<PAGE>
 
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 1998
                                       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.
             (Exact name of registrant as specified in its charter)

            MINNESOTA                                       41-1663185
            ---------                                       ----------
   (State or other jurisdiction                           (IRS Employer 
of incorporation or organization)                    Identification Number)


           2658 Patton Road
          Roseville, Minnesota                                 55113
          --------------------                                 -----
(Address of principal executive offices)                      (Zip Code)


       Registrant's telephone number, including area code: (651) 639-8035

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: 
                                                    Common Stock, $.01 par value

     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 [ ]

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
From 10-K or any amendment to this Form 10-K. [ ]

         As of February 26, 1999, 23,391,597 shares of Common Stock were
outstanding, and the aggregate market value of the common shares (based upon the
closing price on said date on The Nasdaq National Market) of DIAMETRICS MEDICAL,
INC. held by non-affiliates was approximately $104,532,000.


                       DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Registrant's Annual Report to Shareholders for the year ended
December 31, 1998 are incorporated by reference in Part II hereof. Parts of the
Registrant's definitive Proxy Statement for the 1999 Annual Meeting of
Shareholders to be held on May 12, 1999 are incorporated by reference in Part
III hereof.
<PAGE>
 
                                     PART I

         Unless the context otherwise indicates, all references to the
"Registrant," the "Company," or "Diametrics" in this Annual Report on Form 10-K
are to Diametrics Medical, Inc., a Minnesota corporation, incorporated in
January 1990, and where the context requires, its subsidiary, Diametrics
Medical, Ltd. ("DML").

         The following federally registered trademarks of the Company are used
in this Annual Report on Form 10-K: Diametrics Medical, Inc.(R), IRMA(R)SL,
Neocath(R), Paratrend 7(R), Paratrend 7+(TM), Neotrend(TM) and Neurotrend(TM).
SureStep(R)Pro is a registered trademark of LifeScan, a Johnson & Johnson
company.

Item 1.  Business

Overview

         The Company develops, manufactures and markets blood and tissue
analysis systems that provide immediate or continuous diagnostic results at the
point-of-patient care. Since its commencement of operations in 1990, the Company
has transitioned from a development stage company to a full-scale development,
manufacturing and sales organization. The Company's goal is to be the world
leader in critical care blood and tissue analysis systems.

         Blood and tissue analysis is an integral part of patient diagnosis and
treatment, and access to timely and accurate results is critical to effective
patient care. The Company believes that its blood and tissue analysis systems
will result in more timely therapeutic interventions by providing accurate,
precise and immediate or continuous test results, thereby allowing faster
patient transfers out of expensive critical care settings and reducing patient
length of stay. In addition, point-of-care testing can save money for hospitals
by reducing the numerous steps, paperwork and personnel involved in collecting,
transporting, documenting and processing blood and tissue samples. Moreover,
point-of-care blood and tissue analysis could ultimately eliminate the need for
hospitals to maintain expensive and capital intensive stat laboratories.

         The Company's primary product focus since its inception in 1990 has
been the development, manufacturing and marketing of the IRMA ("Immediate
Response Mobile Analysis") System, an electrochemical-based blood analysis
system that provides rapid and accurate diagnostic results at the
point-of-patient care. The IRMA SL System consists of a portable,
microprocessor-based analyzer that employs single-use, disposable cartridges to
perform simultaneously several of the most frequently ordered blood tests in a
simple 90-second procedure.

         The Company's first disposable electrochemical cartridge, introduced in
May 1994, performs three of the most frequently ordered blood tests for critical
care patients--the measurement of oxygen, carbon dioxide and acidity (the "blood
gases"). In June 1995, the Company expanded the IRMA System test menu with the
introduction of its electrolyte cartridge which measures inorganic compounds
including sodium, potassium and ionized calcium. The Company further expanded
its critical or "stat" test menu during the third quarter of 1996 with the
release of the second-generation system, IRMA SL, and the addition of the
measurement of hematocrit (i.e., the concentration of red blood cells in whole
blood) to its electrolyte cartridge. With the addition of hematocrit, the IRMA
SL System is able to perform 95% of the critical or stat tests performed
annually in the United States, comprising an estimated $1.2 billion annual
market. In 1997, the Company introduced its third-generation system, IRMA SL
Series 2000, and a new combination testing cartridge. The combination cartridge
is based upon the Company's new "snapfit" cartridge design and gives clinicians
the ability to perform all critical blood gas, electrolyte and hematocrit tests
using one small blood sample and one single-use cartridge. During 1998, the
Company expanded the test menu of the IRMA System by integrating the LifeScan (a
Johnson & Johnson company) SureStep Pro glucose strip testing module into the
analyzer. Also under development in 1998 were two additional blood tests, blood
urea nitrogen ("BUN") and chloride, and a reusable version of the single use
disposable cartridge, called IRMA-M.

         In the fourth quarter of 1996, the Company expanded its product line
with the introduction of a number of new products through the acquisition of
Biomedical Sensors, Ltd. ("BSL"), a Pfizer 

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company. With the acquisition of BSL (now known as Diametrics Medical, Ltd.),
the Company acquired a world-class continuous monitoring fiberoptic technology
platform, which complements the Company's existing electrochemical sensor
platform. This product line includes indwelling continuous blood monitoring
systems, consisting of a monitor, calibration system and intravascular
disposable sensors. Primary products include Paratrend 7+, which provides direct
continuous monitoring of blood gases and temperature in critically ill adult and
pediatric patients; Neotrend, which provides direct continuous monitoring of
blood gases and temperature in critically ill premature babies; and Neurotrend,
which measures oxygen, carbon dioxide and acidity in brain tissue and fluids as
an indication of cerebral ischemia (i.e., deficient blood supply to the brain)
and hypoxia (i.e., inadequate oxygenation of the blood) in patients with severe
head injury and in patients undergoing surgical intervention in the brain.

         The Company has obtained clearances under Section 510(k) of the Food
Drug and Cosmetic Act (the "FDC Act") to market the IRMA SL System to test blood
gases, electrolytes, glucose, BUN and hematocrit in whole blood in hospital
laboratories and at the point-of-care, and the Paratrend 7 and Neotrend to
monitor blood gases and temperature. Additionally, in the first quarter of 1998,
the Company received clearance from the United States Food and Drug
Administration (the "FDA") to market the new IRMA-M multi-use cartridge for its
IRMA SL System. The Company submitted a pre-market notification for the
Neurotrend monitoring system in January 1998 that is currently under review by
the FDA.

         In August 1998, the Company completed the sale in a private placement
of 2,142,858 shares of the Company's Common Stock, at a price of $7.00 per
share, for aggregate proceeds of $15,000,006. The purchasers of Common Stock
also received warrants to purchase 714,286 shares of Common Stock at $8.40 per
share. The five-year warrants are exercisable immediately, and are callable by
the Company after a twelve month waiting period if the Common Stock closing
price exceeds $12.10 for twenty consecutive trading days and at increasing
amounts in subsequent twelve month periods. Proceeds from the sale of Common
Stock and exercise of warrants will be used for product development, sales and
marketing and other general corporate purposes. In addition, the Company issued
Convertible Senior Secured Fixed Rate Notes to an investor group with proceeds
aggregating $7,300,000. The notes will be due in five years, require quarterly
interest payments at a rate of 7% per annum, and are convertible into the
Company's Common Stock at $8.40 per share. Proceeds from the notes were used to
retire other debt of the Company. The closing market price of the Company's
Common Stock as of the date the private placement was closed and the notes
issued was $5.125.

         In October 1998, the Company entered into an exclusive Distribution
Agreement with CODMAN, a Johnson & Johnson company, for worldwide market
development and distribution of the Company's Neurotrend monitoring system. The
term of the agreement is for six years and is renewable for two years. If
minimum sales levels and marketing expenditure levels are not achieved by
CODMAN, certain payments will be due to the Company. Also, CODMAN has the right
of first refusal to market new continuous monitoring products developed for the
neuro market. In addition, Johnson & Johnson Development Corporation has
committed to purchase up to $5 million of the Company's Common Stock at the
Company's option over the twelve month period ending September 30, 1999 at the
then current market value, not to exceed $7.00 per share.

         The Company's principal executive office is located at 2658 Patton
Road, Roseville, Minnesota 55113, and its telephone number is (651) 639-8035.


PRINCIPAL PRODUCTS

         Additional information regarding the Company's principal products is
provided below:

         IRMA SL Series 2000 Blood Analysis System. The IRMA SL Series 2000
("IRMA SL System"), the third generation IRMA analysis system, was released in
the third quarter 1997, and provides the necessary foundation for current and
future product enhancements. The IRMA SL System is comprised of the IRMA SL
analyzer and a variety of electrochemical-based disposable cartridges which
simultaneously perform select combinations of the most frequently ordered
critical care diagnostic tests of blood gases, electrolytes and hematocrit in a
simple 90-second procedure. The IRMA SL System also 

                                       3
<PAGE>
 
features electronic quality control, as an alternative to aqueous quality
control measures, which eliminates the need for this costly and time-consuming
process for many customers.

         The IRMA SL analyzer is a battery or AC operated, portable,
microprocessor-based instrument weighing approximately four pounds, and includes
an on-board printer. The analyzer can be easily linked for data downloading
purposes to a hospital's laboratory or information system.

         In conjunction with a marketing alliance reached in 1997 with LifeScan,
the Company incorporated blood glucose monitoring into the IRMA platform by
integrating LifeScan's SureStep Pro Glucose Module into the IRMA SL System. The
Company began marketing the new integrated workstation during the first half of
1998.

         IDMS - The IRMA Data Management System. Released in the third quarter
of 1996, IDMS, an advanced data management software program, provides a
comprehensive data management system for point-of-care testing technologies.
Developed initially for the IRMA SL System, IDMS is network compatible and
features an open architecture design that provides for the integration of IDMS
data with other laboratory or clinical information systems.

         Capillary Collection Device. The Capillary Collection Device was
introduced in the third quarter of 1996 as a feature for use on the IRMA SL
System, which provides the capability to collect and test a capillary blood
sample. The Capillary Collection Device is used with the IRMA SL System's single
use cartridges to perform blood gas, electrolyte, and hematocrit testing. The
capillary collection capability of the IRMA SL System is useful in such patient
areas as neonatal and pediatric intensive care, and in other situations where a
capillary sample is preferred over an arterial or venous sample.

         AVOXimeter 4000. Under a distribution agreement initiated in the third
quarter of 1996 with A-VOX Systems, Inc., the Company exclusively distributes
the AVOXimeter 4000 in the United States. The AVOXimeter 4000 is a
battery-operated and easily portable system which provides an accurate and
timely assessment of the levels of hemoglobin and calculated oxygen content in a
patient's blood.

         Paratrend 7+. Paratrend 7+ is the Company's second generation sensor
platform for its continuous monitoring products, and is the only multi-parameter
sensor for direct continuous monitoring of blood gases and temperature in
critically ill adult and pediatric patients. Inserted via an arterial catheter,
the sensor provides constant, precise measurement of vital blood gas parameters.
The new technology uses a fluorescent optical sensor for monitoring oxygen,
replacing the electrochemical version of its predecessor, Paratrend 7.

         Neotrend. Based upon the new fluorescent optical sensor technology
introduced with the Paratrend 7+, Neotrend is the only multi-parameter system
for direct continuous monitoring of blood gases (oxygen, carbon dioxide and
acidity) and temperature in critically ill premature babies. Neotrend was
introduced in the United Kingdom in November 1997 and the Company received FDA
clearance to market Neotrend in the United States in December 1997.

         Neurotrend. The Neurotrend monitoring system is designed for direct
continuous monitoring for cerebral ischemia and hypoxia in patients with severe
head injury and also for use during surgical intervention in the brain.
Neurotrend continuously measures oxygen, carbon dioxide, acidity and temperature
through a small fiberoptic sensor placed directly into the brain tissue or
fluids. CE Mark approval has been received, allowing the system to be marketed
in Europe, and a 510(k) application has been filed with the FDA in the United
States. In October 1998, the Company entered into an exclusive Distribution
Agreement with CODMAN, a Johnson & Johnson company, for worldwide market
development and distribution of the Company's Neurotrend monitoring system.

REGULATORY STATUS

         Human diagnostic products are subject, prior to clearance for
marketing, to rigorous pre-clinical and clinical testing mandated by the FDA and
comparable agencies in other countries and, to a lesser extent, by state
regulatory authorities. The Company and its products are regulated by the FDA

                                       4
<PAGE>
 
under a number of statutes including the FDC Act. The FDC Act provides two basic
review procedures for medical devices. Certain products may qualify for a
submission authorized by Section 510(k) of the FDC Act, wherein the manufacturer
gives the FDA a pre-market notification of the manufacturer's intention to
commence marketing the product. The manufacturer must, among other things,
establish that the product to be marketed is substantially equivalent to another
legally marketed product. Marketing may commence when the FDA issues a letter
finding substantial equivalence. If a medical device does not qualify for the
510(k) procedure, the manufacturer must file a pre-market approval ("PMA")
application. This procedure requires more extensive prefiling testing than the
510(k) procedure and involves a significantly longer FDA review process.

         The Company has obtained clearances under Section 510(k) of the FDC Act
to market the IRMA SL System to test blood gases, electrolytes, hematocrit,
glucose and BUN in whole blood in hospital laboratories and at the
point-of-patient care. The IRMA-M cartridge, which allows multiple test panels
to be performed on a single cartridge, received clearance during 1998.
Continuous monitoring products which have been cleared under Section 510(k)
include the monitoring systems used with the Paratrend 7 sensor for direct
continuous monitoring of blood gases and temperature in adults, and the Neotrend
sensor for monitoring of blood gases and temperature in critically ill premature
babies.

         The Company submitted an additional pre-market notification for the
Neurotrend monitoring system in January 1998 that is currently under review by
the FDA. The Neurotrend monitoring system is designed for direct continuous
monitoring for cerebral ischemia and hypoxia in patients with severe head injury
and also for use during surgical intervention in the brain. Neurotrend
continuously measures oxygen, carbon dioxide, acidity and temperature in brain
tissue or fluids.

         A 510(k) clearance is subject to continual review, and later discovery
of previously unknown problems may result in restrictions on the product's
marketing or withdrawal of the product from the market. The Company's long-term
business strategy includes development of cartridges and sensors for performing
additional blood and tissue chemistry tests, and any such additional tests will
be subject to the same regulatory process. No assurance can be given that the
Company will be able to develop such additional products or uses on a timely
basis, if at all, or that the necessary clearances for such products and uses
will be obtained by the Company on a timely basis or at all, or that the Company
will not be subjected to a more extensive prefiling testing and FDA approval
process. The Company also markets its products in several foreign markets.
Requirements vary widely from country to country, ranging from simple product
registrations to detailed submissions such as those required by the FDA.
Manufacturing facilities are also subject to FDA inspection on a periodic basis
and the Company and its contract manufacturers must demonstrate compliance with
current Good Manufacturing Practices promulgated by the FDA.

         The Company's intermittent testing product's are affected by the
Clinical Laboratory Improvement Act of 1988 ("CLIA") which has been implemented
by the FDA. This law is intended to assure the quality and reliability of all
medical testing in the United States regardless of where tests are performed.
The regulations require laboratories performing blood chemistry tests to meet
specified standards in the areas of personnel qualification, administration,
participation in proficiency testing, patient test management, quality control,
quality assurance and inspections. The regulations have established three levels
of regulatory control based on test complexity; "waived", "moderate complexity"
and "high complexity". The tests performed by the Company's IRMA SL System have
been categorized under CLIA as "moderate complexity" tests by the FDA, which
places this system in the same category as most other commercially available
blood gas and blood chemistry testing instruments. The glucose test is
categorized as a "waived" test", which places this test in the same category as
most other commercially available point-of-care glucose testing systems. The
Company's continuous monitoring products are not affected by CLIA.


RESEARCH AND DEVELOPMENT

         The Company owns two complementary technology platforms; an
electrochemical platform, on which IRMA intermittent testing products are based,
and a fiberoptic platform, on which the Paratrend

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7+, Neotrend and Neurotrend continuous monitoring products are primarily based.
The Company is pursuing product line extensions from both of these core
technology platforms.

         The Company intends to continue to expand its cartridge and test menus
available on the IRMA SL System. Currently under development is the H5 cartridge
which tests sodium, potassium, ionized calcium, hematocrit, chloride and BUN
using one single-use cartridge. The H5 cartridge is scheduled to begin beta
clinical trials in the U.S. by the end of first quarter 1999. In addition to the
single-use cartridge, the Company is developing a multi-use application that
will incorporate the Company's current sensor and calibration technologies into
products that can perform multiple blood test panels over a period of days
before disposal. A multi-use system will serve the needs of high volume critical
care centers where rapid patient throughput and a low cost per test panel is
required. The multi-use module is scheduled to begin clinical trials by the end
of the second quarter 1999. The Company is also in the final design stages for a
new addition to the IRMA SL's blood test menu, the creatinine assay, with an FDA
filing expected by mid 1999. The Company believes that the IRMA SL System and
related core technologies provide a flexible platform which, with a limited
amount of additional development, will be capable of performing a variety of
blood chemistry tests.

         The Company plans to continually improve the IRMA SL System through
software upgrades, manufacturing process improvements and equipment redesign,
based on the results of ongoing marketing studies and field experience.

         In February 1998, the Company filed a 510(k) application with the FDA
for its Neurotrend monitoring system. Studies are also underway to apply the
continuous monitoring technology to other areas. These include applications
which range from the widespread clinical interest in gut perfusion, as an early
indicator of multi-system organ failure; to placement in transplants for
monitoring adequacy of perfusion; and to monitoring tissue to detect shock. The
Company's future development plans also include further expansion of the blood
and tissue analysis test menu available on the continuous monitoring platform.

         The Company has incurred research and development expenses of
approximately $6,466,000, $7,232,000 and $6,360,000 for the years ended December
31, 1998, 1997 and 1996, respectively.


SALES AND MARKETING

         The Company is focusing its marketing efforts for its blood analysis
systems on acute care hospitals. Near term sales of the Company's products are
expected to continue to come from hospital critical care departments where blood
tests are frequently requested on a stat basis. The Company's longer-term
marketing objective is to penetrate smaller hospitals and alternate-site
markets, such as emergency medical facilities, home healthcare agencies,
outpatient clinics, skilled nursing homes and doctors' offices or clinics. The
Company believes that the potential advantages of its blood analysis systems
will form the basis of the Company's marketing efforts to overcome the possible
reluctance of acute care hospitals to change standard operating procedures for
performing blood testing or incur additional capital expenses.

         The Company markets and distributes its products in the United States,
the United Kingdom and Germany primarily through its direct sales and marketing
organization. Outside of these countries, the Company markets and distributes
its products through third party distribution channels, including corporate
partners strategically positioned to access targeted foreign markets, including
Japan and other Pacific Rim Countries, Europe, Mexico, Canada, Latin America and
South America. Effective October 1, 1998, the Company entered into an exclusive
Distribution Agreement with CODMAN, a Johnson & Johnson company, for worldwide
market development and distribution of the Company's Neurotrend monitoring
system. The Company may consider additional distribution channels for its
products, including joint ventures, licensing arrangements or OEM relationships
with strategically positioned corporate partners. Information concerning the
Company's export sales is contained in the financial section of the Company's
Annual Report to Shareholders for the year ended December 31, 1998, under note
15 of Notes to Consolidated Financial Statements, and is incorporated herein by
reference.

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         Additionally, the Company has entered into several arrangements with
hospital systems, healthcare facilities and other influential healthcare buying
groups which establish the Company as a sole, preferred or dual source supplier
of its blood analysis systems. These organizations include Columbia HCA, Vencor,
Inc., Health Services Corporation of America, University Healthsystem Consortium
(now part of Novation), and Purchase Connection. The Company expects to continue
to enter into arrangements with other buying groups and customers with respect
to purchases of its blood and tissue analysis systems.


MANUFACTURING

         The Company's manufacturing facilities support its intermittent testing
and continuous monitoring platforms and are located in Roseville, Minnesota and
High Wycombe, United Kingdom, respectively. The Company manufactures its IRMA
electrochemical thick-film sensor chips in its Roseville, Minnesota facility.
Components for the Company's continuous monitoring sensors used in the Paratrend
7+, Neotrend and Neurotrend products are sourced from a variety of outside
vendors, but the unique assembly and testing of the sensing elements is
performed in the Company's High Wycombe facility. Sub-assembly of external
plastic assemblies are sub-contracted to outside vendors. The Company uses
external manufacturers to produce a range of hardware items, including the
Paratrend 7+, Neotrend and Neurotrend monitors. During the last half of 1998,
the Company began in-house assembly of the IRMA SL analyzer and portions of the
continuous monitoring hardware at the Roseville and High Wycombe facilities,
respectively. These devices could be manufactured by a number of
microelectronics assembly companies, using primarily off-the-shelf components.
Software for the IRMA SL analyzer is developed and maintained by the Company,
and software for the continuous monitoring products is jointly developed with an
external source, with acceptance and validation performed by the Company.

         The majority of the raw materials and purchased components used to
manufacture the Company's products are readily available. Most of the Company's
raw materials are or may be obtained from more than one source. A small number
of these materials, however, are unique in their nature, and are therefore
single sourced. Plans are ongoing to add additional second sourcing where
appropriate.

         The Company's manufacturing facilities include four clean rooms in
Roseville which range from Class 1,000 to Class 100,000, and two clean rooms in
High Wycombe, both rated as Class 10,000. The Company believes its current
facilities can support production of required cartridges and sensors for the
foreseeable future.

         The Company maintains a comprehensive quality assurance and quality
control program, which includes complete documentation of all material
specifications, operating procedures, maintenance and equipment calibration
procedures, training programs and quality control test methods. To control the
quality of its finished product, the Company utilizes ongoing statistical
process control systems during the manufacturing process and comprehensive
performance testing of finished goods.

         The Company continues to successfully undergo required inspections of
its manufacturing facilities by the FDA (most recently in October 1998 and March
1996 for Roseville and High Wycombe facilities, respectively), and by the
British Standards Institution for the High Wycombe facility (most recently in
August 1998). As a result of these inspections, the Company's manufacturing
facilities and documentation and quality control systems are deemed satisfactory
and in compliance with Good Manufacturing Practices.


PATENTS AND PROPRIETARY RIGHTS

         The Company has implemented a strategy of pursuing patent applications
to provide both design freedom and protection from competitors. This strategy
includes evaluating and seeking patent protection both for inventions most
likely to be used in its blood analysis systems and for those inventions most
likely to be used by others as competing alternatives.

         For its intermittent testing platform, the Company currently maintains
three patents issued for its calibration technology, two patents related to its
sensor technology and three for companion technology. In addition, two patents
have been issued and maintained covering the IRMA SL analyzer and

                                       7
<PAGE>
 
disposable cartridge designs. Additionally, the Company has submitted patent
applications pertaining to a multi-use sensor module, an enzymatic sensor and
coagulation measurement technology. Overseas, the Company has foreign patent
applications pending, filed under the Patent Cooperation Treaty, designating
various jurisdictions, including Canada, the major European countries, Brazil,
Australia and Japan, corresponding to one or more U.S. applications. The Company
maintains nine foreign patents; two issued in the United Kingdom, two in
Germany, two in Canada and three in Japan.

         As it relates to its continuous monitoring platform, the Company
currently maintains nine U.S. patents associated with the design and manufacture
of its sensor technology platforms. These patents are at various patent process
stages in the major European countries and Japan.

         Material patents have expirations ranging from the year 2006 to 2016.
The Company is not currently a party to any patent litigation.

         The Company has federally registered the trademarks "IRMA SL",
"Diametrics Medical, Inc.", "Neocath", "Paratrend", "Tissuetrak", "Paratrend
7+", "Neotrend", "Neurotrend", "CAL-POD", "TOM 2000" and claims trademark rights
in "When Stat Isn't Fast Enough."


COMPETITION

         The Company believes that potential purchasers of point-of-care blood
analysis systems will base their purchase decision upon a combination of
factors, including the product's test menu, ease of use, accuracy, price and
ability to manage the data collected. The Company is aware of one company,
i-STAT, that is marketing a portable point-of-care blood analysis system. The
Company believes that the IRMA SL System possesses distinct competitive
advantages over i-STAT's products including ease of use, closed instead of open
handling of blood samples and room temperature instead of refrigerated storage
of reagents.

         The Company also competes with companies that market near-patient
multi-use blood analysis systems. These companies include AVL Scientific
Corporation, Radiometer, Inc. (with their acquisition of Sendx Medical, Inc.),
Instrumentation Laboratories (with their acquisition of the GEM Premier) and
Bayer (with their acquisition of Chiron Diagnostics). However, the Company
believes that to be successful in the point-of-care market, a device must not
only be able to perform a variety of commonly ordered blood chemistry tests, but
also be very portable to facilitate ease of use at the patient's bedside.

         The Company's blood analysis systems also compete with manufacturers
providing traditional blood analysis systems to central and stat laboratories of
hospitals. Although these laboratory-based instruments provide the same tests
available with the Company's products, they are complex, expensive and require
the use of skilled technicians. The Company believes that its blood analysis
systems offer several advantages over these laboratory-based instruments
including immediate or continuous results, ease-of-use, reduced opportunity for
error and cost effectiveness. The Company believes that its multi-parameter
continuous arterial blood gas monitoring systems are currently the only products
of its kind commercially available.

         The Company's products are competitively priced with other
point-of-care product offerings. While competitive cost data is not easily
attainable, the high volume, centralized testing labs can provide testing at a
lower cost per test, but do not provide the convenience and fast turnaround time
for test results that point-of-care products offer. Their costs are also highly
dependent on volume, given the large investment required for facilities,
equipment and trained personnel.

         Many of the companies in the medical technology industry have
substantially greater capital resources, research and development staffs and
facilities than the Company. Such entities may be developing or could in the
future attempt to develop additional products competitive with the Company's
blood and tissue analysis systems. Many of these companies also have
substantially greater experience than the Company in research and development,
obtaining regulatory approvals, manufacturing and marketing, and may therefore
represent significant competition for the Company. There can be no 

                                       8
<PAGE>
 
assurance that the Company's competitors will not succeed in developing or
marketing technologies and products that will be more effective or less
expensive than those being marketed by the Company or that would render the
Company's technology and products obsolete or noncompetitive.


EXECUTIVE OFFICERS

      Name                   Age          Position
      ----                   ---          --------
David T. Giddings            55          President,  Chief Executive Officer and
                                         Chairman

Roy S. Johnson               46          Executive Vice President and
                                         President and Managing Director of
                                         Diametrics Medical, Ltd.

Laurence L. Betterley        45          Senior Vice President and
                                         Chief Financial Officer

James R. Miller              45          Senior Vice President of Sales and
                                         Marketing and Commercial Development


         Mr. Giddings was appointed Chairman of the Board of Directors,
President and Chief Executive Officer of the Company in April 1996. Mr. Giddings
was formerly President and Chief Operating Officer of the United States
operations of Boehringer Mannheim Corporation ("BMC"), a U.S. subsidiary of
Corange Ltd., a private global healthcare corporation. He joined BMC in 1992
after a 26 year career with Eastman Kodak Company, where he held a number of
senior management positions, including General Manager and Vice President of
Marketing and Sales, clinical products division. He also served as Vice
President and General Manager of Kodak's imaging information system group and of
its printing and publishing division.

         Mr. Johnson joined the Company in November 1996 as an Executive Vice
President, and the President and Managing Director of DML, a subsidiary of the
Company established in conjunction with the acquisition in November 1996 of BSL.
DML markets a line of indwelling monitoring systems for continuous blood and
tissue assessment of critically ill patients. Beginning in 1977, Mr. Johnson
served in a number of management positions for the predecessors of the BSL
business, most recently as President and Chief Executive Officer while it was a
subsidiary of Orange Medical Instruments, Inc. and later when it was an
operating unit of Pfizer Inc. Mr. Johnson started his career in 1974 with
Burroughs Welcome in pharmaceutical production management and was the head of
manufacturing in Burroughs` Sidney, Australia subsidiary.

         Mr. Betterley has been Senior Vice President of the Company since
October 1996 and Chief Financial Officer since August 1996. Prior to this, he
was with Cray Research, Inc. in various management and financial positions
including Chief Financial Officer from 1994 to 1996, Vice President of Finance
from 1993 to 1994 and Corporate Controller from 1989 to 1993. Cray Research
develops, manufactures and sells high performance computing systems used for
computational research.

         Mr. Miller joined the Company in March 1995 as Vice President of Sales
and Marketing, was Senior Vice President of Commercial and Business Development
since July 1996, and Senior Vice President of Sales and Marketing and Commercial
Development since January 1998. From 1991 to early 1995, Mr. Miller was Vice
President of Sales and Marketing at IMED Corporation, where he had global sales
and marketing responsibility for infusion and monitoring products for hospital
and alternate site markets.

                                       9
<PAGE>
 
EMPLOYEES

         As of December 31, 1998, the Company had a total of 179 full-time
employees, including 45 persons engaged in research and development activities.
None of the Company's employees are covered by a collective bargaining
agreement, and Diametrics believes it maintains good relations with its
employees.

FORWARD-LOOKING STATEMENTS

         This Form 10-K Annual Report and the Company's financial
statements and other documents incorporated by reference contain forward-looking
statements that involve risk and uncertainties. The Company's actual results may
differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those contained above in this Item 1-Business, the "Management's
Discussion and Analysis of Results of Operations and Financial Condition" in
Item 7 and Exhibit 99 to this Report.

ITEM 2.  PROPERTIES

         The Company's principal properties are as follows:

<TABLE>
<CAPTION>
 Location of                        Use of                  Approximate           Lease
  Property                         Facility                Square Footage     Expiration Date   
----------------             ---------------------         --------------     ---------------
<S>                          <C>                              <C>             <C>
Roseville, Minnesota         Manufacturing, research          46,500          September 1999
                             and development, sales,                          to September 2001                         
                             marketing and administration

Malvern, Pennsylvania        Research and development          2,000          March 1999(1)    


High Wycombe,                Manufacturing, process           14,500          September 2005
   United Kingdom            engineering, purchasing
                             and distribution

High Wycombe,                Sales, marketing and              5,500          January 2015
  United Kingdom             administration

High Wycombe,                Research and development          6,000          April 1999(1)
  United Kingdom
</TABLE>

(1)      During the first quarter 1999, lease was extended through March 2002
         and April 2004, respectively.

The Company believes that its facilities are sufficient for its projected needs
through 2000.


ITEM 3.  LEGAL PROCEEDINGS

         The Company is currently not subject to any material pending or
threatened legal proceedings.

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

         No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1998.


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

                                       10
<PAGE>
 
         The Company's Common Stock, $.01 par value, trades on The Nasdaq
National Market under the symbol "DMED." The information contained under the
heading "Stock Information" in the Company's Annual Report to Shareholders for
the year ended December 31, 1998 (the "Annual Report to Shareholders"), is
incorporated herein by reference.

ITEM 6.  SELECTED FINANCIAL DATA

         The information contained under the heading "Selected Five-Year
Financial Data" on page 13 in the Annual Report to Shareholders is incorporated
herein by reference.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
         FINANCIAL CONDITION

         The information contained under the heading "Management's Discussion
and Analysis of Results of Operations and Financial Condition" on pages 13
through 19 in the Annual Report to Shareholders is incorporated herein by
reference.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The information contained under the heading "Market Risk" on page 18 in
the Annual Report to Shareholders is incorporated herein by reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The information contained under the headings "Consolidated Statements
of Operations", "Consolidated Balance Sheets," "Consolidated Statements of
Shareholders' Equity," "Consolidated Statements of Cash Flows," "Notes to
Consolidated Financial Statements" on pages 20 through 34 and "Report of
Independent Auditors" on page 35 in the Annual Report to Shareholders is
incorporated herein by reference.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         DIRECTORS OF THE REGISTRANT

         The information contained under the heading "Election of Directors" in
the Company's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders to be held on May 12, 1999, which definitive Proxy Statement will
be filed within 120 days after the close of the fiscal year ended December 31,
1998 (the "Proxy Statement"), is incorporated herein by reference.

         EXECUTIVE OFFICERS OF THE REGISTRANT

         See Part I, Item 1 of this Report for information on Executive Officers
of the Company.

         The information contained under the heading "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Proxy Statement is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

         The information contained under the heading "Executive Compensation" in
the Proxy Statement is incorporated herein by reference, except that, pursuant
to Item 402(a)(8) of Regulation S-K, the subsections 

                                       11
<PAGE>
 
under "Executive Compensation" entitled "Report of Compensation Committee on
Executive Compensation" and "Comparative Stock Performance" provided in response
to paragraphs (k) and (l) of Item 402 are not incorporated by reference herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information contained under the heading "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information contained under the heading "Certain Transactions" in
the Proxy Statement is incorporated by reference.


                                     PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)      1. Financial Statements

         The following consolidated financial statements of Diametrics Medical,
Inc., which are included in the Annual Report to Shareholders, are incorporated
by reference in Item 8 hereof:

         Report of Independent Auditors

         Consolidated Statements of Operations for each of the years in the
            three year period ended December 31, 1998

         Consolidated Balance Sheets at December 31, 1998 and 1997 

         Consolidated Statements of Shareholders' Equity for each of the years
         in the three year period ended December 31, 1998

         Consolidated Statements of Cash Flows for each of the years in the
            three year period ended December 31, 1998

         Notes to Consolidated Financial Statements

         Except for the financial statements listed above and the items
specifically incorporated by reference in Items 5, 6, 7 and 8 hereof, the Annual
Report to Shareholders is not deemed to be filed as part of this Annual Report
on Form 10-K.

         2. Financial Statement Schedules

         All schedules have been omitted because they are not applicable or not
required, or because the required information is included in the financial
statements or the notes thereto.

         3. Exhibits

<TABLE>
<CAPTION>
Exhibit
No.                        Description                                                   Method of Filing 
---                        -----------                                                   ---------------- 
<S>      <C>                                                                                     <C>
3.1      Articles of Incorporation of the Company (as amended)                                   (7)

3.2      Bylaws of the Company (as amended)                                                      (6)

4.1      Form of Certificate for Common Stock                                                    (1)
</TABLE>

                                       12
<PAGE>
 
<TABLE>
<S>      <C>                                                                                     <C>
4.2      Form of Registration Rights Agreement between the
         Company and certain of its shareholders and
         warrant holders                                                                         (1)

4.3      Form of Registration Rights Agreement dated as of February 3, 1995
          between the Company and certain of its shareholders                                    (3)

4.4      Registration Rights Agreement, dated as of January 30, 1997, by and
         between the Company and purchasers of Series I Junior
         Participating Preferred Stock                                                           (5)

4.5      Registration Rights Agreement, dated as of June 10, 1997,
         by and between the Company and the Purchasers                                           (8)

4.6      Form of Certificate for  Series I Junior Participating Preferred Stock                  (5)

4.7      Form of Stock Purchase Warrant, dated as of January 30, 1997                            (5)

4.8      Form of Stock Purchase Warrant, dated as of June 10, 1997                               (8)

10.1     Real Property Lease Agreements dated July 31, 1996, between
         Commers-Klodt, a Minnesota General Partnership, and the Company                 Filed herewith

10.2     Master Equipment Lease Agreement dated as of June 15, 1993, between the
         Company and Phoenix Growth Capitol Corp., as amended by Amendment No. 1
         dated June 8, 1994 (including form of warrant issued in connection
         therewith)                                                                              (1)

10.3*    1990 Stock Option Plan (as amended and restated), including
          form of option agreement                                                              (10)

10.4*    1993 Directors' Stock Option Plan, as amended and restated                             (10)

10.5*    1995 Equalizing Director Stock Option Plan                                              (4)

10.6     1995 Employee Stock Purchase Plan (as revised and restated)                             (6)

10.7     Agreement dated January 1, 1995 between the Company and
         Vencor, Inc.                                                                            (3)

10.8     Settlement Agreement and Mutual General Releases
         dated March 25, 1994 among PPG Industries, Inc., the
         Company, Walter L. Sembrowich, David W. Deetz and
         Kee Van Sin                                                                             (1)

10.9     Letter agreement dated as of February 1, 1995 among the Company,
         Allstate Venture Capital and Frazier
         and Company L.P.                                                                        (2)

10.10    Agreement dated June 29, 1990 between the
         Company and David W. Deetz, as supplemented by
         the letter agreement dated March 28, 1995                                               (2)

10.11    Agreement dated December 21, 1995 between the
         Company and Walter L. Sembrowich, Ph.D.                                                 (4)
</TABLE>

                                       13
<PAGE>
 
<TABLE>
<S>      <C>                                                                                     <C>         
10.12    Stock Purchase Agreement, dated as of January 30, 1997,
         between the Company and the Purchasers named therein                                    (5)

10.13    Stock Purchase Agreement dated as of June 10, 1997,
         between the Company and the Purchasers named therein                                    (8)

10.14    Loan and Security Agreement, dated March 31, 1998, between
         DVI Business Credit and the Company                                                     (9)

10.15    Common Stock Purchase Agreement, dated June 30, 1998, between
         the Company and the Purchasers named therein                                           (10)

10.16    Form of Stock Purchase Warrant, dated August 4, 1998                                   (10)

10.17    Note Purchase Agreement, dated August 4, 1998, between the
         Company and the Purchasers named therein                                               (10)

10.18    Form of Convertible Senior Secured Fixed Rate Note due August 4, 2003                  (10)

10.19    Distribution Agreement, dated October 1, 1998, between the Company
         and Johnson & Johnson Professional, Inc.                                               (11)

10.20    Put Option and Stock Purchase Agreement, dated October 1, 1998,
         between the Company and Johnson & Johnson Development Corporation                      (11)

10.21    Severance Pay Agreement (in the event of Change of Control) dated
         July 31, 1998, between the  Company and David T. Giddings                              (11)

10.22    Form of Severance Pay Agreement (in the event of Change of Control)
         dated July 31, 1998, between the Company and its executive officers                    (11)

10.23    Form of Severance Pay Agreement (in the event of Termination Without
         Cause) dated July 31, 1998, between the Company and its executive
         officers                                                                               (11)

13       Portions of the Company's Annual Report to Shareholders for the year
         ended December 31, 1998 incorporated by reference in this Form 10-K             Filed herewith

21       List of Subsidiaries                                                            Filed herewith

23       Consent of KPMG Peat Marwick LLP                                                Filed herewith

24       Powers of Attorney (included in signature page of Report)                       Filed herewith

27       Financial Data Schedule (electronic filing only)                                Filed herewith

99       Cautionary Factors Under the Private Securities Litigation
         Reform Act                                                                      Filed herewith
</TABLE>

-------------------
*        Management compensatory plan filed pursuant to Item 601(b)(10)(iii)(A)
         of Regulation S-K.

(1)      Incorporated by reference to the Company's Registration Statement on
         Form S-1 (Registration Number 33-78518) (the "Registration Statement").

(2)      Incorporated by reference to the Company's 1994 Annual Report on Form
         10-K.

                                       14
<PAGE>
 
(3)      Incorporated by reference to the Company's Registration Statement on
         Form S-1 (Registration Number 33-94442).

(4)      Incorporated by reference to the Company's 1995 Annual Report on Form
         10-K.

(5)      Incorporated by reference to the Company's Current Report on Form 8-K
         filed March 25, 1997.

(6)      Incorporated by reference to the Company's 1996 Annual Report on Form
         10-K.

(7)      Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the Quarter ended March 31, 1997.

(8)      Incorporated by reference to the Company's Current Report on Form 8-K
         filed June 26, 1997.

(9)      Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the Quarter ended March 31, 1998.

(10)     Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the Quarter ended June 30, 1998.

(11)     Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the Quarter ended September 30, 1998.

(b)      Reports on Form 8-K

         No Current Reports on Form 8-K were filed by the Company during the
         fourth quarter of the year ended December 31, 1998.

(c)      See Item 14(a)(3) above.

(d)      See Item 14(a)(2) above.

                                       15
<PAGE>
 
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Roseville, State of Minnesota, on March 30, 1999.

                                              DIAMETRICS MEDICAL, INC.


                                              By  /s/ David T. Giddings
                                                  ------------------------ 
                                                  David T. Giddings
                                                  President,  Chief Executive
                                                  Officer and Chairman

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on March 30, 1999.

         KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby
constitute and appoint David T. Giddings and Laurence L. Betterley, and each of
them, each with full power to act without the other, his true and lawful
attorneys-in-fact and agents, each with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to the Annual Report on Form 10-K for
the year ended December 31, 1998 of Diametrics Medical, Inc. , and to file the
same, with any and all exhibits thereto, and all other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done as fully to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and confirming all of each of said attorneys-in-fact and agents or any
of them may lawfully do or cause to be done by virtue thereof.

         Name                                          Title
         ----                                          -----
         /s/ David T. Giddings         President, Chief Executive Officer and
         --------------------------    Chairman (Principal Executive Officer) 
         David T. Giddings                       


         /s/ Laurence L. Betterley     Senior Vice President and Chief Financial
         --------------------------    Officer  (Principal Financial Officer)  
         Laurence L. Betterley                     


         /s/ Jill M. Nussbaum          Corporate Controller
         --------------------------    (Principal Accounting Officer) 
         Jill M. Nussbaum              

         /s/ Gerald L. Cohn                                                
         --------------------------
         Gerald L. Cohn                Director

         /s/ Andre de Bruin                                               
         --------------------------
         Andre de Bruin                Director

         /s/ Roy S. Johnson                                                    
         --------------------------
         Roy S. Johnson                Director

         /s/ Mark B. Knudson                                                
         --------------------------
         Mark B. Knudson, Ph.D.        Director

         /s/ David V. Milligan                                         
         --------------------------
         David V. Milligan, Ph.D.      Director

         /s/ Richard A. Norling                                         
         --------------------------
         Richard A. Norling            Director

<PAGE>
 
                                  EXHIBIT INDEX

Exhibit
 No.                        Description
 ---                        -----------
10.1     Real Property Lease Agreements dated July 31, 1996, between 
         Commers-Klodt, a Minnesota General Partnership, and the Company

13       Portions of the Company's Annual Report to Shareholders for the year
         ended December 31, 1998 incorporated by reference in this Form 10-K

21       List of Subsidiaries

23       Consent of KPMG Peat Marwick LLP

24       Power of Attorney (included in signature page of Report)

27       Financial Data Schedule (electronic filing only)

99       Cautionary Statements Under the Private Securities Litigation 
         Reform Act