/month, or portion thereof, or (b) the maximum amount permitted by law. In the event that payment is not made within 60 days

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after invoice date, Seller may cease all efforts on the Products and refer the account to a collection agency at its sole discretion. Buyer shall be responsible for any and all collections and attorneys’ fees incurred relating to .Seller’s collection of funds owed by Buyer to Seller.

8.2           Out-of-pocket Expenses . Buyer shall pay Seller for all reasonable out-of-pocket expenses that Seller incurs in relation to the Services provided hereunder; provided that out-of-pocket expenses in excess of $2,500 in the aggregate during any 12-month period hereunder shall be approved in advance by Buyer. Reasonable out-of-pocket expenses, shall include, but not be limited to, out-of-town air and ground travel, food, and lodging where applicable, and videoconference, internet meetings, hosted conference calls, supplier non-recurring charges, fees or surcharges, or other miscellaneous third party costs resulting from Seller’s performance under this Agreement. Mileage reimbursement for personal vehicle use shall be at the current IRS rate per mile where Seller travels out-of-town by personal or company vehicle in relation to the Services provided hereunder.

8.3           Expedite Costs . Seller shall be responsible for Seller’s or Seller’s suppliers’ expedite costs incurred in order to meet the standard delivery schedule unless such expedite costs become necessary due to or are requested by Buyer. Any reasonable expedite costs incurred by Seller due to or requested by Buyer shall be recharged to Buyer.

8.4           Overtime Costs . Seller shall be responsible for Seller’s overtime costs incurred in order to meet the standard delivery schedule unless such overtime costs become necessary due to or are requested by Buyer. Any reasonable overtime costs incurred by Seller due to or requested by Buyer shall be recharged to Buyer.

8.5           Production Delays . Unless otherwise specified in an applicable Exhibit, in the event of production delays requested or caused by Buyer in excess of 30 days, Buyer shall purchase from Seller all Committed Inventory (as defined in Section 8.6(a) below) held at Seller during the delay period and pay a 1.25%/month Storage Fee (as defined in Section 8.6(b) below) with respect to each month, or any portion thereof, of the delay period until delivery of all Products or Committed Inventory from Seller to Buyer is made. The fee calculation shall be made by multiplying 1.25% by the average monthly value of the Committed Inventory held by Seller during the period to which the fee applies.

8.6           Fee Definitions .

(a)           Committed Inventory . “Committed Inventory” includes Component’s in Seller’s inventory, together with Components subject to purchase orders or other written commitments from Seller to Seller’s suppliers, that are purchased by or otherwise committed to by Seller as a result of Purchase Orders, including Components actually received by Seller or included on non-cancelable, non-returnable or limited change purchase orders from Seller to Seller’s suppliers for Components that will be received by Seller during the delay period.

(b)           Storage Fee . In the event of a production delay per Section 8.5, Seller’s “Storage Fee” covers Seller’s costs for the storage, maintenance, warranty, material handling, shrinkage, cycle counting, storage space, floor space and other overhead associated with the inventory as well as supplier management, discrepant material handling, purchasing efforts, reporting,

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tracking, and rescheduling associated with storing and managing inventory during a delay in production.

(c)           G&A Fee . This fee covers Seller’s costs for general and administrative efforts associated with various business issues including, but not limited to, purchasing, inspecting, providing warranty, inventorying, invoicing, storing, receiving, space, capitalizing, managing, and other overhead issues associated with the business relating to the items or issues to which the fee is applicable. This fee shall only be applied to costs incurred by Seller that are owed by Seller to third parties and are not included in the Price, but are otherwise covered by this Agreement and are being recharged to Buyer including, but not limited to, costs associated with Sections 8.2 - 8.4, and 8.8. The standard G&A fee shall be 25% of the amount to which to fee is applied.

8.7           Cancellation of Purchase Orders in Whole or in Part . In the event that Buyer wishes to cancel a Purchase Order or terminates the Agreement as per Sections 2.2 or 2.3, or Seller terminates this Agreement pursuant to Section. 2.2, the following terms shall apply to Committed Inventory purchased or committed to as a result of the Purchase Order (as described above in Section 4.5) from Buyer:

(a)           Seller will make reasonable good faith efforts to return unneeded Components to. its suppliers; and

(b)           Buyer will be responsible for the following costs arising from Buyer’s Purchase Order and subsequent cancellation:

(i)            Sel