<PAGE>

================================================================================


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                    FORM 10-Q

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

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

                For the quarterly period ended September 30, 1999

                                       OR

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


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


                         Commission file number 0-21982

                            Diametrics Medical, Inc.
                 Incorporated pursuant to the Laws of Minnesota


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


       Internal Revenue Service -- Employer Identification No. 41-1663185

                  2658 Patton Road, Roseville, Minnesota 55113
                                 (651) 639-8035

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


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.  Yes [X]  No [_]

The total number of shares of the registrant's Common Stock, $.01 par value,
outstanding on October 31, 1999, was 25,614,033.
<PAGE>

================================================================================

                            Diametrics Medical, Inc.

                                                                            Page
                                                                            ----

Part I -- FINANCIAL INFORMATION

    Item 1. Consolidated Financial Statements (unaudited)
            Consolidated Statements of Operations:
               Three Months Ended September 30, 1999 and 1998................3
               Nine Months Ended September 30, 1999 and 1998.................3

            Consolidated Balance Sheets as of September 30, 1999
             and December 31, 1998...........................................4
            Consolidated Statements of Cash Flows:
               Nine Months Ended September 30, 1999 and 1998.................5
            Notes to Consolidated Financial Statements.......................6
    Item 2. Management's Discussion and Analysis of Results of
            Operations and Financial Condition...............................7

    Item 3. Quantitative and Qualitative Disclosures About Market Risk......14


Part II -- OTHER INFORMATION

    Item 1. Legal Proceedings...............................................14
    Item 2. Changes in Securities...........................................14
    Item 3. Defaults Upon Senior Securities.................................14
    Item 4. Submission of Matters to a Vote of Security Holders.............14
    Item 5. Other Information...............................................14
    Item 6. Exhibits and Reports on Form 8-K................................14
    Signatures..............................................................15

                                       2
<PAGE>

                            DIAMETRICS MEDICAL, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                Three Months Ended              Nine Months Ended
                                                  September 30,                   September 30,
                                               1999            1998            1999            1998
                                            -----------     -----------    ------------     -----------
<S>                                         <C>             <C>            <C>             <C>
Net sales                                   $ 4,694,294     $ 3,102,430    $ 13,577,227    $  8,571,181

Cost of sales                                 4,090,404       2,946,478      11,523,683       8,159,236
                                            -----------     -----------    ------------    ------------

    Gross profit                                603,890         155,952       2,053,544         411,945
                                            -----------     -----------    ------------    ------------

Operating expenses:
    Research and development                    968,693       1,729,984       3,849,777       4,909,526
    Sales and marketing                         683,416       2,243,197       3,839,572       6,002,781
    General and administrative                  935,605         888,657       2,812,705       2,540,366
                                            -----------     -----------    ------------    ------------

    Total operating expenses                  2,587,714       4,861,838      10,502,054      13,452,673
                                            -----------     -----------    ------------    ------------

Operating loss                               (1,983,824)     (4,705,886)     (8,448,510)    (13,040,728)

Other income (expense), net                       2,637         (86,468)       (222,592)       (381,259)
                                            -----------     -----------    ------------    ------------

Net loss                                    $(1,981,187)    $(4,792,354)   $ (8,671,102)   $(13,421,987)
                                            ===========     ===========    ============    ============

Basic and diluted net loss per common share $     (0.08)    $     (0.21)   $      (0.36)   $      (0.62)
                                            ===========     ===========    ============    ============

Weighted average number of
common shares outstanding                    25,551,450      22,548,936      24,405,066      21,530,709
                                            ===========     ===========    ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       3
<PAGE>

                            DIAMETRICS MEDICAL, INC.
                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     September 30,    December 31,
                                                                         1999             1998
                                                                     -------------    -------------
<S>                                                                  <C>              <C>
ASSETS
    Current assets:
      Cash and cash equivalents                                      $   3,335,993    $   3,432,614
      Marketable securities                                             12,949,620        2,976,443
      Accounts receivable                                                5,595,862        5,420,092
      Inventories                                                        4,614,510        4,767,537
      Prepaid expenses and other current assets                            392,719          454,291
                                                                     -------------    -------------

         Total current assets                                           26,888,704       17,050,977
                                                                     -------------    -------------

    Property and equipment                                              19,320,002       20,077,383
      Less accumulated depreciation and amortization                   (13,789,744)     (13,154,590)
                                                                     -------------    -------------

                                                                         5,530,258        6,922,793
                                                                     -------------    -------------

    Other assets                                                         1,015,868        1,372,544
                                                                     -------------    -------------

                                                                     $  33,434,830    $  25,346,314
                                                                     =============    =============

LIABILITIES AND SHAREHOLDERS' EQUITY
    Current liabilities:
      Accounts payable                                               $   3,076,252    $   2,535,343
      Accrued expenses                                                   2,456,860        1,855,004
      Other current liabilities                                          4,778,440        1,245,332
                                                                     -------------    -------------

         Total current liabilities                                      10,311,552        5,635,679
                                                                     -------------    -------------

    Long-term liabilities:
      Long-term liabilities, excluding current portion                   7,904,661        8,163,307
      Other liabilities, excluding current portion                         389,278          181,764
                                                                     -------------    -------------

         Total liabilities                                              18,605,491       13,980,750
                                                                     -------------    -------------

    Shareholders' equity:
      Common stock, $.01 par value: 35,000,000 authorized
         25,563,283 and 23,391,597 shares issued and outstanding           255,633          233,916
      Additional paid-in capital                                       142,921,790      130,477,220
      Accumulated other comprehensive loss                                (556,575)        (225,165)
      Accumulated deficit                                             (127,791,509)    (119,120,407)
                                                                     -------------    -------------

         Total shareholders' equity                                     14,829,339       11,365,564
                                                                     -------------    -------------

                                                                     $  33,434,830     $ 25,346,314
                                                                     =============    =============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       4
<PAGE>

                            DIAMETRICS MEDICAL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                            Nine Months Ended
                                                                              September 30,
                                                                          1999             1998
                                                                       ------------    ------------
<S>                                                                    <C>             <C>
Cash flows from operating activities:
    Net loss                                                           $ (8,671,102)   $(13,421,987)
    Adjustments to reconcile net loss to net
      cash used in operating activities:
      Depreciation and amortization                                       1,709,848       2,500,615
      Other                                                                   4,200           6,952
      Changes in operating assets and liabilities:
        Accounts receivable                                                (175,770)     (1,290,537)
        Inventories                                                         153,027        (811,666)
        Prepaid expenses and other current assets                            61,572        (305,473)
        Accounts payable and accrued expenses                             1,142,765      (1,078,761)
        Deferred credits/revenue                                          4,640,667               -
                                                                       ------------    ------------
           Net cash used in operating activities                         (1,134,793)    (14,400,857)
                                                                       ------------    ------------

Cash flows from investing activities:
    Purchases of property and equipment                                  (1,084,375)     (1,846,619)
    Sale of  evaluation and demonstration instruments                     1,031,430               -
    Purchases of marketable securities                                  (14,074,620)     (6,501,680)
    Proceeds from maturities of marketable securities                     4,101,443       8,401,642
    Other                                                                       600           5,735
                                                                       ------------    ------------
           Net cash provided by (used in) investing activities          (10,025,522)         59,078
                                                                       ------------    ------------

Cash flows from financing activities:
    Principal payments on borrowings                                     (1,061,571)     (1,232,488)
    Proceeds from short-term borrowings                                           -         990,000
    Net proceeds from the issuance of common stock                       12,462,087      16,684,029
    Principal payments on capital lease obligations                         (96,301)       (506,398)
                                                                       ------------    ------------
           Net cash provided by financing activities                     11,304,215      15,935,143
                                                                       ------------    ------------


Effect of subsidiary's year-end change on cash and cash equivalents               -        (664,819)
Effect of exchange rate changes on cash and cash equivalents               (240,521)       (116,743)
                                                                       ------------    ------------
           Net increase (decrease) in cash and cash equivalents             (96,621)        811,802
Cash and cash equivalents at beginning of period                          3,432,614       3,358,684
                                                                       ------------    ------------

Cash and cash equivalents at end of period                             $  3,335,993    $  4,170,486
                                                                       ============    ============

Supplemental disclosure of cash flow information:
    Cash paid during the period for interest                           $    477,219    $  1,296,369
                                                                       ============    ============

</TABLE>

See accompanying notes to consolidated financial statements.

                                       5
<PAGE>

                            DIAMETRICS MEDICAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 1999
                                   (Unaudited)

(1)  Unaudited Financial Statements

     The interim consolidated financial statements of Diametrics Medical, Inc.
     (the "Company") are unaudited and have been prepared by the Company in
     accordance with generally accepted accounting principles for interim
     financial information, pursuant to the rules and regulations of the
     Securities and Exchange Commission. Pursuant to such rules and regulations,
     certain financial information and footnote disclosures normally included in
     the financial statements have been condensed or omitted. However, in the
     opinion of management, the financial statements include all adjustments
     necessary for a fair presentation of the interim periods presented,
     consisting of normal recurring accruals and entries supporting transactions
     executed under the Company's Distribution Agreement with Hewlett-Packard
     Company ("HP"), discussed in this Form 10-Q (see note 4). Operating results
     for these interim periods are not necessarily indicative of results to be
     expected for the entire year, due to seasonal, operating and other factors.

     These statements should be read in conjunction with the financial
     statements and related notes which are incorporated by reference in the
     Company's Annual Report on Form 10-K for the year ended December 31, 1998.
     Certain 1998 amounts have been reclassified from prior reported balances to
     conform with the 1999 presentation.

(2)  COMPREHENSIVE LOSS

     The following table sets forth the computation of comprehensive loss:

<TABLE>
<CAPTION>
                                                  Three Months Ended             Nine Months Ended
                                                     September 30,                 September 30,
                                                  1999           1998           1999            1998
                                               -----------   -----------     -----------    ------------
<S>                                            <C>           <C>             <C>            <C>
Net loss                                       $(1,981,187)  $(4,792,354)    $(8,671,102)   $(13,421,987)

Change in cumulative translation adjustment        106,111       (58,443)       (331,410)        (52,167)
                                               -----------   -----------     -----------    ------------

Comprehensive loss                             $(1,875,076)  $(4,850,797)    $(9,002,512)   $(13,474,154)
                                               ===========   ===========     ===========    ============
</TABLE>

(3)  Inventories

     Inventories are summarized as follows:

                              September 30,      December 31,
                                  1999               1998
                              -------------      ------------
     Raw materials             $ 2,807,595       $ 1,989,953
     Work-in-process               782,689           741,719
     Finished goods              1,024,226         2,035,865
                               -----------       -----------
                               $ 4,614,510       $ 4,767,537
                               ===========       ===========

                                       6
<PAGE>

(4)  OTHER CURRENT LIABILITIES

     Other current liabilities are summarized as follows:

                                              September 30,  December 31,
                                                  1999           1998
                                              -------------  ------------
Deferred credits                               $ 1,878,788    $        -
Deferred revenue                                 2,553,546             -
Current portion of long-term debt
    and capital leases                             346,106       416,509
Short-term borrowings                                    -       828,823
                                               -----------    ----------
                                               $ 4,778,440    $1,245,332
                                               ===========    ==========

     The Company's Distribution Agreement with HP, discussed below, provides for
     prepaid funding of sales and marketing costs during a sales transition
     period, research and development funding, as well as prepaid royalty
     payments over the term of the agreement resulting in deferred credits and
     deferred revenue that will be recognized over the periods benefited.

(5)  SHAREHOLDERS' EQUITY

     As part of an exclusive Distribution Agreement initiated on October 1,
     1998, the Company entered into a $5,000,000 Put Option and Stock Purchase
     Agreement with Johnson & Johnson Development Corporation ("JJDC") who
     committed to purchase up to $5,000,000 of the Company's Common Stock at the
     Company's option over the twelve month period ended September 30, 1999.
     Effective March 26, 1999, the Company exercised approximately $4 million of
     the available Put Option, resulting in the issuance of 773,184 shares of
     the Company's Common Stock to JJDC at a per share price of $5.17.

     As part of an exclusive Distribution Agreement initiated on June 6, 1999
     between the Company and HP, on June 28, 1999 the Company completed the sale
     in a private placement of 1,357,143 shares of Common Stock at a price of
     $7.00 per share, resulting in proceeds of approximately $9.5 million. HP
     also received a warrant to purchase 452,381 shares of Common Stock at $8.40
     per share. The warrant expires on August 4, 2003.

(6)  RELATED PARTY TRANSACTIONS

     One of the Company's directors is also a director of DVI, Inc., a health
     care finance company with which the Company has a credit line and notes
     payable. As of September 30, 1999, there were no outstanding advances
     against the $1,000,000 receivable backed credit line and the outstanding
     balance of the notes payable totaled $945,073.

     The Company's exclusive distributors, CODMAN, a Johnson and Johnson
     Company, and HP, are shareholders of the Company. Sales to these parties
     were approximately $3.3 million and $8.8 million for the three and nine
     months ended September 30, 1999.

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

     The Company's discussion and analysis of results of operations and
     financial condition, including statements regarding the Company's
     expectations about new and existing products, future financial performance,
     Year 2000 compliance, market risk exposure and other forward looking
     statements are subject to various risks and uncertainties, including,
     without limitation, demand and acceptance of new and existing products,
     technological advances and product obsolescence, competitive factors,
     stability of domestic and international financial markets and the
     availability of capital to finance growth. These and other risks are
     discussed in greater detail in Exhibit 99 to the

                                       7
<PAGE>

     Company's Form 10-K filed with the U.S. Securities and Exchange Commission,
     with respect to the Company's fiscal year ended December 31, 1998. When
     used in the Form 10-Q, and in future filings by the Company with the
     Securities and Exchange Commission, in the Company's press releases,
     presentations to securities analysts or investors, in oral statements made
     by or with the approval of an executive officer of the Company, the words
     or phrases "believes," "may," "will," "expects," "should," "continue,"
     "anticipates," "intends," "will likely result," "estimates," "projects," or
     similar expressions and variations thereof are intended to identify such
     forward-looking statements.

SUMMARY
-------

     Diametrics Medical, Inc. (the "Company"), which began operations in 1990,
     is engaged in the development, manufacturing and marketing of critical care
     blood and tissue analysis systems, which provide immediate or continuous
     diagnostic results at the point-of-patient care.

     Since its commencement of operations in 1990, the Company has transitioned
     from a development stage company to a full-scale development, manufacturing
     and sales organization. As of September 30, 1999, the primary funding for
     the operations of the Company has been approximately $143 million raised
     through public and private sales of its equity securities and issuance of
     convertible promissory notes.

     In October 1998, the Company entered into an exclusive Distribution
     Agreement with CODMAN for worldwide market development and distribution of
     the Company's Neurotrend(TM) system. Neurotrend allows clinicians to
     monitor oxygen, carbon dioxide, acidity and temperature in the brain of a
     patient who is undergoing surgery or has experienced severe head injury.
     Sales of the Neurotrend system to CODMAN began in fourth quarter 1998.

     On June 7, 1999, the Company and HP announced that HP had signed an
     exclusive worldwide Distribution Agreement to market, sell and distribute
     the Company's Paratrend(R) and Neotrend(TM) continuous blood-gas monitoring
     systems and the IRMA(R) SL point-of-care blood analysis system. Under the
     terms of the Distribution Agreement, the Company will transfer full
     responsibility for marketing, sales and distribution for these products to
     HP. The initial term of the Distribution Agreement is three and a half
     years, with the option for extensions. Concurrently with the execution of
     the Distribution Agreement, HP agreed to acquire $9.5 million of the
     Company's Common Stock at $7.00 per share, with a warrant to purchase
     452,381 shares of Common Stock at $8.40 per share. The sale of shares of
     Common Stock to HP for $9.5 million was completed on June 28, 1999. In
     addition to HP's equity investment, the Distribution Agreement also
     provides for minimum purchase commitments, market development commitments,
     research and development funding and royalty payments over the term of the
     agreement, as well as funding of sales and marketing costs during a sales
     transition period.

RESULTS OF OPERATIONS
---------------------

     Sales. Sales of the Company's products were $4,694,294 and $13,577,227 for
     the three and nine months ended September 30, 1999, compared to $3,102,430
     and $8,571,181 for the same periods in the prior year, increases of 51% and
     58%, respectively. The increase in sales for the three and nine months
     ended September 30, 1999 over the prior year reflects a 93% and 106%
     increase in instrument sales and a 5% decrease and 7% increase in
     disposable cartridge and sensor sales, respectively. The significant
     increase in instrument sales between periods was impacted primarily by
     sales to the Company's new distribution partners, CODMAN and HP, partially
     offset by the impact of sales returns from displaced distributors. While
     unit sales of disposable cartridges and sensors increased between quarterly
     periods, revenues declined slightly due to lower average sales prices under
     the HP and CODMAN distribution agreements.

     Intermittent testing products represented 42% and 39% of total sales for
     the three and nine months ended September 30, 1999, compared to 72% and 64%
     for the comparable periods in 1998. Continuous monitoring products
     comprised the remaining sales in each period.

                                       8
<PAGE>

     Intermittent blood testing products revenue was comprised of 64% and 55%
     instrument related revenue and 36% and 45% disposable cartridge related
     revenue for the three and nine months ended September 30, 1999,
     respectively. Continuous monitoring products revenue was comprised of 80%
     and 77% instrument related revenue and 20% and 23% disposable sensor
     revenue for the three and nine months ended September 30, 1999,
     respectively. The high concentration of instrument related revenue was
     impacted primarily by sales to CODMAN and HP in the year-to-date period and
     by sales to HP in the third quarter.

     The Company's revenues are affected principally by the number of
     instruments, both monitors and IRMA analyzers, placed with customers and
     the rate at which disposable sensors and cartridges are used in connection
     with these products. As of September 30, 1999, the Company has sold
     approximately 4,400 instruments. Unit sales of instruments for the three
     and nine months ended September 30, 1999, increased approximately 90% and
     104%, respectively, over unit sales for the same periods in 1998, while
     disposable sensor and cartridge unit sales increased 36% and 32%,
     respectively, over the same periods in 1998. As the Company grows, it is
     expected that the Company's growing customer base will increase its rate of
     usage of disposable products, with the result that overall disposable
     product sales will exceed that of instrument sales.

     The Company anticipates revenue in the fourth quarter of 1999 to grow
     modestly relative to the third quarter of 1999, due to the impact of
     replacing the Company's direct sales with HP distribution and transitioning
     certain existing distributors over to HP, partially offset by an expected
     increase in unit volumes. Unit volume growth is expected to continue, with
     resulting increased revenue growth in 2000.

     Cost of Sales. Cost of sales totaled $4,090,404 and $11,523,683, or 87% and
     85% of revenue for the three and nine months ended September 30, 1999,
     compared to $2,946,478 and $8,159,236 or 95% of revenue for both of the
     comparable periods in the prior year. The significant period-to-period
     improvement in the Company's cost of sales as a percentage of revenue
     reflects increased cartridge sales volumes, improved cartridge yields, and
     the impact of cost controls and manufacturing process changes. Also
     favorably affecting gross profit in 1999 was a higher mix of instrument
     sales. These improvements were partially offset by the impact of lower
     average sales prices under the HP Distribution Agreement and the impact of
     sales returns from displaced distributions. The Company expects gross
     margin as a percentage of revenue in the fourth quarter of 1999 to improve
     slightly relative to the third quarter, and to continue to improve during
     2000, as a result of expected continued improvements in manufacturing
     yields, higher unit volumes and product mix.

     Operating Expenses. Research and development expenditures totaled $968,693
     and $3,849,777 for the three and nine months ended September 30, 1999,
     compared to $1,729,984 and $4,909,526 for the same periods in 1998. The
     decline in 1999 expenses is primarily due to the recognition of $166,667
     and $500,000 in the second and third quarters, respectively, of research
     and development funding received from HP as part of the Distribution
     Agreement.

     Sales and marketing expenses totaled $683,416 and $3,839,572 for the three
     and nine months ended September 30, 1999, compared to $2,243,197 and
     $6,002,781 for the same periods in 1998. The period-to-period decreases are
     primarily due to the recognition of $818,182 and $1,386,364 in the second
     and third quarters of 1999, respectively, of sales and marketing funding
     received from HP.

     General and administrative expenses totaled $935,605 and $2,812,705 for the
     three and nine months ended September 30, 1999, compared to $888,657 and
     $2,540,366 for the same periods in

                                       9
<PAGE>

     1998. The period-to-period increases are primarily due to additional costs
     incurred in completing the HP transaction and increased headcount between
     periods.

     Operating expense run rates for the fourth quarter of 1999 are expected to
     approximate or decrease slightly relative to the third quarter of 1999. The
     Company targets a decrease in operating expense run rates in 2000 relative
     to 1999.

     Other Expense. Net other income totaled $2,637 for the three months ended
     September 30, 1999 and net other expense totaled $222,592 for the nine
     months ended September 30, 1999, compared to net other expense of $86,468
     and $381,259 for the same periods in 1998. The Company realized interest
     income of $218,643 and $312,295 for the three and nine months ended
     September 30, 1999, compared to $119,420 and $301,233 for the same periods
     in 1998. The period-to-period increase reflects the impact of higher
     average cash balances, primarily due to the timing of the Company's
     financing activities.

     Interest expense totaled $155,492 and $477,219 for the three and nine
     months ended September 30, 1999, compared to $202,988 and $640,819 for the
     same periods in 1998. The period-to-period decrease reflects the impact of
     lower average debt balances and a reduction in the amount of higher
     interest bearing capital lease debt relative to total debt outstanding.

     Net Loss. The net loss for the three and nine months ended September 30,
     1999 was $1,981,187 and $8,671,102, compared to $4,792,354 and $13,421,987
     for the same periods in 1998. Compared to the three and nine months ended
     September 30, 1998, the net loss decreased by 59% and 35%, respectively for
     the same periods in 1999. These decreases reflect the revenue growth
     previously discussed; improved margins, influenced by higher unit volumes,
     changes in product mix and improved manufacturing yields; and reduced
     operating expenses due primarily to research and development and sales and
     marketing funding received from HP, partially offset by costs incurred to
     transition the selling process to HP. The Company targets continued
     improvement in net loss for the fourth quarter of 1999, and further
     significant improvements in 2000 relative to 1999.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

     At September 30, 1999, the Company had working capital of $16,577,152, an
     increase of $5,161,854 from the working capital reported at December 31,
     1998. The increase is impacted primarily by financing proceeds of
     approximately $13.5 million consisting of $4 million from the Company's
     exercise in the first quarter of a Put Option under a Put Option and Stock
     Purchase Agreement with JJDC, and a $9.5 million equity investment by HP in
     June. Additionally, the Company received $7.5 million of prepayments from
     HP representing funding for royalties and research and development and
     sales and marketing expenses. These increases were partially offset by net
     cash used in operating activities.

     Net cash used in operating activities totaled $1,134,793 for the nine
     months ended September 30, 1999, compared to $14,400,857 for the same
     period in 1998. This was the result of net losses of $8,671,102 and
     $13,421,987 for these same periods in 1999 and 1998, respectively, adjusted
     by changes in key operating assets and liabilities, primarily accounts
     receivable, inventories, accounts payable, accrued expenses and deferred
     credits and revenue.

     Net accounts receivable increased $175,770 for the nine months ended
     September 30, 1999, compared to $1,290,537 for the same period in 1998. The
     smaller increase in the current period was primarily due to an improvement
     in days sales outstanding on increased sales, and the timing of sales and
     related customer payments.

     Inventories decreased $153,027 for the nine months ended September 30,
     1999, compared to an increase of $811,666 for the same period in 1998. The
     increase in 1998 was primarily due to an increase in cartridge raw material
     and work-in-process inventory levels as the Company transitioned from its
     adhesive cartridge to its new snapfit cartridge platform, as well as
     increased

                                       10
<PAGE>

     inventories of analyzer components in anticipation of beginning internal
     assembly of analyzers. The decrease in 1999 primarily reflects a decrease
     in finished goods inventory due to significant sales of instruments,
     partially offset by an increase in raw material inventory to meet
     anticipated production requirements in the fourth quarter.

     Accounts payable and accrued expenses increased $1,142,765 for the nine
     months ended September 30, 1999, compared to a decrease of $1,078,761 for
     the same period in 1998. The increase in 1999 was primarily due to accrued
     financing and other costs associated with the HP Distribution Agreement and
     Common Stock Purchase Agreement. The decrease in 1998 was primarily due to
     a reduction in accrued interest payable, due to the timing of interest
     payments, combined with timing of payments to vendors and employees.

     Deferred credits and revenue increased $4,640,667 for the nine months ended
     September 30, 1999. This increase primarily reflects the receipt of $7.5
     million of prepaid funding from HP under the terms of the Distribution
     Agreement. This prepayment represents partial funding of current and future
     sales and marketing and research and development expenses, as well as
     royalty payments. As of September 30, 1999, approximately $2.9 million of
     these receipts were recorded as reductions to second and third quarter
     expenses.

     Net cash used in investing activities totaled $10,025,522 for the nine
     months ended September 30, 1999, compared to net cash provided by investing
     activities of $59,078 for the same period in 1998. This change was affected
     primarily by the amounts and timing of private equity placements, which
     affected the amount of proceeds from maturities of marketable securities
     and purchases of marketable securities. Purchases of property and
     equipment, totaling $1,084,375 in 1999 and $1,846,619 in 1998, also
     affected net cash used in investing activities in each period. In 1999, the
     Company expects capital expenditures and new lease commitments to
     approximate $1.5 million, primarily reflecting investments to support new
     product development and production.

     Net cash provided by financing activities totaled $11,304,215 for the nine
     months ended September 30, 1999, compared to $15,935,143 for the same
     period in 1998. In 1999, net cash provided by financing activities
     consisted primarily of proceeds of approximately $4 million from the
     issuance of common stock as a result of the exercise of a Put Option under
     a Put Option and Stock Purchase Agreement with JJDC described below, and
     the previously described $9.5 million private equity placement with HP,
     partially offset by principal payments on borrowings and capital lease
     obligations. Net cash provided by financing activities in 1998 was
     primarily due to proceeds from a private placement of common stock of
     approximately $15 million, proceeds from employee stock plans, warrant
     exercises and a draw-down on a line of credit, partially offset by
     principal payments on borrowings and capital lease obligations.

     At September 30, 1999, the Company had U.S. net operating loss and research
     and development tax credit carryforwards for income tax purposes of
     approximately $112,000,000 and $939,000, respectively. Pursuant to the Tax
     Reform Act of 1986, use of the Company's net operating loss carryforwards
     are limited due to a "change in ownership". The Company estimates that the
     use of the U.S. net operating losses incurred prior to August 4, 1995 are
     subject to annual limitations of approximately $9.8 million per year. Net
     operating losses incurred since August 4, 1995 are not currently subject to
     the "change in ownership" limitations. If not used, these net operating
     loss carryforwards begin to expire in 2005.

     The Company's foreign subsidiary also has net operating loss carryforwards
     of approximately $48,000,000 which can be carried forward indefinitely.

     As part of an exclusive Distribution Agreement initiated on October 1,
     1998, the Company entered into a $5,000,000 Put Option and Stock Purchase
     Agreement with JJDC who committed to purchase up to $5,000,000 of the
     Company's Common Stock at the Company's option over the twelve month period
     ended September 30, 1999. Effective March 26, 1999, the Company exercised
     approximately $4 million of the available Put Option resulting in the
     issuance of 773,184 shares of the Company's Common Stock to JJDC at a per
     share price of $5.17. As part of an

                                       11
<PAGE>

     exclusive Distribution Agreement and Common Stock Purchase Agreement with
     HP completed in June 1999, the Company issued 1,357,143 shares of Common
     Stock to HP at a price of $7.00 per share, for aggregate proceeds of $9.5
     million. HP also received a warrant to purchase 452,381 shares of Common
     Stock at $8.40 per share, providing additional funding potential of $3.8
     million. In addition, HP has agreed to minimum purchase commitments, market
     development commitments, research and development funding and royalty
     payments which, with the stock purchase commitment, total in excess of $100
     million.

     The Company believes proceeds from the funding agreements with HP and
     currently available funds and cash generated from projected operating
     revenues, supplemented by proceeds from employee stock plans, warrant
     exercises and asset based credit will meet the Company's working capital
     needs. If the amount or timing of funding from these sources or cash
     requirements vary materially from those currently planned, the Company
     could require additional capital. The Company's long-term capital
     requirements will depend upon numerous factors, including the rate of
     market acceptance of the Company's products and the level of resources
     devoted to expanding the Company's business, manufacturing capabilities and
     research and development activities. While there can be no assurance that
     adequate funds will be available when needed or on acceptable terms,
     management believes that the Company will be able to raise adequate funding
     if needed.

     YEAR 2000 COMPLIANCE
     --------------------

     The Company has addressed the issues associated with computing difficulties
     that may affect existing computer systems as a result of programming code
     malfunction in distinguishing 21st century dates from 20th century dates
     (the "Year 2000" issue). The Year 2000 issue is a pervasive problem
     affecting many information technology systems and embedded technologies in
     all industries. The Company identified teams of internal staff to review
     its products; its internal financial, manufacturing and other process
     control systems; and its interface with major customers and suppliers in
     order to assess and remediate Year 2000 concerns.

     The Company's information technology ("IT") systems consist of computer
     hardware systems and software supplied by third parties. The Company's IT
     systems are Year 2000 compliant company wide.

     The Company's assessment of internal systems included a review of non IT
     systems (systems that contain embedded technology in manufacturing or
     process control equipment containing microprocessors or other similar
     circuitry). This assessment included a review of the Company's internal
     manufacturing equipment and facilities (including building maintenance,
     security, electrical, lighting, fire protection, telephone, heating and
     cooling systems). Based upon this review, the Company believes that its
     manufacturing processes and equipment and internal process control
     equipment are Year 2000 compliant company wide.

     The Company has assessed Year 2000 compliance of its products offered for
     sale to customers, and believes that all are currently compliant. Contacts
     have been made with the Company's customers regarding test procedures they
     can apply to verify compliance of the Company's products.

     The Company has identified third parties with which it has material
     relationships, including suppliers of components for its products and
     providers of critical utility services. The majority of the raw materials
     and purchased components used to manufacture the Company's products are
     readily available. Most of the raw materials are or may be obtained from
     more than one source. A small number of these materials, however, are
     unique in their nature, and are therefore single sourced. The Company has
     contacted all major third party suppliers and has received representations
     that if not currently compliant, each has plans in place to ensure that
     products purchased by the Company from such suppliers will function
     properly in the Year 2000 and that such suppliers' internal systems will be
     Year 2000 compliant no later than November 1999. To minimize the impact of
     any potential temporary delay in the ability of the Company's key suppliers
     to provide components for its products in early 2000, the Company plans to
     have sufficient buffer inventory on

                                       12
<PAGE>

     hand to maintain normal production during such a delay period. These
     actions are intended to help mitigate the risk of the possible external
     impact of the Year 2000 problem. Even assuming that all material third
     parties confirm that they are or expect to be Year 2000 compliant by
     December 31, 1999, it is not possible to state with certainty that such
     parties will be so compliant. It is impossible to fully assess the
     potential consequences in the event service interruptions from component
     suppliers occur or in the event that there are disruptions in such
     infrastructure areas as utilities, communications, transportation, banking
     and government.

     The total estimated incremental cost required to address the Company's Year
     2000 compliance is approximately $150,000, including the cost of software
     and hardware upgrades. The majority of this cost has been incurred in 1999.
     These or any potential additional costs are not expected to have a material
     effect on the Company's financial position, results of operations or cash
     flows.

     Based upon its assessments to date, the Company believes it will not
     experience any material disruption in its operations as a result of Year
     2000 problems in its products, in its internal financial, manufacturing and
     other process control systems, or in its interface with major customers and
     suppliers. However, if major suppliers, including those providing component
     parts, electricity, communications and transportation services, experience
     difficulties resulting in disruption of critical supplies or services to
     the Company, a shutdown of the Company's operations could occur for the
     duration of the disruption. As previously noted, the Company is minimizing
     the component supply risk by maintaining adequate buffer inventories of
     component parts. Based upon the results of survey feedback from its major
     suppliers of component parts and critical services, the Company believes
     the risk of a material disruption in its operations due to third party
     issues is very small. Assuming no major disruption in service from critical
     third party providers, the Company believes that it will be able to manage
     the Year 2000 transition without any material effect on the Company's
     results of operations or financial position. There can be no assurance,
     however, that unexpected difficulties will not arise and, if so, that the
     Company will be able to timely develop and implement a contingency plan.

     EURO CONVERSION
     ---------------

     Effective January 1, 1999, 11 of the 15 member countries of the European
     Union (EU) adopted the euro as their common legal currency. On that date,
     the participating countries established fixed euro conversion rates between
     their existing local currencies and the euro. During the three-and-a-half
     year transition period following its introduction, participating countries
     will be allowed to transact business both in the euro and in their local
     currencies. On July 1, 2002, the euro will be the sole official currency in
     participating EU countries.

     While the Company will continue to evaluate the impact of the euro
     conversion over time, based upon currently available information,
     management does not believe that the conversion to the euro currency will
     have a material impact on the Company's financial condition or overall
     trends in results of operations. There have been no material changes in the
     anticipated impact of euro conversion issues faced by the Company from
     those previously reported in the Company's Annual Report on Form 10-K for
     the year ended December 31, 1998.

     NEW ACCOUNTING PRONOUNCEMENTS
     -----------------------------

     In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
     133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
     No. 133 establishes accounting and reporting standards for derivative
     instruments, including certain derivative instruments embedded in other
     contracts and for hedging activities. The statement requires that an entity
     recognize all derivatives as either assets or liabilities in the statement
     of financial position and measure those instruments at fair value. SFAS No.
     133 is effective for fiscal years beginning after June 15, 1999; however,
     in 1999 the FASB issued SFAS No. 137 "Accounting for Derivative Instruments
     and Hedging Activities // Deferral of the Effective Date of FASB Statement
     No. 133, an Amendment of Statement No. 133" which defers the effective date
     of SFAS No. 133 to fiscal years beginning after

                                       13
<PAGE>

     June 15, 2000. The Company is currently evaluating SFAS No. 133, but does
     not expect that it will have a material effect on its financial statements.

     Item 3. Quantitative and Qualitative Disclosure About Market Risk
     -----------------------------------------------------------------

     The Company's primary market risk exposure is foreign exchange rate
     fluctuations of the British pound sterling to the U.S. dollar as the
     financial results of the Company's U.K. subsidiary, Diametrics Medical,
     Ltd., are translated into U.S. dollars in consolidation. The Company's
     exposure to foreign exchange rate fluctuations also arises from
     transferring funds to its U.K. subsidiary in British pounds sterling. The
     Company does not currently use derivative financial instruments to hedge
     against exchange rate risk. The Company's exposure to interest rate risk is
     limited to short-term borrowings under its $1,000,000 receivable backed
     credit line. Based upon currently available information, management does
     not believe that the effect of foreign exchange rate fluctuations and
     interest rate risk will have a material impact on the Company's financial
     condition or overall trends in results of operations. There have been no
     material changes in market risk faced by the Company from what had been
     previously reported in the Company's Annual Report on Form 10-K for the
     year ended December 31, 1998.

                           PART II - OTHER INFORMATION

     Item 1. Legal Proceedings

          None

     Item 2. Changes in Securities

          None

     Item 3. Defaults Upon Senior Securities

          None

     Item 4. Submission of Matters to a Vote of Security Holders

          None

     Item 5. Other Information

          None

     Item 6. Exhibits and Reports on Form 8-K

          a.   Exhibits

        Exhibit                                                  Method
        No.           Description                              of Filing
        -------       -----------                              ---------


        27     Financial Data Schedule                       Filed herewith


          b.   Reports on Form 8-K.

               On July 23, 1999, the Company filed a Current Report on Form 8-K
               relating to the Distribution Agreement and Common Stock Purchase
               Agreement, both dated June 6, 1999, between the Company and
               Hewlett-Packard Company.

                                       14
<PAGE>

                            DIAMETRICS MEDICAL, INC.


     SIGNATURE
     ---------

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



     DIAMETRICS MEDICAL, INC.




     By: /s/ Laurence L. Betterley
         -----------------------------------
             Laurence L. Betterley
             Senior Vice President
             and Chief Financial Officer
             (and Duly Authorized Officer)


     Dated: November 12, 1999

                                       15