Exhibit 99.1 

 

**CAUTIONARY STATEMENT**

 

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other filings with the Securities and Exchange Commission, as well as other documentsincorporated by reference therein, contain certain “forward-looking statements” 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. Theseforward-looking statements represent the Company’s expectations, beliefs, intentions or strategies concerning future events, including, but not limited to, any statements regarding its current assumptions about future financial performance; thecontinuation of historical trends; the sufficiency of its cash balances and cash generated from operating activities for future liquidity and capital resource needs; the expected impact of changes in accounting policies on the Company’s resultsof operations, financial condition or cash flows; anticipated problems and its plans for future operations; and the economy in general or the future of the medical device industry, all of which are subject to various risks and uncertainties.

 

When used in our Form 10-K, Form 10-Qs and in other filings bythe Company with the Securities and Exchange Commission, in our press releases, presentations to securities analysts or investors, in oral statements made by or with the approval of an executive officer, the words or phrases “believes,”“may,” “will,” “expects,” “should,” “continue,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions andvariations thereof are intended to identify such forward-looking statements. However, any statements that are not statements of historical fact should be deemed to be forward-looking statements. 

 

We caution that these statements by their nature involve risks anduncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including, but not limited to such factors as our ability to successfully implement our new business model;our ability to raise an adequate level of capital to fund operations; market demand and pressures on the pricing for our products; changing market conditions, competition and growth rates within the medical device industry; changes in accountingpolicies; risks associated with operations outside of the U.S.; changing economic conditions such as general economic slowdown, decreased consumer confidence and the impact of war on the economy; and other risks and uncertainties, including thosedescribed below. 

 

You should consider carefully the followingcautionary statements if you own our common stock or are planning to buy our common stock. We intend to take advantage of the “safe harbor” provisions of the PSLRA by providing this discussion. We are not undertaking to address or updateeach factor in future filings or communications regarding our business or results except to the extent required by law. 

**Our financial success will depend upon our ability to successfully implement our new business model.**

 

In accordance with our current restructuring efforts, we are currentlytransitioning our business and realigning our strategic focus towards our continuous monitoring products. Many factors may negatively impact our ability to implement our strategic focus, including our ability or possible inability to manage theimplementation and development of our continuous monitoring business, sustain the productivity of our workforce and retain key employees, manage operating expenses and quickly respond to and recover from unforeseen events associated with therestructuring. We may be required by market conditions and other factors to undertake additional restructuring efforts in the future. Our business, results of operations or financial condition could be materially adversely affected if we are unableto manage the implementation and development of our new business strategy, sustain the productivity of our workforce and retain key employees, manage our operating expenses or quickly respond to and recover from unforeseen events associated with anyfuture restructuring efforts. 

 

**We have received a “going concern”opinion from our independent auditors, have a history of operating losses, and may not achieve profitability sufficient to generate a positive return on your investment.**

 

We have incurred net operating losses since our inception. We have prepared our consolidated financial statements for theyear ended December 31, 2002 and quarter ended September 30, 2003 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 ourindependent auditors covering the December 31, 2002 consolidated financial statements contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern as a result of negative working capital, recurringlosses and negative cash flows. Our consolidated net loss for the nine months ended September 30, 2003 was $5,866,173 and we incurred consolidated net losses of $7,531,016, $3,875,899 and $2,647,617 for the years ended December 31, 2002, 2001 and2000, respectively. For our continuing operations, we incurred a net loss of $5,627,196 for the nine months ended September 30, 2003, and net losses of $5,666,547, $3,371,194 and $1,806,408 for the years ended December 31, 2002, 2001 and 2000,respectively. Our accumulated deficit as of September 30, 2003 was $150,243,621. We expect financial results for the year ending December 31, 2003 to show an increase in net loss relative to 2002, due to lower expected revenue, primarily impacted byour transition to our new distribution and direct sales force channel model, partially offset by a net gain from the refinancing of our convertible notes and a reduced operating loss and net gain from the sale of our intermittent testing business.We expect to incur net operating losses at least through 2004. We cannot assure you that we will ever generate substantial revenues or achieve profitability at a level sufficient to generate a positive return on your investment. If we are unable toraise an adequate level of additional capital or generate sufficient cash flows from operations, our ability to execute our business plan and remain a going concern will be significantly impaired. 

 

**We may be unable to raise additional funds or generate sufficient cash from operations tomeet our future capital requirements and execute our business plan.**

 

Our long-term capital requirements for the development of our continuous monitoring business will depend upon numerous factors, including the impact of changes in distribution relationships and methods on revenue, the rate of marketacceptance of our products, the level of resources devoted to expanding our business and manufacturing capabilities, and the level of research and development activities. However, as described above, we have a history of operating losses. Cash andmarketable securities increased by approximately $823,000 during the nine months ended September 30, 2003 to $4.8 million, largely impacted by gross proceeds of $5.1 million in the third quarter from the sale of our intermittent testing business. Weare monitoring our cash position carefully and evaluating our future operating cash requirements in the context of our strategy, business objectives and expected business performance. As part of this, we have elected to delay project spending andcapital expenditures, and have implemented other cost-cutting measures across all areas of our operations, including personnel, facilities and discretionary spending. A significant amount of available instrument inventory will allow a reduction ofour inventory purchases and production requirements during 2003. Further, we are positioning our business for future sales and earnings growth with the expansion of our global distribution channels, including a direct sales force in the UnitedStates, the United Kingdom and Germany, 

 

2 

and third-party distributors outside of these countries. Proceeds from the sale of our intermittent business increasedour cash reserves, and the sale will reduce our cash burn rate. Effective upon the sale of our intermittent testing business, the holders of our Series E preferred stock elected to exercise their option to put back to us 50% of their original $1.5million investment plus a return of 1% per month. As a result, in October 2003, we redeemed $750,000 in value of our Series E preferred stock, with cash payments of $790,250 including accrued interest. Our current cash reserves, plus future revenuesand related receivable collections, are expected to fund our operations into early to mid 2004. We plan to raise additional capital during the first half of 2004 in order to implement our long-term business strategy. We may pursue the issuance ofadditional equity or debt securities to the extent funding raised from other business alternatives is not sufficient to meet our funding requirements. While we believe that we will be able to raise adequate funding to meet our operationalrequirements, there can be no assurance that adequate funds will be available when needed and on acceptable terms. 

 

**Our common stock is traded on the Over-the-Counter Bulletin Board, which may result in reduced liquidity for our common stock.**

 

On July 1, 2003, we announced that we received a notice from The Nasdaq StockMarket indicating that the Nasdaq Listing Qualifications Panel determined to delist our common stock from The Nasdaq SmallCap Market effective with the open of business on Wednesday, July 2, 2003. Our common stock became immediately eligible totrade on the OTC Bulletin Board effective with the open of business on July 2, 2003 under the symbol “DMED.” Trading our common stock through the OTC Bulletin Board may be more difficult because of lower trading volumes, transaction delaysand reduced security analyst and news media coverage of Diametrics. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our common stock. Trading of our common stock in an over-the-counter market may alsoattract a different type of investor in our common stock, which may limit further our future equity funding options. 

 

**Conversion of our Series E convertible preferred stock to common stock may have a dilutive effect to our common shareholders and a negative effect on the trading priceof our common stock.**

 

On May 12, 2003, we completed thesale in a private placement of 15,000 shares of Series E convertible preferred stock, at a price of $100 per share, resulting in aggregate gross proceeds of $1,500,000. As previously noted, we were required to redeem $750,000 of the Series Epreferred stock investment in October 2003 as a result of the election of the Series E holders to exercise their option to put back to us 50% of their original $1.5 million investment upon the completion of the sale of our intermittent testingbusiness. The stock is convertible at any time into common stock at 88% of the volume weighted average trading price of the common stock for the five consecutive trading days before the conversion date, but at an exercise price no greater than $0.75per share and no less than $0.35 per share. The closing trading price for our common stock on May 12, 2003 was $1.18. The holders of the Series E convertible preferred stock have agreed not to short sell our common stock. Nevertheless, conversion ofthe Series E convertible preferred stock into common stock at a discount to market may have a dilutive effect to our common shareholders and result in a decline in the trading price of our common stock. 

 

**Our financial success depends upon acceptance of our continuous monitoring devices by themedical community.**

 

Our success depends upon acceptance ofour products by the medical community as reliable, accurate and cost-effective. Our point-of-care continuous monitoring devices represent an alternative practice in critical or stat blood testing, which is currently performed primarily by centraland stat laboratories of hospitals, or by point-of-care intermittent blood testing devices. Although professional awareness of continuous blood gas monitoring is increasing, most acute care hospitals have already installed expensive blood testinginstruments and may be reluctant to change standard operating procedures or incur additional capital expenditures for new blood analysis equipment. We are unable to predict how quickly, if at all, our products will be accepted by the medicalcommunity or, if accepted, predict the volume of our products or the related disposable sensors we can expect to sell. 

 

**We face significant competition in the medical device industry that may have a negative impact on our product prices and market share.**

 

The medical technology industry is characterized by rapidly evolvingtechnology and intense competition. Many of our competitors have substantially greater capital resources, research and development staff, and facilities than we do, and many of these companies also have greater experience in research anddevelopment, obtaining regulatory approvals, manufacturing, and sales and marketing. We cannot assure you that our competitors will not succeed in developing or marketing technologies and products that are 

 

3 

more effective or less expensive than ours that could render our products obsolete or noncompetitive. Although we believe that our products may offer certaintechnological advantages over our competitors’ current products, earlier entrants in the market in a therapeutic area often obtain and maintain significant market share. Our product pricing is competitive with alternative products of othersuppliers. In the future, we may experience competitive pricing pressures that may cause a decrease in unit prices and sales levels. 

 

**Our financial success will depend upon our ability to manage any growth in our business with limited resources.**

 

If we are successful in increasing the revenues of our continuous monitoringbusiness, we may be required to expand our operations. If we are required to expand our operations, expansion will likely result in new and increased responsibilities for our management personnel and place significant strain on our management,operating and financial systems and other resources. To accommodate any such growth and compete effectively, we will be required to implement improved information systems, procedures and controls, and to expand, train, motivate and manage our workforce. Our future success will depend to a significant extent on the ability of our current and future management personnel to operate effectively both independently and as a group. We cannot assure you that our personnel, systems, procedures andcontrols will be adequate to support our future operations. 

 

**We aretransitioning to a new distribution and direct sales force channel model as a result of the termination of our exclusive distribution agreement with Philips Medical Systems, which may result in lower sales volume for our products until our newdistribution and direct sales force are fully established.**

 

We market and distribute our products through both direct and indirect distribution channels. With the termination effective November 1, 2002 of our agreement with Philips for exclusive worldwide distribution of our TrendCare continuousblood gas monitoring systems, we began establishing a direct sales force in the United States, the United Kingdom and Germany, and entered into new nonexclusive arrangements with third-party distributors outside of these countries for sale of theseproducts, primarily addressing markets in Europe and the Far East. We also continued to sell disposable sensors and related accessories to Philips for Philips’ nonexclusive distribution to its customer base through October 31, 2003. Our salesto Philips represented approximately 85%, 82% and 78% of total sales from continuing operations in 2002, 2001 and 2000, respectively. Due to the significant purchases of our products by Philips for their internal use in the sales process and to meetminimum purchase commitments, Philips sales to end-user customers over the last three years were estimated to be substantially less than our product sales to Philips. Sales to Philips of TrendCare continuous blood gas monitoring systems were $5.3million for the first nine months of 2002 (89% of total revenue from our continuing operations). Since termination of the exclusive agreement with Philips, sales to Philips were $168,000 in the fourth quarter of 2002 (36% of total revenue from ourcontinuing operations), $184,000 in the first quarter of 2003 (25% of total revenue from our continuing operations), $91,000 in the second quarter of 2003 (13% of total revenue from our continuing operations) and only $15,000 in the third quarter of2003 (2% of revenue from continuing operations). (Sales of our intermittent testing products to Philips, included in the business we sold to ITC, were $10.5 million in the first nine months of 2002, $1.2 million in fourth quarter 2002, $811,000 infirst quarter 2003 and $634,000 and $375,000 in the second and third quarters of 2003, respectively). While we believe we will be successful in establishing effective distribution channels, failure to do so under reasonable terms or within areasonable timeframe could have a material and adverse effect on our ability to sell and market our products, and on our financial condition and results of operations. Once established, any significant failure of our new distributors to performunder the terms of the respective agreements, the significant failure of our direct sales force to meet sales objectives, or a significant failure on our part to adequately support the requirements of these parties, could also have a material andadverse effect on our operations and financial performance. 

 

**We have limitedmanufacturing experience, and we may not be able to produce large commercial quantities of our products in a cost-effective manner if demand increases.**

 

We must manufacture our products in compliance with regulatory requirements, in sufficient quantities and on a timely basis, and still maintain productquality and acceptable manufacturing costs. Our products consist of two principal components: portable, microprocessor-based instruments and disposable sensors. We have limited experience producing our products in large commercial quantities.Although we believe that we will be able to 

 

4 

achieve and maintain product accuracy and reliability when producing in large quantities, on a timely basis and at anacceptable cost, we cannot assure you that we will be able to do so. Also, product design changes, equipment failures and manufacturing process changes may disrupt our existing operations and impact sales. 

 

**We depend on patents and proprietary technology, that we may not be able to protect in amanner that will provide us any competitive advantage.**

 

Oursuccess will depend in part on our ability to obtain patent protection for our products and processes, to preserve our trade secrets and to operate without infringing the intellectual property rights of others. The patent positions of medical devicecompanies are uncertain and involve complex and evolving legal and factual questions. We cannot assure you that any of our pending or future patent applications will result in issued patents, that any current or future patents will not bechallenged, invalidated or circumvented, that the scope of any of our patents will exclude competitors or that the patent rights granted to us will provide us any competitive advantage. In addition, we cannot assure you that our competitors will notseek to apply for and obtain patents that will prevent, limit or interfere with our ability to make, use or sell our products either in the United States or in international markets. Further, the laws of certain foreign countries may not protect ourintellectual property rights to the same extent as do the laws of the United States. 

 

In addition to patents, we rely on trade secrets and proprietary knowledge that we seek to protect, in part, through confidentiality agreements with employees, consultants and others. We cannot assure you that ourproprietary information or confidentiality agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors. 

 

**We may face intellectual property infringement claims which would be costly to resolve andmay exceed our financial resources to assert or defend our claim.**

 

There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry and our competitors may resort to intellectual property litigation as a means of competition. Intellectual propertylitigation is complex and expensive and the outcome is difficult to predict. We cannot assure you that we will not become subject to patent infringement claims or litigation. Litigation or regulatory proceedings may also be necessary to enforce ourpatents or other intellectual property rights. We may not always have the financial resources to assert patent infringement suits or to defend ourselves from claims. An adverse result in any litigation could subject us to liabilities to, or requireus to seek licenses from or pay royalties to, others that may be substantial. Furthermore, we cannot assure you that the necessary licenses would be available to us on satisfactory terms, if at all. 

 

**The demand for and price of our products may depend in part on uncertain government healthcare policies and reimbursement by third parties, and which could decline as a result of future health care reform.**

 

The willingness of hospitals to purchase our products may depend on the extent to which hospitals limit their own capital expenditures due to existing orfuture cost reimbursement regulations. In addition, sales volumes and prices of our products in certain markets will depend in part on the level of reimbursement to hospitals for blood analysis from third-party payors, such as government and privateinsurance plans, health maintenance organizations and preferred provider organizations. Third-party payors are increasingly challenging the pricing of medical procedures they consider unnecessary, inappropriate or not cost-effective. We cannotassure you that current reimbursement amounts, if any, will not be decreased in the future, and that any decrease will not reduce the demand for or the price of our products. Any federal or state health care reform measures could adversely affectthe price of medical devices in the United States, including our products, or the amount of reimbursement available. We cannot predict whether any reform measures will be adopted or what impact they may have on us. 

 

 

5 

**We must obtain regulatory approval in order to sell new products we develop, which we may not be able to obtain on atimely or cost-effective basis.**

 

We and our products areregulated by the Food and Drug Administration under the Food, Drug and Cosmetic Act. We have obtained pre-market notification clearances under Section 510(k) of the Food, Drug and Cosmetic Act to market the Paratrend 7+ and Neotrend L to monitorblood gases and temperature, and the Neurotrend system to monitor oxygen, carbon dioxide, acidity and temperature in the brain. A Section 510(k) clearance is subject to continual review, and later discovery of previously unknown problems may resultin restrictions on marketing or withdrawal of the product from the market. Our long-term business strategy includes development of sensors for performing additional blood and tissue chemistry tests, and any new tests will be subject to the sameregulatory process. We cannot assure you that we will be able to develop additional products or uses or that we will obtain the necessary clearances for new products and uses on a timely basis or at all. 

 

We also market our products in several foreign markets. Requirements varywidely from country to country, ranging from simple product registrations to detailed submissions such as those required by the FDA. Our manufacturing facilities are also subject to FDA inspection on a periodic basis and we and our contractmanufacturers must demonstrate compliance with current Quality System Regulations promulgated by the FDA. Violations of the applicable regulations at our manufacturing facilities or the manufacturing facilities of our contract manufacturers mayprevent us from marketing of our products. 

 

**Our products may expose us tocostly product liability claims that may exceed our insurance coverage.**

 

We may be exposed to product liability claims if a patient is adversely affected by our products. We maintain a general insurance policy which includes coverage for product liability claims. The policy is limited to amaximum of $1,000,000 per product liability claim and an annual aggregate policy limit of $10,000,000. We cannot assure you that our existing insurance coverage limits are adequate to cover any liabilities we might incur or that insurance willcontinue to be available on commercially reasonable terms, if at all. 

 

**Wedepend on contract manufacturers and suppliers for key components of our products, which could have an adverse effect on our ability to manufacture our products if the supply chain is interrupted.**

 

The majority of the raw materials and purchased components used tomanufacture our products are readily available. Many of these raw materials and components are purchased from single sources due to technology, price, quality or other considerations. Some of these single-sourced components are manufactured to ourspecifications. Most of these items, however, may be sourced from other suppliers, often after a requalification process. Sourcing from alternative suppliers in some cases may require product design or software changes to accommodate variations fromthe original components. In the event that our supply of critical raw materials or components was interrupted due to the time required to requalify materials or components or modify product designs, our ability to manufacture the related product indesired quantities and in a timely manner could be adversely affected, potentially negatively impacting our financial condition and results of operations. 

 

**International operations will expose us to additional risks that could have an adverse effect on our ability to market our products abroad.**

 

Our distributors sell our products globally, including internationalmarkets, subject to receipt of required foreign regulatory approvals. We cannot assure you that our distributors will devote adequate resources to selling our products internationally. Doing business outside of the United States also exposes us tovarious risks that could have a material and adverse effect on our ability to market our products internationally, including: 

 
 · changes in overseas economic and political conditions,  · currency exchange rate fluctuations,  · foreign tax laws, or  · tariffs or other trade regulations. 
 

6