##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q   þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
   Commission file number 0-21982 Diametrics Medical, Inc.    Internal Revenue Service  Employer Identification No. 41-1663185 3050 Centre Pointe Drive, Suite 150, 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 þ No o Indicate by check mark whether the Registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes o No þ As of May 31, 2005, 35,121,835 shares of Common Stock were outstanding.




---



##### Table of Contents



Diametrics Medical, Inc.  
 PagePart
I  FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial Statements (unaudited)Consolidated Statements of Operations:Three Months Ended March 31, 2005 and 2004
    
    
    3Consolidated Balance Sheetsas of March 31, 2005and December 31, 2004
    
    
    4Consolidated Statements of Cash Flows:Three Months Ended March 31, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Management's Discussion and Analysis of Results of Operations and Financial Condition
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 4.
    
    Controls and Procedures
    
    
    15Part II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    15Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    15Item 3.
    
    Defaults Upon Senior Securities
    
    
    15Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    15Item 5.
    
    Other Information
    
    
    15Item 6.
    
    Exhibits
    
    
    15Signatures
    
    
    
    16Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certificaton of CFO Pursuant to Section 906
 2




---



##### Table of Contents



PART I  FINANCIAL INFORMATION 
 Item 1. Consolidated Financial Statements (unaudited) 
 DIAMETRICS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) Three Months EndedMarch 31,2005
    
    
    2004Net revenue
    
    $
    
    
    
    $
    Cost of revenue
    
    
    
    
    
    
    Gross profit
    
    
    
    
    
    
    Operating expenses:Research and development
    
    
    456,586
    
    
    
    Selling, general and administrative
    
    
    387,146
    
    
    
    521,616Total operating expenses
    
    
    843,732
    
    
    
    521,616Operating loss
    
    
    (843,732
    )
    
    
    (521,616
    )Interest income
    
    
    
    
    
    
    4,761Interest expense
    
    
    (7,515,220
    )
    
    
    (371,122
    )Other expense, net
    
    
    (2,790
    )
    
    
    (79,296
    )Loss before discontinued operations
    
    
    (8,361,742
    )
    
    
    (967,273
    )Discontinued operations:Income
(loss) from discontinued operations
    
    
    14,819
    
    
    
    (1,188,678
    )Gain on sale of discontinued operations
    
    
    
    
    
    

    557,05214,819
    
    
    
    (631,626
    )Net loss
    
    
    (8,346,923
    )
    
    
    (1,598,899
    )Beneficial conversion featurepreferred
stock dividend
    
    
    
    
    
    
    (665,994
    )Loss available to common shareholders
    
    $
    (8,346,923
    )
    
    $
    (2,264,893
    )Basic and diluted net loss per common share:Loss before discontinued operations
    
    $
    (0.24
    )
    
    $
    (0.04
    )Discontinued operations:Loss from discontinued operations
    
    
    0.00
    
    
    
    (0.04
    )Gain on sale of discontinued operations
    
    
    
    
    
    
    0.02Income
(loss) from discontinued operations
    
    
    0.00
    
    
    
    (0.02
    )Net loss
    
    $
    (0.24
    )
    
    $
    (0.06
    )Loss available to common shareholders
    
    $
    (0.24
    )
    
 $
    (0.08
    )Weighted average number of
common shares outstanding
    
    
    35,121,835
    
    
    
    28,498,626
 See accompanying notes to consolidated financial statements. 3




---



##### Table of Contents



DIAMETRICS MEDICAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    211,519
    
    
    $
    1,095,800Prepaid expenses and other current assets
    
    
    88,218
    
    
    
    24,815Assets of discontinued operations
    
    
    
    
    
    
    25,017Total current assets
    
    
    299,737
    
    
    
    1,145,632Property and equipment, net
    
    
    1,332
    
    
    
    3,171Other assets, net
    
    
    99,896
    
    
    
    107,226$
    400,965
    
    
    $
    1,256,029LIABILITIES AND SHAREHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    560,566
    
    
    $
    636,055Accrued interest
    
    
    853,383
    
    
    
    675,843Other accrued expenses
    
    
    76,659
    
    
    
    42,941Convertible senior secured fixed rate notes
    
    
    180,143
    
    
    
    28,281Liabilities of discontinued operations
    
    
    119,417
    
    
    
    93,677Total current liabilities
    
    
    1,790,168
    
    
    
    1,476,797Long-term liabilities:Convertible subordinated debt
    
    
    8,166,594
    
    
    
    988,106Total liabilities
    
    
    9,956,762
    
    
    
    2,464,903Shareholders deficit:Preferred
stock, $.01 par value: 5,000,000 shares authorized,
25,000 shares issued and outstanding at both March 31, 2005
and December 31, 2004 (liquidation preference of preferred shares is $2,500,000 at March 31, 2005
and December 31, 2004)
    
    
    250
    
    
    
    250Common stock, $.01 par value: 1,000,000,000 and 200,000,000 sharesauthorized
at March 31, 2005 and December 31, 2004, 35,121,835
shares issued and outstanding at both dates, respectively;
    
    
    351,218
    
    
    
    351,218Additional paid-in capital
    
    
    165,432,535
    
    
    
    165,432,535Accumulated deficit
    
    
    (175,339,800
    )
    
    
    (166,992,877
    )Total shareholders deficit
    
    
    (9,555,797
    )
    
    
    (1,208,874
    )$
    400,965
    
    
    $
    1,256,029
 See accompanying notes to consolidated financial statements. 4




---



##### Table of Contents



DIAMETRICS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) Three
Months EndedMarch 31,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (8,346,923
    )
    
    $
    (1,598,899
    )Adjustments to reconcile net loss to net cash flows from operating activities:Loss from discontinued operations
    
    
    
    
    
    
    1,188,678Gain on sale of discontinued operations
    
    
    
    
    
    
    (557,052
    )Income on liquidation of discontinued operations
    
    
    (14,819
    )
    
    
    Depreciation and amortization
    
    
    9,169
    
    
    
    12,668Accretion of convertible notes
    
    
    7,330,350
    
    
    
    233,186Stock-based compensation
    
    
    
    
    
    
    40,156Expense related to warrant repricing
    
    
    
    
    
    
    90,674Prepaid expenses and other current assets
    
    
    (63,403
    )
    
    
    103,429Accounts payable
    
    
    (75,489
    )
    
    
    275,339Accrued interest
    
    
    177,540
    
    
    
    126,782Other accrued expenses
    
    
    33,718
    
    
    
    (169,238
    )Deferred credits and revenue
    
    
    
    
    
    
    1,245Net cash used in continuing operating activities
    
    
    (949,857
    )
    
    
    (253,032
    )Cash flows from investing activities:Other
    
    
    
    
    
    
    8,634Net cash provided by investing activities
    
    
    
    
    
    
    8,634Cash flows from financing activities:Net proceeds from the issuance of preferred stock and common stock warrants
    
    
    
    
    
    
    1,262,539Net cash provided by (used in) financing activities
    
    
    
    
    
    
    1,262,539Net cash provided by (used in) discontinued operations
    
    
    65,576
    
    
    
    (524,523
    )Net increase (decrease) in cash and cash equivalents
    
    
    (884,281
    )
    
    
    493,618Cash and cash equivalents at beginning of period
    
    
    1,095,800
    
    
    
    170,692Cash and cash equivalents at end of period
    
    $
    211,519
    
    
    $
    664,310Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    
    
    
    $
    Supplemental
disclosure of noncash investing and financing activities:Effective
January 16, 2004, the Company completed a $1.5 million financing
through the sale of 15,000 shares of Series F convertible preferred
stock. A beneficial conversion feature embedded in the preferred
stock was calculated at $665,994 and was recorded as a noncash charge
to retained earnings and treated as a reconciling item on the
Statements of Operations to adjust the reported net loss to loss
available to common shareholders.
 5




---



##### Table of Contents



DIAMETRICS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(UNAUDITED) (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The interim consolidated financial statements of Diametrics Medical, Inc. (the
Company) are unaudited and have been prepared by the Company in accordance
with accounting principles generally accepted in the United States of America
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, consisting of
normal recurring accruals, necessary for a fair presentation of the interim
periods presented. Operating results for these interim periods are not
necessarily indicative of results to be expected for the entire year. The Company has identified certain of its significant accounting policies that
it considers particularly important to the portrayal of the Companys results
of operations and financial position and which may require the application of a
higher level of judgment by the Companys management and, as a result, are
subject to an inherent level of uncertainty. These are characterized as
critical accounting policies and address the accounting for and
classification of debt and equity instruments and revenue recognition and
accounts receivable, each more fully described under Managements Discussion
and Analysis of Results of Operations and Financial Condition in the Companys
Annual Report on Form 10-K for the year ended December 31, 2004. No other
changes to the Companys critical accounting policies have been made during the
quarter ended March 31, 2005. These statements should be read in conjunction with the financial statements
and related notes which are part of the Companys Annual Report on Form 10-K
for the year ended December 31, 2004. 6




---



##### Table of Contents



Description of the Business.Diametrics Medical, Inc., is a medical device
company. Its focus has changed significantly over the past 18 months. On
November 1, 2004, the Company terminated all of its employees in the United
Kingdom and all but four of its employees in the United States. On November 22,
2004, a meeting of creditors was held in London, England for the purposes of
liquidating the assets of its wholly-owned subsidiary in the United Kingdom,
Diametrics Medical Limited (DML). The Company has created a new, wholly-owned
subsidiary called TGC Research Limited (TGC), which acquired certain assets,
including equipment and intellectual property, from the liquidator of DML in
January 2005. TGC was formed as a research and development organization,
focusing initially on the development of a line of new products aimed at
continuous glucose monitoring and control in critically ill patients, in a
hospital setting, at the point-of-patient care. Principles of Consolidation.The accompanying consolidated financial statements
include the accounts of Diametrics Medical, Inc. and its wholly-owned
subsidiaries, TGC Research Limited and Diametrics Medical, Ltd. All material
inter-company accounts and transactions have been eliminated. Research and Development.Research and development costs relate to new product
development and are expensed as incurred. Net Loss Per Common Share.Basic loss per share (EPS) is calculated by
dividing net loss by the weighted average common shares outstanding during the
period. Diluted EPS reflects the potential dilution to basic EPS that could
occur upon conversion or exercise of securities, options or other such items to
common shares using the treasury stock method, based upon the weighted average
fair value of the Companys common shares during the period. For each period
presented, basic and diluted loss per share amounts are identical as the effect
of potential common shares is antidilutive. The following is a summary of outstanding securities which have been excluded
from the calculation of diluted EPS because the effect on net loss per common
share would have been antidilutive: March 31,
    
    
    December 31,2005
    
    
    2004Common stock options
    
    
    1,422,600
    
    
    
    1,422,600Common stock warrants
    
    
    66,811,426
    
    
    
    66,811,426Convertible senior secured fixed rate notes
    
    
    2,013,430
    
    
    
    2,013,430Convertible preferred stock-Series F
    
    
    6,666,667
    
    
    
    6,666,667Convertible preferred stock-Series G
    
    
    25,000,000
    
    
    
    25,000,000Restricted stock
    
    
    64,251
    
    
    
    64,251
 Use of Estimates.The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting period. The Companys significant
estimates primarily relate to the assessment of the fair value of long-lived
assets and accounting for debt and equity transactions. Actual results could
differ from those estimates. 7




---



##### Table of Contents



Stock Based Compensation.As permitted by Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the
Company applies the intrinsic-value method prescribed in Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, to
account for the issuance of stock incentives to employees and directors. As a
result, no compensation expense related to employees and directors stock
incentives has been recognized in the financial statements as all options
granted under stock incentive plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. Had compensation
costs for the Companys stock incentive plans been determined based on the fair
value of the awards on the date of grant, consistent with the provisions of
SFAS No. 123, the Companys net loss per share would have increased to the pro
forma amounts indicated below: Three months ended March 31,2005
    
    
    2004Loss available to common shareholders, as reported
    
    $
    (8,346,923
    )
    
    $
    (2,264,893
    )Stock-based employee compensation expense included
in net loss available to common shareholders
    
    
    
    
    
    
    40,156Total stock-based employee compensation expense
determined under fair value-based method for all
awards
    
    
    (130,488
    )
    
    
    (254,805
    )Pro forma net loss available to common shareholders
    
    $
    (8,477,411
    )
    
    $
    (2,479,542
    )Loss available to common shareholders:Basic and diluted, as reported
    
    $
    (0.24
    )
    
    $
    (0.08
    )Basic and diluted, proforma
    
    $
    (0.24
    )
    
    $
    (0.09
    )
 No new options were issued during the three months ended March 31, 2005 and
2004. Recently Issued Accounting Pronouncements In June 2005, Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 154 (SFAS No. 154), Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No.
3. The statement applies to all voluntary changes in accounting principle, and
changes the requirements for accounting for and reporting of a change in
accounting principle. SFAS No. 154 requires retrospective application to prior
periods financial statements of a voluntary change in accounting principle
unless it is impracticable. SFAS No. 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. Earlier application is permitted for accounting changes and corrections
of errors made occurring in fiscal years beginning after June 1, 2005. The
statement does not change the transition provisions of any existing accounting
pronouncements, including those that are in a transition phase as of the
effective date of this statement. The Company does not expect the adoption of
SFAS No. 154 to have a material effect on its consolidated financial
statements. (2) GOING CONCERN Although the Company discontinued all its operations in October 2004, it did
obtain additional funding in December 2004 and again in May 2005 for a new
product research project started in early 2005. The accompanying financial
statements have therefore been prepared on a going-concern basis. The report of
the Companys independent registered public accounting firm on the consolidated
financial statements for the year ended December 31, 2004 contains an
explanatory paragraph expressing substantial doubt about the Companys ability
to continue as a going concern as a result of recurring losses, negative cash
flows and uncertainties regarding the Companys ability to successfully
develop, produce and market a new product or products. The financial statements
would require additional adjustments relating to the recoverability and
classification of recorded asset amounts and the amounts and classification of
liabilities if the Company is unable to continue as a going concern. 8




---



##### Table of Contents



The Company is planning to use available funds to develop new products aimed at
continuous glucose monitoring in critically ill patients. It believes its
experience with in-vivo measurement systems positions it well to develop such
products. Planning efforts are projected to continue through summer 2005. The Company will be required to raise additional capital in order to sustain
and fund its operations over the long term. Initial projections by management
indicated a need for $10 million to $15 million, which may be adjusted as the
Company develops its business plan and evaluates further the costs of product
development and sales and marketing programs. The Company currently has no
available lines of credit or other credit facilities and is not certain that it
can obtain financing or, if it is available, whether it will be on acceptable
terms. The Company may pursue the issuance of additional equity or debt
securities to the extent funding raised from other business alternatives is not
sufficient to meet its funding requirements. If additional funds are raised
through the issuance of equity or equity-related securities, current
shareholders may experience dilution of their ownership interests and the newly
issued securities may have rights superior to those of common stock. If
additional funds are raised by issuing debt, the Company may be subject to
restrictive covenants that could limit its operating flexibility. While
management believes that the Company will be able to raise adequate funding to
meet its operational requirements, there can be no assurance that adequate
funds will be available when needed and on acceptable terms. If the Company is
unable to obtain additional financing when needed, it would be required to
significantly scale back development plans and reduce the scope of its
operations or cease operations entirely. (3) BORROWINGS The following is a rollforward of the Companys borrowings from December 31,
2004 to March 31, 2005: Convertible seniorsecured fixed rate
    
    
    Convertiblenotes
    
    
    subordinated debtBalance at
December 31, 2004
    
    $
    28,281
    
    
    $
    988,106Principal payments
    
    
    
    
    
    
    Accretion of interest
    
    
    151,862
    
    
    
    7,178,488Balance at
March 31, 2005
    
    $
    180,143
    
    
    $
    8,166,594
 Principal payments of $56,250 are due on a monthly basis for the convertible
senior secured fixed rate notes beginning August 1, 2005. The face amount of
those notes is $1,800,000. Principal payments for the convertible subordinated
debt are not due until the convertible senior fixed rate notes are repaid. The
face amount of that debt is $7,300,000. The carrying amount of that debt of
$8,166,594 includes unamortized debt premium of $895,508 at March 31, 2005. (4) ASSET PURCHASE On January 14, 2005, the Company announced that its wholly-owned
subsidiary in the United Kingdom, TGC, had acquired certain assets out of
liquidation from the liquidator of DML. DML was formerly a wholly-owned
subsidiary of the Company that was placed into liquidation in November 2004.
The assets purchased by TGC included certain equipment and intellectual
property, including certain trademarks. The purchased assets are expected to
form the core of a new product research and development program that TGC will
begin implementing in 2005. This R&D program initially will be focused on
bringing to market a line of products aimed at monitoring and controlling
glucose on a 9




---



##### Table of Contents



continuous basis in critically ill patients. The cost of
purchasing the assets was approximately $333,000, which was funded by proceeds
from the sale of Convertible Senior Secured Notes dated
December 15, 2004. The cost of the assets was charged to research and
development expense at the date of the acquisition as they have no alternative
use. (5) SHAREHOLDERS
DEFICIT On March 18, 2005, the Companys shareholders approved an increase in the
number of authorized shares of all classes of stock from 205,000,000 to
1,005,000,000 and in the number of authorized shares of Common Stock from
200,000,000 to 1,000,000,000. (6) SUBSEQUENT EVENT On May 2, 2005, the Company arranged an additional loan of $150,000 on the same
terms as borrowings under the Convertible Senior Secured Notes dated December
15, 2004. It expects to use the proceeds to continue planning for its new
product development. Warrants to purchase an additional 3,750,000 shares of
common stock were also issued to the lenders. 
 Item 2. Managements Discussion and Analysis of Results of Operations and
Financial Condition FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q of Diametrics Medical, Inc. for the quarter
ended March 31, 2005 contains forward-looking statements, principally in the
sections entitled Managements Discussion and Analysis of Results of
Operations and Financial Condition. Generally, you can identify these
statements because they use words like anticipates, believes, expects,
future, intends, plans, and similar terms. These statements reflect only
our current expectations. Although we do not make forward-looking statements
unless we believe we have a reasonable basis for doing so, we cannot guarantee
their accuracy and actual results may differ materially from those we
anticipated due to a number of uncertainties, many of which are unforeseen,
including, among others, the risks we face as described in this filing. You
should not place undue reliance on these forward-looking statements which apply
only as of the date of this quarterly report. These forward-looking statements
are within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
and are intended to be covered by the safe harbors created thereby. To the
extent that such statements are not recitations of historical fact, such
statements constitute forward-looking statements that, by definition, involve
risks and uncertainties. In any forward-looking statement where we express an
expectation or belief as to future results or events, such expectation or
belief is expressed in good faith and believed to have a reasonable basis, but
there can be no assurance that the statement of expectation of belief will be
accomplished. 10




---



##### Table of Contents



We believe it is important to communicate our expectations to our investors.
There may be events in the future, however, that we are unable to predict
accurately or over which we have no control, and we remain subject to various
risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Factors that could cause actual results or events to differ materially from
those anticipated, include, but are not limited to: our ability to successfully
develop new products; the ability to obtain financing for product development;
changes in product strategies; general economic, financial and business
conditions; changes in and compliance with governmental healthcare and other
regulations; changes in tax laws; the availability of key management and other
personnel, and other risks and uncertainties, including those described in the
Companys Form 10-K filed with the U.S. Securities and Exchange Commission for
the fiscal year ended December 31, 2004. 11




---



##### Table of Contents



OVERVIEW The focus of the Company has changed significantly from the quarter ended March
31, 2004 to the quarter ended March 31, 2005. On November 1, 2004, we
terminated all of our employees in the United Kingdom and all but four of our
employees in the United States. On November 22, 2004, a Meeting of Creditors
was held in London, England for the purposes of liquidating the assets of the
Companys wholly-owned subsidiary in the United Kingdom, Diametrics Medical
Limited (DML). The Company subsequently created a new, wholly-owned
subsidiary in the United Kingdom, TGC Research Limited (TGC), which acquired
certain equipment and intellectual property from the liquidator of DML in the
first quarter of 2005. TGC was created to become a research and development organization, focusing
initially on the development of a line of new products aimed at continuous
glucose monitoring and control in critically ill patients in a hospital setting
at the point-of-patient care. During the past three years, clinical practice
patterns in intensive care units around the world have changed dramatically.
Clinical evidence, we believe, has conclusively demonstrated that maintaining
patients within strict glycemic limits (a clinical practice known as tight
glycemic control) can dramatically reduce mortality, risk of infection and
other complications. We believe that optimal glycemic control can only be
achieved by the continuous monitoring of glucose, a measurement modality that
is not currently available in intensive care units. We believe that clinically
accurate glucose measurements can only be achieved by in-vivo measurement. Our
new focus initially will be to develop a product system that will effectively
and accurately measure, on a continuous basis, glucose in the critically ill
patient. We expect this product offering will allow clinicians around the world
to maintain tight glycemic control in this patient population, which we
believe, represents a significant business opportunity. During the first quarter ended March 31, 2004 and thereafter to November 1,
2004, our only business was the development, manufacturing and distribution of
blood and tissue monitoring systems that provided continuous diagnostic
information at the point-of-patient care. That business, known as Diametrics
Medical, Ltd., was acquired in late 1996 and operated as a wholly-owned
subsidiary of the Company, with manufacturing, research and development and
marketing operations located in High Wycombe, England. Blood and tissue
analysis is an integral part of patient diagnosis and treatment and timely
access to certain measurements is critical to effective patient care. We
believed that use of our systems would result in more timely decisions by
providing accurate and continuous test results at the patients bedside,
thereby reducing the time spent in critical care settings. Our monitoring
systems had also recently been used in several biotech applications to provide
continuous measurement of environments surrounding cell research and growth.
Most of those utilizations had been on a trial basis, although others had
generated revenue from systems and sensor sales. We marketed and distributed our TrendCare products through a direct sales force
in the United States, the United Kingdom and Germany and through nonexclusive
third-party distributors in various other countries. We distributed our
Neurotrend cerebral tissue monitoring system through Codman & Shurtleff, Inc.,
a Johnson & Johnson Company (Codman), under an exclusive worldwide
distribution agreement. The results of operation for the continuous monitoring business have been
reported as discontinued operation for each quarter presented in this report.
Revenues of the continuous monitoring business, included in discontinued
operations, were $25,562 and $651,016, respectively for the quarters ended
March 31, 2005 and 2004. Income (loss) attributable to that business during
those periods were $14,819 and ($1,188,678), respectively. APPLICATION OF CRITICAL ACCOUNTING POLICIES The Companys consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the U.S., which require the Company
to make estimates and
assumptions in certain circumstances that affect amounts reported. In preparing
these 12




---



##### Table of Contents



financial statements, management has made its best estimates and
judgments of certain amounts, giving due consideration to materiality. There
have been no changes to the Companys significant accounting policies during
2005. In addition, there were no debt or equity instruments issued during the
three months ended March 31, 2005. RESULTS OF OPERATIONS Quarter ended March 31, 2005 Compared to March 31, 2004 Revenue and Cost of Revenue. As a result of discontinued operations, the
Company has no revenue or cost of revenue related to continuing operations. Operating Expenses. Total operating expenses for the quarter ended March 31,
2005 totaled $843,732, an increase of $322,116 or 62% relative to 2004. The
increase in expense reflects the Companys increase in research and development
from $0 for the three months ended March 31, 2004 to $456,586. Approximately
$333,000 relates to the expensing of assets purchased from the Companys former
subsidiary, DML, with the remaining expenditures spent on developing the assets
that were purchased. The decrease in selling, general and administrative costs
related to the overall reduction in general administrative staff from March 31,
2004 to March 31, 2005. Other Income (Expense).The significant changes between periods in net other
income and expense occurred primarily as a result of the accounting treatment
for the issuance of additional debt and the modification of debt. The expensing
of the beneficial conversion feature and other debt discounts related to the
Companys debt obligations resulted in the recognition of $7,330,350 of
interest expense. Discontinued Operations.On October 4, 2004, the Company concluded that it was
no longer able to fund the operations of DML. The Directors of DML then ceased
all operations in the U.K. and, effective November 1, 2004 terminated all of
our employees there. On November 22, 2004, a Meeting of Creditors was held in
London, England for the purposes of liquidating the assets of DML. Based upon a
review of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-lived Assets, the Company assessed the measurement date for the sale
transaction as the date of Director approval, which occurred on October 4,
2004. As prescribed by SFAS No. 144, the Company began reporting the results of
operations of DML as discontinued operations effective as of the year ended
December 31, 2004 for all periods presented. Upon DML entering liquidation in
November, the Company recorded a loss of $2.4 million. The Company recorded a gain on liquidation of $14,819 for the three months
ended March 31, 2005 as a result of the sale of the remaining inventory
balances on hand. In addition, as a result of recording DML as a discontinued
operation, the Company recognized a loss from discontinued operations of
$1,188,678 for the three months ended March 31, 2004. LIQUIDITY AND CAPITAL RESOURCES The accompanying financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and satisfaction of
liabilities and other commitments in the normal course of business. The report
of the Companys independent registered public accounting firm on the
consolidated financial statements for the year ended December 31, 2004
contained an explanatory paragraph expressing substantial doubt about the
Companys ability to continue as a going concern as a result of recurring
losses and negative cash flows. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that may be necessary
if the Company is unable to continue as a going concern. 13




---



##### Table of Contents



At March 31, 2005, the Company had negative working capital of approximately
$1,490,000, compared with negative working capital of approximately $284,000 at
March 31, 2004, after restatement of the balance sheet for the impact of
discontinued operations. Cash of $212,000 represented 71% of total current
assets at March 31, 2005. Current liabilities of $1,790,000 at that date
consisted primarily of $1,491,000 in accounts payable and accrued expenses and
$180,000 in current maturities of long-term debt. The Company used the net
proceeds from $1,800,000 of Convertible Senior Notes funded on December 15,
2004, after banking, legal and accounting fees related to that financing, to
pay certain critical liabilities. Others have been negotiated or are being paid
over several months. The Company is monitoring its cash position carefully and is evaluating its
future operating cash requirements in the context of its strategy, business
objectives and expected business performance. Cash on hand at March 31, 2005
was expected to provide two to three months of funding as the Company developed
plans for its new product development activities. An additional $150,000 was
borrowed on May 2, 2005 and additional amounts will likely be required to
complete that planning. After receipt of the $150,000 in May 2005, the Company
had available funds of $250,000. Operations used about $100,000 in April 2005
and $150,000 in May 2005 and it is expected that requirements will be in that
range in future months, excluding incremental accounting, auditing and legal
fees related to filings with the Securities and Exchange Commission and any
initial new product development costs. The Companys long-term capital requirements for the development of its new
products will depend upon numerous factors, including the rate of market
acceptance of the Companys products and the level of research and development
activities. It is presently anticipated that such activities will require from
$10 to $15 million. 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 to meet its operational
requirements. If the Company is unable to raise an adequate level of additional
capital or generate sufficient cash flows from operations, the Companys
ability to execute its business plan and remain a going concern will be
significantly impaired. Income Tax Carryforwards.At December 31, 2004, the Company had U.S. tax net
operating loss and research and development tax credit carryforwards for income
tax purposes of approximately $139,500,000 and $1,493,000, respectively.
Pursuant to the Tax Reform Act of 1986, use of a portion of the Companys net
operating loss carryforwards are limited due to a change in ownership. If not
used, these net operating loss carryforwards begin to expire in 2005 ($500,000)
and at increasing amounts between 2006 and 2023 ($31.6 million between 2006 and
2009, and $107 million thereafter). Before the Company uses any of the carryforwards, the Company may undertake a
change in ownership study. 
 Item 3. Quantitative and Qualitative Disclosure About Market Risk The Company is exposed to market risk from foreign exchange rate fluctuations
of the British pound sterling to the U.S. dollar as the financial position and
operating results of the Companys U.K. subsidiary, TGC, are translated into
U.S. dollars for consolidation. The Company is presently considering certain
product development contracts with European based businesses. Such contracts
would likely be denominated in Euros which would also create market risk as
funds were transferred from the U.S. 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 or interest rate risk. The Companys debt
obligations as of March 31, 2005 related to its convertible senior secured
notes bear interest at prime plus 4%. The convertible senior secured notes
have a face value of $1,800,000 at March 31, 2005. A 1% increase in the prime
rate would increase interest expense by $18,000 on an annual basis. The
Companys convertible subordinated notes are at fixed rates, and are therefore
not subject to exposure from fluctuating interest rates. 14




---



##### Table of Contents



Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. As of March 31, 2005, the Company carried out an evaluation, under the
supervision and with the participation of management, including the Companys
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of its disclosure controls and procedures (as defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange
Act)). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure controls and
procedures were effective as of March 31, 2005 to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms. (b) Changes in internal controls over financial reporting. During the quarter ended March 31, 2005, there has been no change in the
Companys internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, its internal control over financial
reporting. 
 PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings None 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders At a special meeting held on March 18, 2005, the Companys shareholders
approved an increase in the number of authorized shares of all classes of stock
from 205,000,000 to 1,005,000,000 and in the number of authorized shares of
Common Stock from 200,000,000 to 1,000,000,000. The increase was approved with
26,773,144 shares voting for, 307,450 shares voting against and 14,730 shares
abstaining. 
 Item 5. Other Information None 
 Item 6. Exhibits Exhibit
    
    
    
    MethodNo.
    
    
    
    of Filing31.1
    
    Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
    
    Filed herewith31.2
    
    Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
    
    Filed herewith32.1
    
    Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
    
    Filed herewith32.2
    
    Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
    
    Filed herewith
 15




---



##### Table of Contents



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/ W. Glen WinchellW. Glen WinchellSenior Vice President
and Chief Financial Officer
(and Duly Authorized Officer) Dated: June 13, 2005 16