<PAGE>
 
================================================================================

               UNITED STATES 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 June 30, 1997

                                      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
                                (612) 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 June 30, 1997, was 19,738,506.

================================================================================
<PAGE>
 
                           DIAMETRICS MEDICAL, INC.

<TABLE> 
<CAPTION> 
                                                                                       PAGE       
                                                                                       ----       
<S>                                                                                    <C> 
PART I - FINANCIAL INFORMATION                                                                

     ITEM 1.        CONSOLIDATED FINANCIAL STATEMENTS

                    CONSOLIDATED STATEMENTS OF OPERATIONS:
                      Three Months Ended June 30, 1997 and 1996.........................  3
                      Six Months Ended June 30, 1997 and 1996...........................  3

                    CONSOLIDATED BALANCE SHEETS as of June 30, 1997
                     and December 31, 1996..............................................  4

                    CONSOLIDATED STATEMENTS OF CASH FLOWS:
                      Six Months Ended June 30, 1997 and 1996...........................  5

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..........................  6

     ITEM 2.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
                    AND FINANCIAL CONDITION.............................................  8

PART II - OTHER INFORMATION

     ITEM 1.        LEGAL PROCEEDINGS................................................... 12
     ITEM 2.        CHANGES IN SECURITIES............................................... 12
     ITEM 3.        DEFAULTS UPON SENIOR SECURITIES..................................... 12
     ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 12
     ITEM 5.        OTHER INFORMATION................................................... 12
     ITEM 6.        EXHIBITS AND REPORTS ON FORM 8-K.................................... 12
     SIGNATURES......................................................................... 13
 </TABLE>

                                       2
<PAGE>
 
                            DIAMETRICS MEDICAL, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                         Three Months Ended              Six Months Ended
                                              June 30,                       June 30,
                                        1997           1996            1997            1996
                                     ------------   ------------   -------------   -------------    
<S>                                  <C>            <C>            <C>             <C>             
Net sales                            $ 2,607,679    $   583,530    $  4,562,645    $  1,193,101
 
Cost of sales                          2,821,574      2,145,907       5,649,520       4,544,952
                                     ------------   ------------   -------------   -------------    
  Gross profit (loss)                   (213,895)    (1,562,377)     (1,086,875)     (3,351,851)
                                     ------------   ------------   -------------   -------------    
 
Operating expenses:
  Research and development             1,772,087      1,804,950       3,561,463       3,192,918
  Sales and marketing                  1,954,638      1,670,447       3,943,426       3,280,006
  General and administrative             986,935        772,775       1,938,014       1,507,654
  Restructuring and other charges        163,204        303,864         163,204         525,301
                                     ------------   ------------   -------------   -------------    
  Total operating expenses             4,876,864      4,552,036       9,606,107       8,505,879
                                     ------------   ------------   -------------   -------------    
 
Operating loss                        (5,090,759)    (6,114,413)    (10,692,982)    (11,857,730)
 
Other income (expense), net             (163,275)        49,942        (333,065)        245,249
                                     ------------   ------------   -------------   -------------    
 
Net loss                             $(5,254,034)   $(6,064,471)   $(11,026,047)   $(11,612,481)
                                     ============   ============   =============   =============     
 
Net loss per common share            $     (0.29)   $     (0.40)   $      (0.66)   $      (0.77)
                                     ============   ============   =============   =============    
 
Weighted average number of
common shares outstanding             18,244,016     15,094,419      16,743,710      15,003,639
                                     ============   ============   =============   =============     
</TABLE>

                                       3
<PAGE>
 
                           DIAMETRICS MEDICAL, INC.
                          CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                       June 30,     December 31,                         
                                                                         1997           1996                                        

                                                                    -------------  --------------        
<S>                                                                 <C>            <C> 
ASSETS                                                                                                                             
  CURRENT ASSETS:                                                                                                                  
     Cash and cash equivalents                                      $  4,569,955   $  2,451,993                                    
     Marketable securities                                            10,482,876      3,402,598                                    
     Accounts receivable:                                                                                                          
       Trade, net                                                      2,498,309      2,033,496                                    
       Nontrade                                                           86,733        556,272                                    
     Inventories                                                       4,490,041      4,464,099                                    
     Prepaid expenses and other current assets                           499,597        543,755                                    
                                                                    -------------  --------------

       Total current assets                                           22,627,511     13,452,213                                    
                                                                    -------------  --------------  
                                                                                                                                   
  PROPERTY AND EQUIPMENT                                              17,041,647     16,295,952                                    
     Less accumulated depreciation and amortization                   (9,241,429)    (8,008,200)                                   
                                                                    -------------  --------------

                                                                       7,800,218      8,287,752                                    
                                                                    -------------  --------------

  OTHER ASSETS                                                         2,038,685      2,318,674                                    
                                                                    -------------  --------------

                                                                    $ 32,466,414   $ 24,058,639                                    
                                                                    =============  ==============

LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                               
  CURRENT LIABILITIES:                                                                                                             
     Accounts payable                                               $    946,331   $  1,644,324                                    
     Accrued expenses                                                  3,573,332      3,848,248                                    
     Current portion of long-term liabilities                          1,319,568      1,310,154                                    
                                                                    -------------  --------------

       Total current liabilities                                       5,839,231      6,802,726                                    
                                                                    -------------  --------------

  LONG-TERM LIABILITIES:                                                                                                           
     Long-term liabilities, excluding current portion                  8,463,564      7,795,851                                    
     Capital lease obligations, excluding current portion                276,478        666,668                                    
     Other liabilities, excluding current portion                        117,775        119,155                                    
                                                                    -------------  --------------

       Total liabilities                                              14,697,048     15,384,400                                    
                                                                    -------------  --------------

  SHAREHOLDERS' EQUITY:                                                                                                            
     Common stock, $.01 par value: 35,000,000 authorized 19,738,506            
      and 15,209,481 shares issued and outstanding                       197,385        152,095                                     
     Additional paid-in capital                                      108,615,702     88,451,972                                    
     Cumulative translation adjustment                                     1,463         89,309                                    
     Accumulated deficit                                             (91,045,184)   (80,019,137)                                   
                                                                    -------------  --------------

       Total shareholders' equity                                     17,769,366      8,674,239                                    
                                                                    -------------  --------------
                                                                                                                                   
                                                                    $ 32,466,414   $ 24,058,639                                     
                                                                    =============  ==============
</TABLE>

                                       4
<PAGE>
 
                            DIAMETRICS MEDICAL, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                               Six Months Ended
                                                                                   June 30,
                                                                          1997                1996
                                                                      -------------       -------------
<S>                                                                   <C>                 <C>       
CASH FLOWS FROM OPERATING ACTIVITIES:                                                     
  Net loss                                                            $(11,026,047)       $(11,612,481)
  Adjustments to reconcile net loss to net                                                
   cash used in operating activities:                                                     
    Depreciation and amortization                                        2,068,723           1,372,642
    Gain on disposal of property and equipment                             (61,883)             (1,686)
    Change in operating assets and liabilities:                                           
      Receivables, net                                                       4,726              48,695
      Inventories                                                          (25,942)         (1,206,887)
      Prepaid expenses and other current assets                             44,158             (53,043)
      Accounts payable and accrued expenses                               (933,678)           (695,509)
                                                                      -------------       -------------  
        Net cash used in operating activities                           (9,929,943)        (12,148,269)
                                                                      -------------       ------------- 

CASH FLOWS FROM INVESTING ACTIVITIES:                                                     
  Purchases of property and equipment                                   (1,447,754)           (576,967)
  Purchases of marketable securities                                   (14,480,278)         (5,907,680)
  Proceeds from maturities of marketable securities                      7,400,000          16,325,000
  Other                                                                     91,843              48,144
                                                                      -------------       ------------- 
        Net cash provided by (used in) investing activities             (8,436,189)          9,888,497
                                                                      -------------       ------------- 

CASH FLOWS FROM FINANCING ACTIVITIES:                                                     
  Principal payments on borrowings                                         (52,829)            (44,608)
  Proceeds from long-term borrowings                                       877,656                   -
  Net proceeds from the issuance of preferred stock                     11,900,000                   -
  Net proceeds from the issuance of common stock                         8,309,020             770,109
  Principal payments under capital lease obligations                      (542,981)           (543,325)
                                                                      -------------       ------------- 
        Net cash provided by financing activities                       20,490,866             182,176
                                                                      -------------       ------------- 
CUMULATIVE TRANSLATION ADJUSTMENT                                           (6,772)                  -
                                                                      -------------       ------------- 
        Net increase (decrease) in cash and cash equivalents             2,117,962          (2,077,596)
                                                                                          
Cash and cash equivalents at beginning of period                         2,451,993           1,149,311
                                                                      -------------       ------------- 
Cash and cash equivalents at end of period                            $  4,569,955        $   (928,285)
                                                                      =============       =============  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                         
  Cash paid during the period for interest                            $    201,724        $    273,641
                                                                      =============       =============  
</TABLE>

                                       5
<PAGE>
 
                           DIAMETRICS MEDICAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 1997
                                  (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 consolidated 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, 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, 1996.

(2)  RECLASSIFICATIONS

     Certain 1996 amounts in the Consolidated Statements of Operations have been
     reclassified from prior reported balances to conform to the 1997
     presentation. The reclassifications had no impact on the net loss or loss
     per share as reported in 1996.

(3)  INVENTORIES

     Inventories are summarized as follows:

<TABLE> 
<CAPTION> 
                                         June 30,         December 31,        
                                           1997               1996            
                                    -------------------------------------   
     <S>                            <C>                  <C>              
     Raw materials                   $    1,185,325      $    1,623,243     
     Work-in-process                        556,157             569,505     
     Finished goods                       2,748,559           2,271,351     
                                    -------------------------------------   
                                     $    4,490,041      $    4,464,099     
                                    =====================================    
</TABLE> 

                                       6
<PAGE>
 
(4)  PRO FORMA INFORMATION                  

     On November 6, 1996, the Company acquired all the outstanding capital stock
     of Biomedical Sensors, Ltd. (BSL), an operating unit of Pfizer Inc., and
     certain assets from Howmedica, Inc., a wholly-owned subsidiary of Pfizer
     Inc., for $1,500,000 in cash and a $7,300,000 senior secured fixed rate
     loan note, due November 4, 2002. The Company has accounted for the
     acquisition using the purchase method. As such, the excess of the purchase
     price over the fair value of the identifiable assets acquired was recorded
     as goodwill, which consisted of purchased technology and other intangible
     assets totaling $2,305,899.

     The following reflects unaudited consolidated condensed results of
     operations for the three and six months ended June 30, 1997 compared to
     results for the comparable periods in 1996, stated on a pro forma basis, as
     though the acquisition occurred at the beginning of 1996:

<TABLE> 
<CAPTION> 
                               Three Months Ended                          Six Months Ended       
                                       June 30,                               June 30,            
                             1997         1996 Pro forma              1997         1996 Pro forma  
                        ---------------------------------         -------------------------------- 
     <S>                <C>               <C>                     <C>              <C>            
     Net sales          $    2,607,679    $     1,741,530         $    4,562,645   $    3,092,101  
     Cost of sales           2,821,574          3,039,097              5,649,520        6,208,952 
     Costing expenses        4,876,864          6,275,036              9,606,107       11,793,879 
     Net Loss               (5,254,034)        (7,485,471)           (11,026,047)     (14,639,481)
                                                                                                  
     Net loss per                                                                                 
     common share       $        (0.29)   $         (0.50)        $        (0.66)  $        (0.98)
</TABLE> 

(5)  SHAREHOLDERS' EQUITY

     On January 30, 1997, the Company completed the sale in a private placement
     of 750,000 shares of Series I Junior Participating Convertible Preferred
     Stock at a price of $16.00 per share. Each share of Preferred Stock was
     automatically converted into four shares of Common Stock upon shareholder
     approval of an increase in authorized shares of Common Stock on April 10,
     1997.

     On June 10, 1997, the Company completed the sale in a private placement of
     1,422,222 shares of Common Stock at a price of $5.625 per share.

     Authorized shares of all classes of the Company's stock increased from
     25,000,000 to 40,000,000, and authorized shares of Common Stock, par value
     $.01 per share, increased from 20,000,000 to 35,000,000 upon shareholder
     approval on April 10, 1997.

                                       7
<PAGE>
 
     ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
     -------------------------------------------------------------------------
     FINANCIAL CONDITION
     -------------------

     Statements regarding the Company's expectations about new and existing
     products, future financial performance 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 and
     the availability of capital to finance growth. These and other risks are
     discussed in greater detail in Exhibit 99 to the Company's Form 10-K filed
     with the Securities and Exchange Commission, with respect to the Company's
     fiscal year ended December 31, 1996.

     SUMMARY
     -------

     Diametrics Medical, Inc. (the "Company"), which began operations in 1990,
     is engaged in the development, manufacturing and marketing of critical care
     blood 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 manufacturing and sales
     organization. As of June 30, 1997, the primary funding for the operations
     of the Company has been approximately $108.9 million raised through public
     and private sales of its equity securities and issuance of convertible
     promissory notes, all of which have been repaid or converted into common
     stock.

     As noted in Footnote 4, "Pro Forma Information", in November 1996 the
     Company acquired all the outstanding capital stock of Biomedical Sensors,
     Ltd. (BSL), an operating unit of Pfizer Inc., and certain assets from
     Howmedica, Inc., a wholly owned subsidiary of Pfizer Inc. The combined
     operations of these former Pfizer entities are collectively referred to
     below as "Biomedical Sensors". Based in England, the new subsidiary,
     Diametrics Medical, Ltd. (DML), brings an existing product line which
     includes indwelling continuous blood monitoring systems utilizing fiber
     optic and electrochemical technology platforms. Current products include
     Paratrend 7, an intravascular blood gas monitoring system, and Neocath, a
     continuous oxygen monitoring system for newborns. Both products consist of
     a monitoring system and intravascular disposable sensors.

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

     SALES Sales of the Company's products were $2,607,679 and $4,562,645 for
     the three and six months ended June 30, 1997, compared to $583,530 and
     $1,193,101 for the same periods last year, an increase of 347% and 282%,
     respectively. The increase for the three and six months ended June 30, 1997
     over the prior year reflects the inclusion of sales related to DML and also
     a 142% and 94% increase, respectively, in sales of IRMA instruments and
     cartridges. Compared to a pro forma combined basis of Diametrics' and
     Biomedical Sensors' sales for the three and six months ended June 30, 1996,
     sales increased 50% and 48% for the same periods in 1997.

     The Company's revenues are affected principally by the number of Paratrend
     7, Neocath and IRMA instruments placed with customers and the rate at which
     disposable sensors and cartridges are used in connection with these
     products. As of June 30, 1997, the Company has over 1,700 monitors and IRMA
     instruments at customer locations consuming the Company's fiber optic and
     electrochemical sensors for critical care blood and tissue analysis.
     Disposable fiber optic sensor units sold for the six months ended June 30,
     1997 increased 22% over Biomedical Sensors' unit sales as a Pfizer
     operating unit for the same period in 1996, and IRMA disposable cartridge
     units sold for the three and six months ended June 30, 1997 increased 131%
     and 120%, respectively, over the comparable periods in 1996.

     The Company's revenue in the last half of 1997 is expected to exceed that
     of the first half, with revenues for the full year 1997 potentially more
     than doubling the level achieved in 1996. The projected revenue growth is
     the result of continued market penetration, further planned expansion of
     the blood analysis and monitoring product lines and the inclusion of a full
     year of sales from DML.

                                       8
<PAGE>
 
     COST OF SALES The Company incurred manufacturing costs associated with
     product sales of $2,821,574 and $5,649,520 for the three and six months
     ended June 30, 1997, compared to $2,145,907 and $4,544,952 for the same
     periods in the prior year, an increase of 31% and 24%, respectively. The
     increase over the prior year reflects the inclusion of manufacturing costs
     related to the operations of DML, partially offset by reductions in IRMA
     cartridge manufacturing costs. Compared to a pro forma combined basis of
     Diametrics' and Biomedical Sensors' manufacturing costs for the three and
     six months ended June 30, 1996, costs decreased 7% and 9%, respectively,
     for the same periods in 1997. The improvement in manufacturing expenses
     reflects increased fiber optic sensor and IRMA cartridge volumes, improved
     yields, increased shelf life of cartridges and better control of overhead
     costs.

     A negative gross profit resulted as sales volume was not yet sufficient to
     cover labor, material and overhead costs. The Company, however, expects
     unit costs to continue to decline in 1997 as sales volumes increase and
     continued improvements are realized in manufacturing yields, processes,
     costs and product design. Depending upon product mix and production
     volumes, gross margins are targeted to approximate break-even levels for
     the full year 1997.

     OPERATING EXPENSES Research and development expenditures were $1,772,087
     and $3,561,463 for the three and six months ended June 30, 1997, compared
     to $1,804,950 and $3,192,918 for the same periods in the prior year. The
     decrease for the three months ended June 30, 1997 and increase for the six
     months ended June 30, 1997, reflects inclusion of expenses related to the
     operations of DML, offset in the second quarter 1997 by a 41% expense
     reduction and in the 1997 year-to-date period by a 34% expense reduction in
     Diametrics' U.S. operations. Compared to a pro forma combined basis of
     Diametrics' and Biomedical Sensors' research and development costs for the
     three and six months ended June 30, 1996, costs decreased 28% and 20%,
     respectively, for the same periods in 1997, due to the completion during
     1996 of development of the IRMA SL, and the impact of staff reductions in
     the Company's U.S. operations in late 1996.

     Sales and marketing expenses totaled $1,954,638 and $3,943,426 for the
     three and six months ended June 30, 1997, compared to $1,670,447 and
     $3,280,006 for the same periods in 1996. The period-to-period increases
     reflect the inclusion of expenses related to the operations of DML.
     Compared to a pro forma combined basis of Diametrics' and Biomedical
     Sensors' sales and marketing expenses for the three and six months ended
     June 30, 1996, expenses decreased 20% and 17%, respectively, for the same
     periods in 1997, due to cost containment and better deployment of
     resources.

     General and administrative expenses totaled $986,935 and $1,938,014 for the
     three and six months ended June 30, 1997, compared to $772,775 and
     $1,507,654 for the same periods in 1996. The period-to-period increases
     reflect the inclusion of expenses related to the operations of DML.
     Compared to a pro forma combined basis of Diametrics' and Biomedical
     Sensors' general and administrative expenses for the three and six months
     ended June 30, 1996, general and administrative expenses decreased 6% and
     5%, respectively, for the same periods in 1997, due primarily to the impact
     of staff reductions in the Company's U.S. operations in late 1996.

     Restructuring and other charges totaled $163,204 for both the three and six
     month periods ended June 30, 1997, compared to $303,864 and $525,301,
     respectively, for the same periods in 1996. 1997 charges reflect severance
     costs associated with a work force reduction, primarily in the Company's
     U.S. manufacturing operations. 1996 charges reflect severance costs
     associated with a restructuring of the management team and work force
     reductions primarily in manufacturing and research and development. These
     restructuring activities were completed before the end of the second
     quarter of the years in which charges were incurred, and the Company does
     not have any future cash obligations relative to the described
     restructuring activities. The impact of the headcount reductions on future
     operating results and cash flows is not expected to be material, as savings
     achieved in these areas have been and will continue to be reinvested in
     other areas of the Company, including the Company's international
     operations.

     Operating expense run rates for the remaining two quarters in 1997 are
     targeted to approximate or moderately exceed second quarter 1997 levels.

                                       9
<PAGE>
 
     OTHER INCOME (EXPENSE) Net other expense was $163,275 and $333,065 for the
     three and six months ended June 30, 1997, compared to net other income of
     $49,942 and $245,249 for the same periods in the prior year, a decrease of
     $213,217 and $578,314, respectively. The Company realized interest income
     of $126,402 and $258,635 for the three and six months ended June 30, 1997,
     compared to $263,766 and $626,752 for the same periods in the prior year.
     The period-to-period decrease reflects the impact of lower average cash
     balances resulting from a net use of cash in operations.

     Interest expense totaled $257,910 and $529,635 for the three and six months
     ended June 30, 1997, compared to $134,034 and $273,641 for the same periods
     in 1996. The period-to-period increase primarily reflects interest accrued
     on a long-term note payable to Pfizer Inc. issued in connection with the
     Company's acquisition of Biomedical Sensors in November 1996.

     NET LOSS The net loss for the three and six months ended June 30, 1997 was
     $5,254,034 and $11,026,047, compared to $6,064,471 and $11,612,481 for the
     same periods in 1996. Compared to a pro forma combined basis of Diametrics'
     and Biomedical Sensors' net loss for the three and six months ended June
     30, 1996, the net loss decreased 30% and 25%, respectively, for the same
     periods in 1997. The Company is targeting a reduced net loss in the last
     half of 1997, compared to the first half of 1997.

                                       10
<PAGE>
 
     LIQUIDITY AND CAPITAL RESOURCES
     -------------------------------

     At June 30, 1997, the Company had working capital of $16,788,280, an
     increase of $10,138,793 from the working capital reported at December 31,
     1996. The increase primarily reflects the impact of $11.9 million net
     proceeds received in January 1997 with the completion of a private equity
     placement of 750,000 shares of convertible preferred stock and $7.9 million
     net proceeds received in June 1997 with the completion of a private equity
     placement of 1,422,222 shares of common stock less the net cash used in
     operating, investing and financing activities for the six months ended June
     30, 1997.

     On August 4, 1997, the Company announced it called the warrants issued in
     conjunction with a private equity placement in January of this year.
     Effective July 31, 1997, warrants for 750,000 shares of common stock at
     $5.0625 per share were called, providing additional funding of $3.8 million
     for the Company if all warrants are exercised. Warrant holders have until
     August 29, 1997 to exercise. As of August 11, 1997, 51,250 shares were
     exercised resulting in gross proceeds to the Company of $259,453.

     At June 30, 1997, the Company had property and equipment of $17,041,647, up
     from $16,295,952 at December 31, 1996, less accumulated depreciation of
     $9,241,429 and $8,008,200 at June 30, 1997 and December 31, 1996,
     respectively. The $746,000 net increase in the cost of property and
     equipment is the result of approximately $1,448,000 of capital additions,
     consisting primarily of investments in production equipment and
     demonstration instruments used to facilitate sales, less retirements of
     approximately $488,000 and foreign currency translation decreases of
     approximately $185,000. Approximately $3,650,000 of the Company's property
     and equipment are financed through capital lease obligations at June 30,
     1997. In 1997, the Company expects capital expenditures and new lease
     commitments to approximate $3 million, primarily reflecting investments to
     support new product development and production.

     At June 30, 1997, the Company had U.S. net operating loss and research and
     development tax credit carryforwards for income tax purposes of
     approximately $84,000,000 and $1,000,000 respectively. Pursuant to the Tax
     Reform Act of 1986, use of the Company's net operating loss carryforwards
     may be limited if a cumulative "change in ownership" of more than 50
     percent occurs within any three year period. In connection with prior sales
     by the Company of its securities in public and private offerings, the
     Company has experienced a "change in ownership." As a result, the
     utilization of the Company's net operating loss and certain credit
     carryforwards incurred prior to these changes are subject to annual
     limitations.

     The Company's foreign subsidiary also has net operating loss carryforwards
     of approximately $35,800,000 which can be carried forward indefinitely.

     As reflected in the accompanying consolidated financial statements, the
     Company has incurred a net loss of $5,254,034 and $11,026,047 for the three
     and six months ended June 30, 1997. In addition, the Company has incurred
     net losses and has had negative cash flows from operating activities since
     inception. In January and June 1997 the Company completed two private
     placements which generated net cash proceeds to the Company of
     approximately $19.8 million. The Company believes current working capital
     and projected operating revenues for the remainder of 1997 and 1998,
     supplemented by proceeds from employee stock plans, warrant exercises and
     asset based credit, may provide the Company with sufficient liquidity
     through most of 1998. If capital requirements vary materially from those
     currently planned, the Company could require additional capital at an
     earlier time. Additional funds may also be required for the Company to meet
     significantly greater than anticipated demand for its products. As a
     result, the Company has and will continue to evaluate raising additional
     capital through alliances with strategic corporate partners, issuance of
     debt, or an equity offering. There can be no assurance that adequate funds
     will be available when needed or on acceptable terms. The Company's long-
     term capital requirements will depend upon numerous factors, including the
     rate of market acceptance of the Company's products, the level of resources
     devoted to expanding the sales and marketing organization, manufacturing
     capabilities and the Company's research and development activities.

                                       11
<PAGE>
 
                          PART II - OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

     None

ITEM 2.   CHANGES IN SECURITIES

     On June 10, 1997, the Company completed the sale in a private placement of
     1,422,222 shares of Common Stock, par value $.01 per share (the "Common
     Stock"), at a price of $5.625 per share, for aggregate proceeds of
     $8,000,000. Each purchaser of Common Stock also received a detachable
     warrant to purchase one share of the Company's Common Stock for each four
     shares of common stock purchased, with an exercise price (subject to
     adjustment) equal to $6.75 per share. Such warrants were immediately
     exercisable. The securities were privately sold to certain accredited
     investors. The securities were sold pursuant to Rule 506 under Regulation D
     of the Securities Act of 1933, as amended.

     The Company issued stock warrants in 1992 in conjunction with private
     bridge financing agreements with certain shareholders and outside
     investors. The detachable warrants are exercisable up to five years from
     the date of purchase at an exercise price of $4.77 per share. During the
     quarter ended June 30, 1997, 6,637 shares of the Company's common stock
     were issued in connection with such warrants, with proceeds amounting to
     $31,658. The securities were sold pursuant to Rule 506 under Regulation D
     of the Securities Act of 1933, as amended.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

     None

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     A Special Meeting of the Company's shareholders was held on April 10, 1997
     to consider an amendment to the Company's Articles of Incorporation to
     increase the number of authorized shares of Common Stock from 20,000,000 to
     35,000,000 (the "Amendment"). The Amendment was approved by shareholders by
     a vote as follows: 9,601,120 voted "For"; 88,405 voted "Against"; 22,195
     abstained; and no broker non-votes.

     The Annual Meeting of the Company's shareholders was held on May 7, 1997.
     At the meeting, shareholders voted on the reelection of two directors for
     terms expiring at the Annual Meeting of the Company in 2000. Each of the
     directors was reelected by a vote as follows: James E. Ashton, Ph.D.
     received 13,529,470 votes "For" and 47,676 votes were "Withheld"; and Roy
     S. Johnson received 13,527,870 votes "For" and 49,276 votes were
     "Withheld."

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 June 26, 1997, the Company filed a Current Report on Form 8-K
          relating to the Company's completion of the sale in a private
          placement of 1,422,222 shares of Common Stock at a price of $5.625 per
          share.

                                       12
<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:  August 14, 1997

                                       13
<PAGE>
 
                           DIAMETRICS MEDICAL, INC.

                                 EXHIBIT INDEX


 
     EXHIBIT
     
     NO.                                     DESCRIPTION
     ---                                     -----------
     27         Financial Data Schedule