<PAGE>

SELECTED FIVE-YEAR FINANCIAL DATA

<TABLE>
<CAPTION>
(in thousands, except share and per share amounts)                             Years ended December 31,
----------------------------------------------------------------------------------------------------------------------------------
                                                                 1999             1998          1997          1996         1995
<S>                                                            <C>             <C>           <C>           <C>          <C>
Statement of Operations Data:(3)
Net sales                                                       $    18,687   $    12,156   $    10,434   $     3,797  $     1,607
Operating loss                                                      (10,044)      (17,175)      (20,737)      (23,831)     (23,469)
Net loss                                                            (10,244)      (17,388)      (21,037)      (23,575)     (23,046)
Net loss per share (1), (2)                                           (0.41)        (0.79)        (1.13)        (1.56)       (1.82)
Weighted average shares outstanding                              24,719,038    21,996,382    18,665,837    15,088,493   12,640,212

Balance Sheet Data:
Working capital                                                 $    15,009   $    11,415   $    12,509   $     6,649  $    27,123
Total assets (3)                                                     31,972        25,346        28,662        24,059       36,620
Long-term liabilities                                                 7,823         8,345         8,969         8,582        1,851
Shareholders' equity                                                 13,841        11,366        12,773         8,674       31,194
</TABLE>

(1)  The Company has not paid any dividends since inception.

(2)  Basic and diluted net loss per share amounts are identical as the effect of
     potential common shares is antidilutive.

(3)  On November 6, 1996 the Company acquired all of the outstanding capital
stock of Biomedical Sensors, Ltd. and certain assets of Howmedica, Inc. The
Company accounted for the acquisition using the purchase method of accounting
and, accordingly, the results of operations of the acquired entities have been
included in the Company's consolidated financial statements from November 6,
1996.


     MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
     CONDITION

     SUMMARY

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

     Since its commencement of operations in 1990, the Company has transitioned
     from a development stage company to a full-scale development, manufacturing
     and sales organization.  As of December 31, 1999, the primary funding for
     the operations of the Company has been approximately $144 million raised
     through public and private sales of its equity securities and issuance of
     convertible promissory notes.

     The Company's trend of achieving successive improvements in annual
     operating results continued in 1999, with annual sales growth of 54%;
     continued growth in gross profit, increasing 254% over 1998; and further
     reductions in operating expenses, declining 28% from 1998; all resulting in
     a 41% improvement in annual operating loss.  The implementation of two key
     distribution partnerships in late 1998 and mid 1999 contributed
     significantly to the favorable financial trend in 1999, with further
     improvements expected in 2000 and future years.

     The Company's partnering strategy for distribution and commercialization of
     its products includes Agilent Technologies, Inc. (Agilent), the exclusive
     global distributor of the Company's leading critical care blood monitoring
     products, the IRMA(R)SL blood analysis system and the Trendcare(R)
     continuous blood gas monitoring systems, including Paratrend(R) and
     Neotrend(TM); and CODMAN, a Johnson & Johnson company, who is the
     exclusive worldwide distributor of the Neurotrend(TM) Cerebral Tissue
     Monitoring System.  Neurotrend, which was cleared for marketing by the
     U.S. Food and Drug Administration in November 1999, is a multiparameter
     fiber optic system which continuously monitors oxygen, carbon dioxide,
     acidity and temperature in the brain, providing critical information to
     guide clinicians and surgeons in treating patients with severe head
     trauma or those requiring surgical intervention in the brain.

     The CODMAN distribution agreement was initiated in October 1998, has a term
     of 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 (JJDC) committed to
     purchase up to $5 million of the Company's Common Stock at the Company's
     option over the twelve-month period ended September 30, 1999 at the then
     current market value.  The Company exercised approximately $4 million of
     the available Put Option during 1999.

                                      13
<PAGE>

     The Agilent distribution agreement was completed in June 1999, initially as
     an agreement between the Company and Hewlett Packard Company (HP). Under
     the terms of the distribution agreement, the Company transferred full
     responsibility for marketing, sales and distribution of the blood
     monitoring products described above to HP. The initial term of the
     agreement is three and a half years, with the option for extensions.
     Concurrently with the execution of the agreement, HP made a $9.5 million
     equity investment in the Company. In addition to HP's equity investment,
     the agreement also provides for minimum purchase commitments, market
     development commitments, research and development funding and royalty
     payments over the initial term of the agreement, as well as funding of
     sales and marketing costs during the sales transition period in 1999. In
     late 1999, HP assigned the distribution agreement and its equity investment
     with the Company to Agilent, a leading provider of test and measurement
     solutions and communications components, which was formed as a new company
     and subsidiary of HP, expected to be spun-off as an independent company in
     2000.

     The Company's partnerships with these market leaders were instrumental in
     driving the significant sales growth and operating expense reductions
     achieved in 1999. Also contributing to improved financial performance was a
     significant improvement in IRMA cartridge yields, resulting in lower unit
     manufacturing costs and improved margins. In mid 1999, the Company
     implemented a fully automated manufacturing line for assembly of its new
     snap-fit cartridge format, which helped facilitate the improvement in
     cartridge yields, while increasing plant capacity. Further automation of
     the Company's manufacturing processes is planned for 2000, with expected
     continued improvements in production yields and unit manufacturing costs.

     RESULTS OF OPERATIONS

     Sales  Sales of the Company's products were $18,687,184 for 1999, compared
     to $12,155,526 for 1998 and $10,434,366 for 1997. The 16% increase in sales
     from 1997 to 1998 reflects a 15% growth in sales of instruments and a 19%
     increase in disposable cartridge and sensor sales.  Sales grew 54% in 1999
     from 1998, reflecting a 99% increase in sales of instruments and a slight
     increase in disposable cartridge and sensor sales.  The significant
     increase in instrument sales between 1998 and 1999 was impacted primarily
     by sales to the Company's new distribution partners, Agilent and CODMAN,
     partially offset by the impact of sales returns from distributors that were
     displaced as a result of the new exclusive distribution agreements.  While
     unit sales of disposable cartridges and sensors grew 25% between 1998 and
     1999, related revenues were relatively flat due to the impact of lower
     average sales prices under the Agilent and CODMAN distribution agreements.
     The Company's direct sales to Agilent and CODMAN comprised approximately 3%
     and 69% of total sales in 1998 and 1999, respectively, and are expected to
     increase as a percentage of total sales in 2000.  Intermittent testing
     products represented 39%, 63% and 59% of sales in 1999, 1998 and 1997,
     respectively, with continuous monitoring products comprising the remaining
     sales in each year.

     For the year ended December 31, 1999, intermittent blood testing products
     revenue was comprised of 56% instrument related revenue and 44% disposable
     cartridge related revenue.  Continuous monitoring products revenue was
     comprised of 77% instrument related revenue and 23% disposable sensor
     revenue.  The high concentration of instrument related revenue in 1999 was
     largely impacted by sales to CODMAN and Agilent.

     The Company's revenues are affected principally by the number of
     instruments, both monitors and IRMA analyzers, placed with customers and
     the rate at which disposable sensors and cartridges are used in connection
     with these products. As of December 31, 1999, the Company has sold
     approximately 5,000 instruments. Unit sales of instruments in 1999
     increased approximately 105% from 1998, while disposable sensor and
     cartridge unit sales increased approximately 25%. As the Company grows, it
     is expected that the growing end-user customer base will increase the rate
     of usage of disposable products, with the result that overall disposable
     product sales will exceed that of instrument sales.

     The Company has targeted continued revenue growth in 2000, as a result of
     further planned expansion of its blood and tissue analysis product lines
     and continued commercialization of these products by market leading
     distribution partners.

     Cost of Sales  Cost of sales totaled $15,779,694 for 1999, compared to
     $11,334,721 for 1998 and $11,666,142 for 1997. Cost of sales as a
     percentage of revenue was 84% in 1999, 93% in 1998 and 112% in 1997. The
     year-to-year improvement in the Company's cost of sales as a percentage of
     revenue reflects increased sales volumes, improved cartridge yields, and
     the impact of cost controls and manufacturing process changes. Also
     favorably affecting gross profit in 1999 was a higher mix of instrument
     sales, including the sale to Agilent of a pool of used or refurbished
     instruments. This pool carried a lower cost value than new instrument
     inventory due to the impact of depreciation being recorded since initially
     being placed into service. These improvements were partially offset by the
     impact of lower average sales prices under the Agilent distribution
     agreement and the impact of sales returns from distributors that were
     displaced as a result of the Company's new exclusive distribution
     agreements. The Company is targeting continued improvements in gross profit
     during 2000 as a result of expected continued improvements in manufacturing
     yields and higher unit volumes.

     Operating Expenses  Total operating expenses decreased by $5 million or
     28% from 1998 to 1999, following a decrease of $1.5 million or 8% from 1997
     to 1998. On a pre-restructure

                                      14
<PAGE>

     charge basis, 1998 operating expenses decreased $1 million or 5% relative
     to 1997, primarily the result of work force reductions in 1997, which
     reduced average headcount between years by 13% in the Company's U.S.
     operations. The significant decline in operating expenses from 1998 to 1999
     is primarily the result of research and development funding received from
     Agilent as part of the distribution agreement and the transfer of the
     Company's sales and marketing functions to Agilent.

     Research and development expenses totaled $4,847,463 in 1999, compared to
     $6,466,154 in 1998 and $7,231,669 in 1997. The 11% reduction in expenses
     between 1997 and 1998 is primarily the result of work force reductions
     during 1997, with average headcount declining 16% between years.  The 25%
     decline in expenses from 1998 to 1999 is primarily due to the recognition
     in 1999 of research and development funding received from Agilent as part
     of the distribution agreement.  The Company is targeting 2000 expenses at
     levels comparable to 1999, due to the impact of the expected recognition in
     2000 of a full year of research and development funding, offset by
     additional investments to support new research and development projects.

     Sales and marketing expenses totaled $4,352,859 in 1999, compared to
     $8,268,824 in 1998 and $8,120,529 in 1997.  The 2% increase in expenses
     from 1997 to 1998 is primarily impacted by higher commissions on increased
     direct sales and increased sales support costs for placement of the
     Company's products with new customers.  The 47% reduction in expenses from
     1998 to 1999 is primarily due to the recognition in 1999 of sales and
     marketing funding received from Agilent to cover costs during a sales
     transition period.  Further contributing to the decline was a reduction in
     marketing activities in anticipation of the transition of significant
     portions of the Company's sales and marketing functions to Agilent.  This
     transition was completed in late 1999, and as a result, sales and marketing
     expenses in 2000 are expected to decrease significantly from 1999.

     General and administrative expenses totaled $3,750,967 in 1999, compared to
     $3,261,098 in 1998 and $3,689,036 in 1997. The 12% decline in expenses from
     1997 to 1998 is primarily the result of work force reductions during 1997.
     The 15% increase in expenses from 1998 to 1999 is primarily due to
     additional costs incurred in completing the Agilent transaction and
     increased compensation costs due to improved performance against Company
     objectives.

     Restructuring and other charges totaled $463,816 in 1997, and no charges
     were recorded in 1998 and 1999. Charges in 1997 consisted of severance
     costs of approximately $319,000 associated with work force reductions,
     primarily in the Company's U.S. manufacturing, research and development and
     general and administrative areas, and $145,000 for the write-down of excess
     and obsolete equipment resulting from the work force reductions and process
     changes.

     Other Income (Expense)  Net other expense in 1999 was $199,748, compared to
     $212,391 in 1998 and $299,717 in 1997.  The Company realized interest
     income of $528,787 in 1999, compared to $422,441 in 1998 and $658,625 in
     1997.  The year-to-year fluctuations reflect the impact of the timing of
     the Company's financing activities between 1996 and 1999 on average cash
     and investment balances during each year.

     Interest expense totaled $630,459 in 1999, compared to $807,411 in 1998 and
     $1,017,657 in 1997. The year-to-year decline in expense primarily reflects
     lower average debt balances each successive year and a reduction in the
     amount of higher interest bearing capital lease debt relative to total debt
     outstanding.

     Net Loss  Net loss for the year ended December 31, 1999 was $10,243,547,
     compared to $17,387,662 in 1998 and $21,036,543 in 1997.  The year-to-year
     improvement in net loss reflects revenue growth; improved margins,
     influenced by higher unit volumes, changes in product mix and improved
     manufacturing yields; and reduced operating expenses due primarily to
     research and development funding received from Agilent and the transfer of
     the Company's sales and marketing functions to Agilent, partially offset by
     costs incurred to complete the Agilent transaction. The Company is
     targeting continued significant improvement in net loss in 2000 relative to
     1999.

     LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 1999, the Company had working capital of approximately $15
     million, an increase of $3.6 million from the working capital of $11.4
     million reported at December 31, 1998.  The net increase primarily reflects
     the impact of the amount and timing of proceeds from private equity
     placements in 1998 and 1999, and an improvement in net cash used in
     operating activities for the year ended December 31, 1999.  Through
     December 31, 1999, the Company raised approximately $144 million through
     the public and private sales of its equity securities and the issuance of
     convertible promissory notes.

     Net cash used in operating activities totaled $3 million for the year ended
     December 31, 1999, compared to $18.8 million and $16.6 million for the same
     periods in 1998 and 1997, respectively.  This was the result of net losses
     of $10.2 million, $17.4 million and $21 million for these same periods in
     1999, 1998 and 1997, respectively, adjusted by changes in key operating
     assets and liabilities, primarily accounts receivable, inventories,
     accounts payable, accrued expenses and deferred credits and revenue.

     As discussed in note 19 of Notes to Consolidated Financial Statements,
     effective January 1, 1998, the Company changed the year-end of its wholly-
     owned subsidiary, Diametrics Medical, Ltd. (DML), to December 31 from
     November 30 to produce a consistent reporting period for the consolidated
     entity.  As a result of this change in year-end, DML's net results of
     operations for the

                                      15
<PAGE>

     month of December 1997 were closed to beginning accumulated deficit as of
     January 1, 1998. Additionally, the changes in DML's operating assets and
     liabilities during the month of December 1997 are included in the
     Consolidated Statement of Cash Flows for the year ended December 31, 1998.
     The discussion below of changes in accounts receivable, inventories,
     accounts payable and accrued expenses includes the impact of the DML year-
     end change on these balances.

     Net accounts receivable increased $1.4 million for the year ended December
     31, 1999, compared to $1.7 million in 1998 and $1.2 million in 1997.  The
     increases are primarily due to increased sales in each year. The reduced
     growth in accounts receivable in 1999 relative to 1998 on a significantly
     larger increase in sales between years is primarily due to an improvement
     in days sales outstanding and the timing of sales.

     Inventories decreased $651,000 for the year ended December 31, 1999, after
     an increase of $1.3 million in 1998 and a decrease of $876,000 in 1997.
     The decrease in 1999 primarily reflects a decrease in finished goods
     inventory due to significant sales to the Company's distributors, partially
     offset by an increase in raw material inventory to meet anticipated
     production requirements in the first quarter 2000.  The overall net decline
     in 1999 inventory levels is also impacted by an improvement in inventory
     turnover during the year, stemming from improved inventory management.  The
     increase in 1998 was due to increased inventory levels needed to begin
     internal assembly of the Company's IRMA SL analyzers and to meet an
     expected increase in demand.

     Accounts payable and accrued expenses increased $405,000 for the year ended
     December 31, 1999, after a decrease of $1.5 million in 1998 and an increase
     of $418,000 in 1997.  The increase in 1999 is primarily due to increased
     accruals for costs to complete committed product upgrades, and employee
     bonuses.  The decrease in 1998 was affected primarily by a reduction in
     accrued interest payable, due to the timing of interest payments, and
     reductions in product upgrade accruals as upgrades were completed from a
     prior upgrade program, combined with timing of payments to vendors and
     employees.  The increase in 1997 was primarily the result of the timing of
     vendor payments.

     Deferred credits and revenue increased $5.1 million during 1999,
     representing the remaining balance of prepaid funding of $9.5 million
     received from Agilent under the distribution agreement.  The prepayment
     provided partial funding of current and future research and development
     expenses, sales and marketing costs during a sales transition period, and
     royalty payments.

     Net cash used in investing activities totaled $9.1 million for the year
     ended December 31, 1999, following net cash provided by investing
     activities of $3.2 million in 1998 and a net use of cash in 1997 of $7.8
     million. These year-to-year changes were primarily affected by the amounts
     and timing of private equity placements, which affected the amount of cash
     available for the purchase of marketable securities.  Purchases of property
     and equipment also affected net cash provided by or used in investing
     activities, and totaled $1.7 million for the year ended December 31, 1999,
     $2.3 million in 1998 and $3 million in 1997.  Capital additions in each
     year consisted primarily of investments in development and production
     equipment and instruments for internal use in research and development and
     sales.  In 2000, the Company expects total capital expenditures and new
     lease commitments to approximate $3 million for the year, primarily
     reflecting investments to support new product development and production.

     Net cash provided by financing activities totaled $11.8 million for the
     year ended December 31, 1999, compared to $16.4 million in 1998 and $25.3
     million in 1997. The year-to-year changes were due primarily to the amounts
     and timing of private equity placements in each of these years.

     In late 1996 and throughout 1997, the Company entered into long-term debt
     obligations of approximately $8.9 million.  The original debt consisted of
     a $7.3 million senior secured fixed rate loan note issued to Pfizer Inc. in
     connection with the Company's acquisition of DML and approximately $1.6
     million in notes payable for equipment financing.  Proceeds from the
     issuance in August 1998 of $7.3 million of Convertible Senior Secured Fixed
     Rate Notes, issued in conjunction with a private equity placement, were
     simultaneously used to retire the $7.3 million Pfizer note.  The Company's
     long-term debt obligations require principal and interest repayments of
     approximately $900,000 in each of years 2000 and 2001, $600,000 in 2002 and
     $7.6 million in 2003.

     Effective March 31, 1998, the Company secured a $1 million receivable
     backed line of credit.  The loan agreement requires the Company's accounts
     receivable collections be applied to reduce the loan balance, including
     advances, interest and fees.  At December 31, 1999, no advances were
     outstanding under the line of credit.

     At December 31, 1999, the Company had U.S. net operating loss and research
     and development tax credit carryforwards for income tax purposes of
     approximately $112.8 million and $1.2 million, respectively. Pursuant to
     the Tax Reform Act of 1986, use of a portion of the Company's net operating
     loss carryforwards are limited due to a "change in ownership." (See note 13
     of Notes to Consolidated Financial Statements for further discussion).

     As part of an exclusive distribution agreement initiated on October 1,
     1998, the Company entered into a $5 million Put

                                      16
<PAGE>

     Option and Stock Purchase Agreement with JJDC who committed to purchase up
     to $5 million of the Company's Common Stock at the Company's option over
     the twelve month period ended September 30, 1999. Effective March 26, 1999,
     the Company exercised approximately $4 million of the available Put Option
     resulting in the issuance of 773,184 shares of the Company's Common Stock
     to JJDC at a per share price of $5.17. As part of an exclusive Distribution
     Agreement and Common Stock Purchase Agreement with HP completed in June
     1999, the Company issued 1,357,143 shares of Common Stock to HP at a price
     of $7.00 per share, for aggregate proceeds of $9.5 million. HP also
     received a warrant to purchase 452,381 shares of Common Stock at $8.40 per
     share, providing additional funding potential of $3.8 million. In addition,
     HP agreed to minimum purchase commitments, market development commitments,
     research and development funding and royalty payments over the initial term
     of the agreement. In late 1999, HP assigned the distribution agreement and
     its equity investment with the Company to Agilent, which was formed as a
     new company and subsidiary of HP. The Company believes proceeds from the
     funding agreements with Agilent, currently available funds and cash
     generated from projected revenues, supplemented by proceeds from employee
     stock plans, warrant exercises and asset based credit will meet the
     Company's working capital needs. If the amount or timing of funding from
     these sources or cash requirements vary materially from those currently
     planned, the Company could require additional capital. The Company's long-
     term capital requirements will depend upon numerous factors, including the
     rate of market acceptance of the Company's products and the level of
     resources devoted to expanding the Company's business, manufacturing
     capabilities and research and development activities. While there can be no
     assurance that adequate funds will be available when needed or on
     acceptable terms, management believes that the Company will be able to
     raise adequate funding if needed.



     YEAR 2000 COMPLIANCE

     During 1999, the Company completed the process of assessing and preparing
     for the Year 2000 date change.  This process involved the review and
     remediation, where applicable, of date recognition issues in its products;
     its internal financial, manufacturing and other process control systems;
     and its interface with major customers and suppliers.

     As a result of its efforts in addressing Year 2000 concerns, the Company to
     date has not experienced any significant difficulties attributed to Year
     2000 issues, nor has it received notice from its customers of any material
     incidents or difficulties related to its products or services as a result
     of the Year 2000 event.  The incremental costs required to address the
     Company's Year 2000 compliance approximated $150,000, including the cost of
     software and hardware upgrades.  The majority of this cost was incurred in
     1999.

     MARKET RISK

     The Company's primary market risk exposure is foreign exchange rate
     fluctuations of the British pound sterling to the U.S. dollar as the
     financial position and operating results of the Company's U.K. subsidiary,
     DML, are translated into U.S. dollars for consolidation.  The Company's
     exposure to foreign exchange rate fluctuations also arises from
     transferring funds to its U.K. subsidiary in British pounds sterling.
     Effective November 1, 1999, most of the Company's sales are made to
     distributors and denominated in U.S. dollars, thereby significantly
     mitigating the risk of exchange rate fluctuations on trade receivables.
     November 1, 1999 marked the completion of a sales transition period with
     Agilent, the Company's exclusive global distributor of the IRMA SL blood
     analysis system and the Trendcare continuous blood monitoring products,
     which followed the completion of a distribution agreement in the fourth
     quarter 1998 with CODMAN, who is the exclusive global distributor of
     Neurotrend, a continuous cerebral tissue monitoring product.

     The effect of foreign exchange rate fluctuations on the Company's financial
     results for the years ended December 31, 1999, 1998 and 1997 was not
     material.  The Company does not currently use derivative financial
     instruments to hedge against exchange rate risk.  Because foreign exchange
     exposure to these rate fluctuations increases as intercompany balances
     grow, the Company will continue to evaluate the need to initiate hedging
     programs to mitigate the impact on intercompany balances of changes in the
     exchange rate of the British pound sterling to the U.S. dollar.

     The Company's exposure to interest rate risk is limited to short-term
     borrowings under its $1 million receivable backed credit line.  Any
     advances under the line of credit bear interest on the unpaid principal
     amount at a fluctuating rate tied to the Prime Rate.  The Company does not
     use derivative financial instruments to manage interest rate risk.    As
     borrowings at any one time are limited to $1 million and are generally
     repaid within a few months, the Company's exposure is not believed to be
     material.  All other existing debt agreements of the Company bear interest
     at fixed rates, and are therefore not subject to exposure from fluctuating
     interest rates.

     EURO CONVERSION

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

                                      17
<PAGE>

     As noted under "Market Risk", the Company sells and distributes most of its
     products globally through distributors, with sales denominated in U.S.
     dollars. The Company's subsidiary, DML, conducts its operations from the
     U.K. The U.K. is one of the four countries of the EU that did not adopt the
     euro as its legal currency effective January 1, 1999; however, the U.K. may
     convert to the euro at a later date.  The conversion to the euro by the
     participating countries of the EU is not expected to result in large-scale
     changes to the denominations or pricing of the Company's sales contracts.

     The Company has assessed the potential impact of the euro conversion on
     business processes, information technology systems and fixed assets in its
     U.K. operations, and has made required changes in tandem with required Year
     2000 related upgrades.

     While the Company will continue to evaluate the impact of the euro
     conversion over time, based upon currently available information,
     management does not believe that the conversion to the euro currency will
     have a material impact on the Company's financial condition or overall
     trends in results of operations.

     NEW ACCOUNTING PRONOUNCEMENTS

     SFAS No. 133, "Accounting for Derivative Instruments and Hedging
     Activities," (as amended by SFAS No. 137 with respect to the effective
     date) will be effective for the Company in January 2001.  SFAS No. 133
     requires all derivatives to be recognized as assets or liabilities on the
     balance sheet and measured at fair value on a mark-to-market basis.  This
     applies whether the derivatives are stand-alone instruments, such as
     forward currency exchange contracts and interest rate swaps or collars, or
     embedded derivatives, such as call options contained in convertible debt
     investments.  Along with the derivatives, the underlying hedged items are
     also to be marked-to-market on an ongoing basis.  These market value
     adjustments are to be included either in net earnings or loss in the
     statement of operations or in other comprehensive income (and accumulated
     in stockholders' equity), depending on the nature of the transaction. The
     Company is currently evaluating SFAS No. 133, but does not expect that it
     will have a material effect on its financial statements.

     In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
     "Revenue Recognition in Financial Statements" (SAB 101).  SAB 101
     summarizes certain of the SEC staff's views in applying generally accepted
     accounting principles to revenue recognition in financial statements. SAB
     101 will be effective for the Company in the first quarter of 2000.  The
     Company believes that its revenue recognition policies are in compliance
     with SAB 101, and does not expect it to have a material impact on its
     financial condition or results of operations.

     The Company's discussion and analysis of results of operations and
     financial condition, including statements regarding the Company's
     expectations about new and existing products, future financial performance,
     Year 2000 compliance, market risk exposure and other forward looking
     statements are subject to various risks and uncertainties, including,
     without limitation, demand and acceptance of new and existing products,
     technological advances and product obsolescence, competitive factors,
     stability of domestic and international financial markets and the
     availability of capital to finance growth.  These and other risks are
     discussed in greater detail in an exhibit in the Company's Form 10-K filed
     with the U.S. Securities and Exchange Commission.

                                      18
<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                                          Years ended December 31,
                                                                      -------------------------------------------------------------
DIAMETRICS MEDICAL, INC. AND SUBSIDIARY                                     1999                    1998                    1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                     <C>              <C>
Net sales                                                                  $ 18,687,184            $ 12,155,526     $ 10,434,366
Cost of sales                                                                15,779,694              11,334,721       11,666,142
                                                                      -------------------------------------------------------------

      Gross profit (loss)                                                     2,907,490                 820,805       (1,231,776)

Operating expenses:
   Research and development                                                   4,847,463               6,466,154        7,231,669
   Sales and marketing                                                        4,352,859               8,268,824        8,120,529
   General and administrative                                                 3,750,967               3,261,098        3,689,036
   Restructuring and other charges                                                    -                       -          463,816
                                                                   -------------------------------------------------------------

                                                                             12,951,289              17,996,076       19,505,050
                                                                   -------------------------------------------------------------

      Operating loss                                                        (10,043,799)            (17,175,271)     (20,736,826)

Interest income                                                                 528,787                 422,441          658,625
Interest expense                                                               (630,459)               (807,411)      (1,017,657)
Other income (expense), net                                                     (98,076)                172,579           59,315
                                                                   --------------------------------------------------------------

      Net loss                                                             $(10,243,547)           $(17,387,662)    $(21,036,543)
                                                                   ==============================================================

Basic and diluted net loss per common share                                $      (0.41)           $      (0.79)    $      (1.13)
                                                                   ==============================================================

Weighted average common shares outstanding                                   24,719,038              21,996,382       18,665,837
                                                                   ==============================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

                                      19
<PAGE>

Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                             ---------------------------------
Diametrics Medical, Inc. and Subsidiary                                             1999              1998
--------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>               <C>
Assets

Current assets:
   Cash and cash equivalents                                                    $ 2,786,162       $ 3,432,614
   Marketable securities                                                         11,339,009         2,976,443
   Accounts receivable, net of allowance for doubtful accounts of
       $200,000 in 1999 and $280,000 in 1998                                      6,790,673         5,420,092
   Inventories                                                                    4,116,348         4,767,537
   Prepaid expenses and other current assets                                        285,336           454,291
                                                                             ---------------------------------
     Total current assets                                                        25,317,528        17,050,977
                                                                             ---------------------------------

Property and equipment, net                                                       5,774,497         6,922,793

Other assets, net                                                                   880,171         1,372,544
                                                                             ---------------------------------

                                                                                $31,972,196       $25,346,314
                                                                             ---------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
   Accounts payable                                                             $ 2,438,550       $ 2,535,343
   Accrued expenses                                                               2,414,785         1,855,004
   Deferred credits and revenue                                                   5,105,214                 -
   Short-term borrowings                                                                  -           828,823
   Current portion of long-term liabilities                                         349,511           416,509
                                                                             ---------------------------------
     Total current liabilities                                                   10,308,060         5,635,679
                                                                             ---------------------------------

Long-term liabilities:
   Long-term liabilities, excluding current portion                               7,813,796         8,163,307
   Other liabilities                                                                  9,684           181,764
                                                                             ---------------------------------
     Total liabilities                                                           18,131,540        13,980,750
                                                                             ---------------------------------

Shareholders' equity:
    Preferred stock, $.01 par value: 5,000,000 shares
     authorized, none issued                                                              -                 -
   Common stock, $.01 par value: 35,000,000 shares authorized, 25,778,499
     and 23,391,597 shares issued and outstanding at December 31, 1999
     and 1998, respectively                                                         257,785           233,916
   Additional paid-in capital                                                   143,463,332       130,477,220
   Accumulated other comprehensive loss                                            (516,507)         (225,165)
   Accumulated deficit                                                         (129,363,954)     (119,120,407)
                                                                             ---------------------------------
     Total  shareholders' equity                                                 13,840,656        11,365,564
                                                                             ---------------------------------
Commitments and contingencies (notes 8, 17, and 18)
                                                                                $31,972,196       $25,346,314
                                                                             ---------------------------------
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.

                                      20
<PAGE>

<TABLE>
<CAPTION>

Consolidated Statements of  Shareholders' Equity

                                                                            Additional
                                                 Preferred      Common       paid-in        Accumulated
Diametrics Medical, Inc. and Subsidiary            stock         stock       capital          deficit
----------------------------------------------------------------------------------------------------------
<S>                                              <C>             <C>        <C>             <C>
Balance, December 31, 1996                           $     -    $152,095    $ 88,451,972    $ (80,019,137)
                                              ------------------------------------------------------------

Net loss                                                   -           -               -      (21,036,543)

Foreign currency translation adjustment                    -           -               -                -

Minimum pension liability                                  -           -               -                -
                                              ------------------------------------------------------------

Comprehensive loss for the year ended
  December 31, 1997                                        -           -               -      (21,036,543)

Issued preferred stock                                 7,500           -      11,857,799                -

Conversion of preferred stock to common stock         (7,500)     30,000         (22,500)               -

Issued common stock                                        -      14,933       7,840,236                -

Issued common stock under
  employee stock purchase plan                             -         554         205,574                -

Exercise of options to common stock                        -       2,291       1,057,733                -

Exercise of warrants to common stock                       -       9,026       4,551,025                -

Issued stock options in lieu of cash
 compensation                                              -           -          28,408                -
                                              ------------------------------------------------------------
Balance, December 31, 1997                                 -     208,899     113,970,247     (101,055,680)
                                              ------------------------------------------------------------

Net loss                                                   -           -               -      (17,387,662)

Foreign currency translation adjustment                    -           -               -                -

Minimum pension liability                                  -           -               -                -
                                              ------------------------------------------------------------

Comprehensive loss for the year ended
  December 31, 1998                                        -           -               -      (17,387,662)

Issued common stock                                        -      21,582      14,792,052                -

Issued common stock under
  employee stock purchase plan                             -         450         209,646                -

Exercise of options to common stock                        -       2,441       1,183,531                -

Exercise of warrants to common stock                       -         544         309,144                -

Issued stock options in lieu of cash
 compensation                                              -           -          12,600                -

Effect of subsidiary's year-end change                     -           -               -         (677,065)
                                              ------------------------------------------------------------
Balance, December 31, 1998                                 -     233,916     130,477,220     (119,120,407)
                                              ------------------------------------------------------------

Net loss                                                   -           -               -      (10,243,547)

Foreign currency translation adjustment                    -           -               -                -

Minimum pension liability                                  -           -               -                -
                                              ------------------------------------------------------------

Comprehensive loss for the year ended
  December 31, 1999                                        -           -               -      (10,243,547)

Issued common stock                                        -      21,303      11,849,017                -

Issued common stock under
  employee stock purchase plan                             -         329         146,284                -

Exercise of options to common stock                        -       2,237         976,708                -

Issued stock options in lieu of cash
 compensation                                              -           -          14,103                -
                                              ------------------------------------------------------------
Balance, December 31, 1999                           $     -    $257,785    $143,463,332    $(129,363,954)
                                              ------------------------------------------------------------





<CAPTION>
                                                 Accumulated other           Total              Total
                                                   comprehensive         shareholders'      comprehensive
Diametrics Medical, Inc. and Subsidiary            income (loss)             equity         income (loss)
-----------------------------------------------------------------------------------------------------------
<S>                                              <C>                      <C>                <C>
Balance, December 31, 1996                        $   89,309               $  8,674,239
                                              -----------------------------------------

Net loss                                                   -                (21,036,543)       $(21,036,543)

Foreign currency translation adjustment              (69,725)                   (69,725)            (69,725)

Minimum pension liability                           (369,773)                  (369,773)           (369,773)
                                              -------------------------------------------------------------

Comprehensive loss for the year ended
  December 31, 1997                                 (439,498)                         -        $(21,476,041)
                                                                                               ------------
Issued preferred stock                                     -                 11,865,299

Conversion of preferred stock to common stock              -                          -

Issued common stock                                        -                  7,855,169

Issued common stock under
  employee stock purchase plan                             -                    206,128

Exercise of options to common stock                        -                  1,060,024

Exercise of warrants to common stock                       -                  4,560,051

Issued stock options in lieu of cash
 compensation                                              -                     28,408
                                              -----------------------------------------
Balance, December 31, 1997                          (350,189)                12,773,277
                                              -----------------------------------------

Net loss                                                   -                (17,387,662)       $(17,387,662)

Foreign currency translation adjustment              (98,328)                   (98,328)            (98,328)

Minimum pension liability                            223,352                    223,352             223,352
                                              -------------------------------------------------------------

Comprehensive loss for the year ended
  December 31, 1998                                  125,024                          -        $(17,262,638)
                                                                                               ------------
Issued common stock                                        -                 14,813,634

Issued common stock under
  employee stock purchase plan                             -                    210,096

Exercise of options to common stock                        -                  1,185,972

Exercise of warrants to common stock                       -                    309,688

Issued stock options in lieu of cash
 compensation                                              -                     12,600

Effect of subsidiary's year-end change                     -                   (677,065)
                                              -----------------------------------------
Balance, December 31, 1998                          (225,165)                11,365,564
                                              -----------------------------------------

Net loss                                                   -                (10,243,547)       $(10,243,547)

Foreign currency translation adjustment             (405,483)                  (405,483)           (405,483)

Minimum pension liability                            114,141                    114,141             114,141
                                              -------------------------------------------------------------

Comprehensive loss for the year ended
  December 31, 1999                                 (291,342)                         -        $(10,534,889)
                                                                                               ------------
Issued common stock                                        -                 11,870,320

Issued common stock under
  employee stock purchase plan                             -                    146,613

Exercise of options to common stock                        -                    978,945

Issued stock options in lieu of cash
 compensation                                              -                     14,103
                                              -----------------------------------------
Balance, December 31, 1999                         $(516,507)              $ 13,840,656
                                              -----------------------------------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                      21
<PAGE>

Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                              Years ended December 31,
                                                                     -------------------------------------------
Diametrics Medical, Inc. and Subsidiary                                  1999           1998           1997
----------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>            <C>            <C>
Cash flows from operating activities:
   Net loss                                                          $(10,243,547) $ (17,387,662) $ (21,036,543)
   Adjustments to reconcile net loss to net cash
     used in operating activities:
      Depreciation and amortization                                     2,224,519      3,147,460      4,162,997
      Other                                                                12,988         13,252        (52,513)
      Changes in operating assets and liabilities
        Receivables, net                                               (1,370,581)    (1,652,185)    (1,178,760)
        Inventories                                                       651,189     (1,325,613)       875,881
        Prepaid expenses and other current assets                         168,955        (44,360)       232,582
        Accounts payable                                                  (96,793)       393,253        649,432
        Accrued expenses                                                  501,842     (1,899,428)      (231,365)
        Deferred credits and revenue                                    5,105,214              -              -
                                                                     -------------------------------------------
         Net cash used in operating activities                         (3,046,214)   (18,755,283)   (16,578,289)
                                                                     -------------------------------------------

Cash flows from investing activities:
   Purchases of property and equipment                                 (1,689,372)    (2,252,544)    (2,957,958)
   Sale of evaluation and demonstration instruments                       944,737              -              -
   Purchases of marketable securities                                 (16,026,009)    (6,558,430)   (26,208,044)
   Proceeds from maturities of marketable securities                    7,663,443     11,983,629     21,209,000
   Other                                                                   25,819         11,891        199,954
                                                                     -------------------------------------------
         Net cash provided by (used in) investing activities           (9,081,382)     3,184,546     (7,757,048)
                                                                     -------------------------------------------

Cash flows from financing activities:
   Principal payments on borrowings                                    (1,143,337)    (1,306,067)      (129,714)
   Proceeds from borrowings                                                     -      1,818,823      1,058,626
   Net proceeds from issuance of preferred stock                                -              -     11,865,299
   Net proceeds from issuance of common stock                          12,995,878     16,519,390     13,681,372
   Principal payments on capital lease obligations                       (101,995)      (611,809)    (1,165,522)
                                                                     -------------------------------------------
         Net cash provided by financing activities                     11,750,546     16,420,337     25,310,061
                                                                     -------------------------------------------

Effect of subsidiary's year-end change on cash and cash equivalents             -       (664,819)             -

Effect of exchange rate changes on cash and cash equivalents             (269,402)      (110,851)       (68,033)

         Net increase (decrease) in cash and cash equivalents            (646,452)        73,930        906,691

Cash and cash equivalents at beginning of year                          3,432,614      3,358,684      2,451,993
                                                                     -------------------------------------------
Cash and cash equivalents at end of year                              $ 2,786,162    $ 3,432,614    $ 3,358,684
                                                                     -------------------------------------------

Supplemental disclosures of cash flow information:
   Cash paid during the year for interest                               $ 630,459    $ 1,544,161      $ 377,849
                                                                     ===========================================
</TABLE>

Supplemental disclosure of noncash investing and financing activities:
On August 4, 1998, the Company entered into a convertible senior secured fixed
   rate note of $7,300,000 in connection with a private equity placement and
   used the proceeds to retire another note.

The accompanying notes are an integral part of these consolidated financial
statements.

                                      22
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     DESCRIPTION OF THE BUSINESS  Diametrics Medical, Inc. along with its
     subsidiary (the Company), is a medical device company engaged in the
     development, manufacture and commercialization of critical care blood and
     tissue analysis systems which provide immediate or continuous diagnostic
     results at the point-of-patient care.

     The Company markets its products to health care organizations primarily
     through distribution partners with exclusive global distribution rights,
     and on an interim basis, certain third-party distributors where pre-
     existing contracts with the Company apply until the distribution rights are
     transitioned to the Company's exclusive distributors.  The Company also
     continues to sell direct to end-users for a small volume of products and
     transactions that are not subject to the exclusive distribution agreements.

     PRINCIPLES OF CONSOLIDATION  The accompanying consolidated financial
     statements include the accounts of Diametrics Medical, Inc. and Diametrics
     Medical, Ltd., its wholly-owned subsidiary (the Company).  All material
     intercompany accounts and transactions have been eliminated.

     TRANSLATION OF FOREIGN CURRENCIES  The financial statements of the
     Company's foreign subsidiary are translated into U.S. dollars for
     consolidation.  All assets and liabilities are translated using period-end
     exchange rates and statements of operations items are translated using
     average exchange rates for the period.  The resulting translation
     adjustments are recorded as a separate component of shareholders' equity.
     Foreign currency transaction gains and losses are included in determining
     net income, but have not been material in any of the years presented.

     CASH AND CASH EQUIVALENTS  The Company considers highly liquid debt
     instruments purchased with an original maturity of three months or less to
     be cash equivalents.  At December 31, 1999, cash and cash equivalents
     consist mainly of U.S. government money market funds.

     MARKETABLE SECURITIES  Investments in marketable debt securities are
     classified as held to maturity and are stated at amortized cost, which
     approximates estimated fair value.  At December 31, 1999, marketable
     securities consist mainly of investment grade commercial paper, with
     original maturities ranging from five to nine months.  These securities are
     classified as held-to-maturity because of the Company's intent and ability
     to hold its investments to maturity.

     CONCENTRATION OF CREDIT RISK  Financial instruments that may subject the
     Company to significant concentrations of credit risk consist primarily of
     trade receivables. The Company has two major distribution partners in the
     medical diagnostic device industry who market and sell the Company's
     products globally under exclusive distribution agreements.  As of December
     31, 1999, outstanding accounts receivable for one of these distributors
     represented 80% of total outstanding accounts receivable, and sales to this
     distributor represented 62% of sales for the year ended December 31, 1999.
     Customer creditworthiness is routinely monitored and collateral is not
     required.

     INVENTORIES  Inventories are stated at the lower of cost or market using
     the first in, first out method.

     PROPERTY AND EQUIPMENT  Leasehold improvements are recorded at cost and
     amortized over the term of the underlying lease.  Furniture and equipment
     are recorded at cost and depreciated on a straight-line basis over their
     estimated useful lives of 2 to 7 years.  Maintenance and repairs are
     expensed as incurred.

     OTHER ASSETS  Other assets consist principally of intangible assets
     representing purchased completed technology and other intangible assets
     resulting from the excess of the cost of a purchased business over the fair
     value of the net assets acquired.  The intangible assets are amortized
     using the straight-line method over five years.  The recoverability of the
     purchased completed technology and other intangible assets is assessed
     quarterly based upon an analysis of undiscounted cash flows projected to be
     generated by the acquired business.

     REVENUE RECOGNITION  The Company recognizes revenue upon shipment of
     product to its distributors or customers or, in the case of trial
     instruments and monitors placed directly with end-user customers, upon the
     customer's acceptance of the product.

     NET LOSS PER COMMON SHARE  Basic earnings per share (EPS) is calculated by
     dividing net loss by the weighted average common shares outstanding during
     the period. Diluted EPS reflects the potential dilution to basic EPS that
     could occur upon conversion or exercise of securities, options, or other
     such items, to common shares using the treasury stock method based upon the
     weighted average fair value of the Company's common shares during the
     period. For each period presented, basic and diluted loss per share amounts
     are identical, as the effect of potential common shares is antidilutive.

     PRODUCT WARRANTY  The Company, in general, warrants its new hardware and
     operating system software products to be free from defects in material and
     workmanship under normal use and service for a period of eighteen months
     after date of shipment in the case of distributors, and one year after date
     of sale in the case of end-user customers.  The Company warrants its
     disposable products to be free from defects in material and workmanship
     under normal use until its stated expiration date.  Provisions are made for
     the estimated cost of maintaining product warranties for the hardware,
     software and disposable products at the time the products are sold.

                                      23
<PAGE>

     INCOME TAXES  Deferred tax assets and liabilities are recognized for the
     future tax consequences attributable to differences between the financial
     statement carrying amounts of existing assets and liabilities and their
     respective tax bases.  Deferred tax assets and liabilities are measured
     using enacted tax rates expected to apply to taxable income in the years in
     which those temporary differences are expected to be recovered or settled.
     The effect on deferred tax assets and liabilities of a change in tax rates
     is recognized in income in the period that includes the enactment date.
     Due to historical net losses of the Company, a valuation allowance is
     established to offset the net deferred tax asset.

     USE OF ESTIMATES  The preparation of financial statements in conformity
     with generally accepted accounting principles requires management to make
     estimates and assumptions that affect the reported amounts of assets and
     liabilities and disclosure of contingent assets and liabilities at the date
     of the financial statements and the reported amounts of revenues and
     expenses during the reporting period. Actual results could differ from
     those estimates.

     STOCK BASED COMPENSATION  The Company applies the intrinsic value method
     prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
     Stock Issued to Employees," to account for the issuance of stock
     incentives to employees and directors and, accordingly, no compensation
     expense related to employees' and directors' stock incentives has been
     recognized in the financial statements.

     IMPAIRMENT OF LONG-LIVED ASSETS  The Company utilizes the undiscounted cash
     flows alternative to detect impairment in long-lived assets.

     RECLASSIFICATIONS  Certain 1998 and 1997 amounts have been reclassified
     from prior reported balances to conform to the 1999 presentation.

(2)  LIQUIDITY

     The Company incurred a net loss of $10,243,547 for the year ended December
     31, 1999. In addition, the Company has incurred net losses and has had
     negative cash flows from operating activities since inception. During 1999,
     the Company received proceeds totaling approximately $13.5 million from
     equity investments made under Common Stock Purchase Agreements with the
     Company's exclusive global distributors, CODMAN and Agilent. Additionally,
     the Agilent distribution agreement provides for minimum purchase
     commitments, market development commitments, research and development
     funding and royalty payments over the initial term of the agreement. The
     Company believes proceeds from the funding agreements with Agilent,
     currently available funds and cash generated from projected revenues,
     supplemented by proceeds from employee stock plans, warrant exercises and
     asset based credit, will meet the Company's working capital needs.

(3)  INVENTORIES

                                              December 31,
                                          1999            1998
                                       ----------------------------

Raw materials                            $2,260,586      $1,989,953
Work-in-process                             658,983         741,719
Finished goods                            1,196,779       2,035,865
                                       ----------------------------
                                         $4,116,348      $4,767,537
                                       ----------------------------

(4)  PROPERTY AND EQUIPMENT

                                                December 31,
                                            1999            1998
                                       ----------------------------
Manufacturing equipment                $  6,412,203    $  5,653,623
Laboratory fixtures and equipment         1,874,789       1,970,294
Office furniture and equipment            3,494,892       3,421,541
Leasehold improvements                    3,338,370       3,388,445
Tooling                                   2,071,556       2,069,438
Demonstration instruments                 1,300,443       2,513,659
Equipment-in-progress                       963,045       1,060,383
                                       ----------------------------
                                         19,455,298      20,077,383
Less accumulated depreciation
  & amortization                        (13,680,801)    (13,154,590)
                                       ----------------------------

                                       $  5,774,497    $  6,922,793
                                       ----------------------------

(5)  OTHER ASSETS

                                                    December 31,
                                                1999            1998
                                           ------------------------------

Purchased completed technology, net              $722,442      $1,122,569
Acquired customer base and
 other intangible assets, net                     147,970         222,615
Other                                               9,759          27,360
                                           ------------------------------
                                                 $880,171      $1,372,544
                                           ------------------------------

Amortization charged to expense for intangible assets was $474,772, $474,772 and
$507,981 in 1999, 1998 and 1997, respectively.

(6)  ACCRUED EXPENSES

                                              December 31,
                                          1999            1998
                                   --------------------------------

Employee compensation                    $1,236,319      $1,015,850
Product upgrades                            292,746          73,629
Customer advance payments                   167,501         174,662
Distributor reserve                          93,091               -
Other                                       625,128         590,863
                                   --------------------------------
                                         $2,414,785      $1,855,004
                                   --------------------------------

                                      24
<PAGE>

(7)  DEFERRED CREDITS AND REVENUE

                                                   December 31,
                                             1999               1998
                                             ------------------------

Deferred research and development funding    $2,833,334         $   -
Deferred royalty payments                     2,271,880             -
                                             ------------------------
                                             $5,105,214         $   -
                                             ------------------------


   The Company's distribution agreement with Agilent provides for prepaid
   funding of research and development costs and royalty payments over the
   initial term of the agreement.  These prepayments will be recognized over
   the periods benefited.

(8)  BORROWINGS

                                                           December 31,
                                                        1999          1998
                                                      ------------------------
Long-term debt:

    Convertible senior secured fixed
      rate notes                                      $7,300,000    $7,300,000
    Notes payable                                        863,307     1,177,821
                                                      ------------------------
                                                       8,163,307     8,477,821
Less current portion of long-term debt                  (349,511)     (314,514)
                                                      ------------------------
                                                      $7,813,796    $8,163,307
                                                      ------------------------

Short-term borrowings:
    Credit line                                       $        -    $  828,823
                                                      ------------------------

The aggregate maturities of outstanding long-term debt are:

Year ending December 31:
2000                                                                $  349,511
2001                                                                   388,400
2002                                                                   125,396
2003                                                                 7,300,000
                                                                    ----------
                                                                    $8,163,307
                                                                    ==========

     On August 4, 1998, the Company issued Convertible Senior Secured Fixed Rate
     Notes with proceeds aggregating $7,300,000.  Interest on the Convertible
     Senior Secured Fixed Rate Notes is payable quarterly in arrears, at 7.00%
     per annum.  The full principal balance is due August 4, 2003.  The notes
     are secured by the issued and outstanding shares of DML, 100% of which are
     owned by the Company.

     The Convertible Senior Secured Fixed Rate Note agreements contain
     provisions, which in the event of a change in control of the Company,
     allow the note holders to require the Company to repurchase all or a
     portion of the holder's notes at a purchase price of 100% of the principal
     amount plus accrued and unpaid interest. In addition, the note agreements
     contain provisions under which the note holders may convert the notes into
     shares of Common Stock of the Company at a conversion price of $8.40 per
     share, subject to adjustment for the impact of certain transactions
     initiated by the Company that result in dilution of the note holders
     investment in the Company.

     The notes payable balance requires principal and interest payments in
     monthly installments at varying amounts through September 2002, at annual
     interest rates ranging from 10.1% to 10.95%.  Maturity dates of the notes
     range from December 1, 2001 to September 25, 2002, and all notes are
     secured by equipment.  See also note 15.

     The Company has a $1,000,000 receivable backed credit line.  The loan
     agreement requires the Company's accounts receivable collections be applied
     to reduce the loan balance, including advances, interest and fees.  All
     advances under the line of credit bear interest on the unpaid principal
     amount at a fluctuating rate equal to the Prime Rate plus three percent.
     Interest is payable monthly in arrears.  The loan agreement requires the
     monthly payment of an annualized unutilized loan fee equal to one half of
     one percent (.5%) of the difference between the committed available loan
     amount and the average outstanding loan balance.  The full $1,000,000
     available under the line of credit was unused at December 31, 1999.  See
     also note 15.

(9)  LEASES

     At December 31, 1999 the Company had no outstanding obligations under
     capital leases.  The gross amount included in property and equipment and
     related accumulated amortization relating to capital leases at December 31,
     1998 was as follows:

                                              1998
                                           ---------
Manufacturing equipment                    $ 144,370
Laboratory fixtures and equipment             40,202
Office furniture and equipment               345,090
                                           ---------
                                             529,662
Less accumulated amortization               (524,667)
                                           ---------
                                           $   4,995
                                           ---------

                                      25
<PAGE>

(10) STOCK OPTIONS AND WARRANTS

     Under the terms of the 1990 Stock Option Plan, incentive stock options and
     non-qualified stock options to purchase up to 3,750,000 shares of common
     stock may be granted to Company employees and consultants.

     Additionally, the 1993 Directors' Stock Option Plan provides grants to non-
     employee directors of the Company of non-qualified stock options to
     purchase up to an aggregate of 367,500 shares of common stock.

     Under the plans, the option price is equal to the fair value on the date of
     grant.  Under the 1990 Stock Option Plan, options become exercisable over
     varying periods and terminate up to ten years from the date of grant.
     Under the 1993 Directors' Stock Option Plan, initial grants of options to
     new directors become exercisable over a three-year period and terminate ten
     years from the date of grant.  Subsequent annual grants to directors vest
     six months after the date of grant.  At December 31, 1999, 529,818 and
     129,588 additional shares were available for grant under the 1990 Stock
     Option Plan and 1993 Directors' Stock Option Plan, respectively.

     The following tables reflect the per share weighted-average fair value of
     stock options granted during 1999, 1998 and 1997 under each of the plans on
     the date of grant using the Black Scholes option-pricing model with the
     following assumptions: annualized volatility of 76.93%, 84.42% and 74.15%
     for 1999, 1998 and 1997, respectively; risk-free interest rate of 5.6% in
     1999, 5.0% in 1998 and 5.7% in 1997; and for each year, an expected life of
     five and three years for the 1990 Stock Option Plan and 1993 Directors'
     Stock Option Plan, respectively.

     Summarized below is the status of the Company's stock option plans as of
     December 31, 1999, 1998 and 1997 and changes during those years:

<TABLE>
<CAPTION>

                                                  1999                                    1998
                                   ------------------------------------    ------------------------------------
                                                          Weighted                                Weighted
                                                           average                                 average
1990 Stock Option Plan                  Shares         exercise price           Shares         exercise price
                                   -------------    -------------------    -------------    -------------------
<S>                                <C>              <C>                    <C>              <C>
Outstanding at beginning of year       2,388,425                  $5.43        2,387,797                 $ 5.26
Granted                                  444,550                   6.03          317,265                   6.61
Exercised                               (223,723)                  4.38         (236,062)                  4.87
Expired                                 (324,580)                  6.46          (80,575)                  6.63
                                   -------------                           -------------
Outstanding at end of year             2,284,672                   5.50        2,388,425                   5.43
                                   -------------                           -------------

Options exercisable at year-end        1,421,954                   5.22        1,420,403                   5.05

Weighted-average fair value of
 options granted during the year      $     4.00                                   $4.59

1993 Directors' Stock Option Plan

Outstanding at beginning of year         160,131                  $6.12          114,375                 $ 5.89
Granted                                   44,031                   6.38           64,631                   7.32
Exercised                                      -                      -           (8,000)                  4.63
Expired                                        -                      -          (10,875)                 12.00
                                   -------------                           -------------
Outstanding at end of year               204,162                   6.17          160,131                   6.12
                                   -------------                           -------------

Options exercisable at year-end          195,162                   6.13          131,256                   6.08

Weighted-average fair value of
 options granted during the year      $     3.42                                   $4.45

<CAPTION>
                                                     1997
                                    ------------------------------------
                                                           Weighted
                                                            average
1990 Stock Option Plan                   Shares         exercise price
                                    -------------    -------------------
<S>                                 <C>              <C>
Outstanding at beginning of year        2,290,395                  $5.15
Granted                                   452,415                   5.94
Exercised                                (210,621)                  4.63
Expired                                  (144,392)                  6.57
                                    -------------
Outstanding at end of year              2,387,797                   5.26
                                    -------------

Options exercisable at year-end         1,258,262                   4.85

Weighted-average fair value of
 options granted during the year            $3.84

1993 Directors' Stock Option Plan

Outstanding at beginning of year          170,000                  $6.16
Granted                                    40,000                   6.00
Exercised                                 (18,500)                  4.63
Expired                                   (77,125)                  6.84
                                    -------------
Outstanding at end of year                114,375                   5.89
                                    -------------

Options exercisable at year-end            76,625                   5.81

Weighted-average fair value of
 options granted during the year            $3.13
</TABLE>

                                      26
<PAGE>

The following table summarizes information concerning stock options outstanding
and exercisable options at December 31, 1999 for the above plans:


<TABLE>
<CAPTION>
      OPTIONS OUTSTANDING                                                                        OPTIONS EXERCISABLE
 ------------------------------------------------------------------------------       -----------------------------------
                                                    Weighted          Weighted                               Weighted
                                                     average           average                               average
    Range of                     Number             remaining         exercise             Number            exercise
    exercise                   outstanding            life              price            exercisable          price
     prices
 ------------------------------------------------------------------------------       --------------------------------
<S>                         <C>                   <C>               <C>               <C>                   <C>
 $   1.72   -    1.72               130,910               1.0             $1.72               130,910          $1.72
     3.25   -    3.88                89,175               3.9              3.57                86,175           3.57
     4.13   -    4.94               588,193               6.3              4.64               428,943           4.66
     5.00   -    5.94               644,966               7.2              5.55               269,399           5.27
     6.00   -    6.88               695,858               5.9              6.14               507,733           6.14
     7.00   -    7.95               128,960               7.3              7.36                70,360           7.30
     8.00   -   12.00               210,772               6.9              8.31               123,596           8.44
                            ---------------       -----------       -----------       ---------------       ----------
                                  2,488,834               6.2              5.56             1,617,116           5.33
                            ---------------                                           ---------------
</TABLE>

     The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
     Employees," and related interpretations in accounting for its plans.
     Accordingly, no compensation expense has been recognized for its stock-
     based compensation plans as they relate to employees and directors.  Had
     the Company determined compensation cost based upon the fair value at the
     grant date for its stock options under SFAS No. 123, the Company's net loss
     and net loss per share would have increased to the pro forma amounts
     indicated below:

<TABLE>
<CAPTION>
                                       1999                1998                1997
                                 --------------------------------------------------------
<S>                             <C>                 <C>                 <C>
Net loss as reported                 $(10,243,547)       $(17,387,662)       $(21,036,543)
Net loss pro forma                   $(12,045,839)       $(19,284,933)       $(23,331,303)

Net loss per share as reported       $      (0.41)       $      (0.79)       $      (1.13)
Net loss per share pro forma         $      (0.49)       $      (0.88)       $      (1.25)
</TABLE>

                                      27
<PAGE>

     In connection with certain financing and marketing arrangements entered
     into since the Company's inception, the Company has granted stock purchase
     warrants for the purchase of common stock.  The stock purchase warrants
     become exercisable over varying periods and expire up to ten years from
     the date of grant.  At December 31, 1999, stock purchase warrants
     representing 2,112,880 shares were exercisable with an additional
     8,337 shares becoming exercisable over the first four months of 2000.
     Stock warrants outstanding under these arrangements are summarized as
     follows:

<TABLE>
<CAPTION>
                                               1999                                 1998
                                  ----------------------------------   ----------------------------------
                                                         Exercise                             Exercise
                                                           price                                price
                                       Shares            per share          Shares            per share
                                  --------------     ---------------   --------------     ---------------

<S>                                 <C>            <C>                <C>               <C>
Outstanding at beginning of year       1,713,086   $   1.72  -  8.40        1,028,160   $   1.72  -  6.75

Granted                                  452,381                8.40          739,286       5.19  -  8.40

Exercised                                      -                   -          (54,360)      5.19  -  6.13
Expired                                  (44,250)               6.00                -                   -
                                  --------------                       --------------
Outstanding at end of year             2,121,217       1.72  -  8.40        1,713,086       1.72  -  8.40

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

Warrants exercisable at year-end       2,112,880       1.72  -  8.40        1,671,753       1.72  -  8.40

<CAPTION>

                                                  1997
                                    ----------------------------------
                                                            Exercise
                                                             price
                                          Shares           per share
                                    ---------------     --------------

<S>                                <C>                 <C>
Outstanding at beginning of year            786,814   $  1.72  - 6.13
Granted                                   1,328,334      4.53  - 6.75
Exercised                                  (902,617)     4.77  - 6.75
Expired                                    (184,371)     4.77  - 5.06
                                    ---------------
Outstanding at end of year                1,028,160      1.72  - 6.75
                                    ---------------

Warrants exercisable at year-end            961,827      1.72  - 6.75
</TABLE>


(11) EMPLOYEE STOCK PURCHASE PLAN

     The Company adopted an employee stock purchase plan (the "Plan")
     effective July 3, 1995, under which 300,000 shares of common stock are
     available for sale to employees.  The Plan enables all employees, after a
     90-day waiting period, to contribute up to 10 percent of their wages toward
     the purchase of the Company's common stock at 85 percent of the lower of
     fair market value for such shares on the first business day of each quarter
     or the last business day of each quarter.

     Participant elections resulted in the issuance of 32,852 shares at an
     average price per share of $4.46 in 1999, 45,012 shares at an average price
     per share of $4.67 in 1998 and 55,394 shares at an average price per share
     of $3.72 in 1997.

(12) EMPLOYEE BENEFIT PLANS

     The Company has a 401(k) savings plan for its U.S. employees.  U.S.
     employees of the Company who meet certain age and service requirements may
     contribute up to 20 percent of their salaries to the plan on a pre-tax
     basis.  The Company has the discretion to match employee contributions up
     to 6 percent of compensation.  As of December 31, 1999, the Company has not
     made any contributions to the plan.

     As part of its acquisition of DML in November 1996, the Company assumed
     sponsorship of the subsidiary's contributory  defined benefit retirement
     plan (the "Retirement Plan"), covering the majority of the subsidiary's
     employees.  The Retirement Plan provides benefits based upon final
     pensionable salary and years of credited service.  The Company's funding
     policy for the Retirement Plan is to contribute into a trust fund at a rate
     that is intended to remain at a level percentage of total pensionable
     payroll.  The assets of the Retirement Plan are held separately from those
     of the Company and invested in the London and Manchester Secure Growth
     Fund, Balanced Fund and a small holding in the Performance Fund.  A portion
     of the Retirement Plan assets are also invested in the Scottish Equitable
     Funds.

                                      28
<PAGE>

     Contributions to the Retirement Plan are charged to expense so as to spread
     the cost of the pensions over the employees' working lives with the
     Company.  The contributions are determined by a qualified actuary on the
     basis of a valuation using the "attained age" valuation method.

     The following provides a reconciliation of the projected benefit
     obligation, plan assets and funded status of the Retirement Plan at
     December 31, along with the components of net periodic pension cost for
     each year presented:

<TABLE>
<CAPTION>
                                                                                          1999                1998
                                                                                --------------------------------------
<S>                                                                                <C>                    <C>
Change in Projected Benefit Obligation
    Projected benefit obligation at beginning of year                                    $4,924,458         $3,954,675
    Service cost                                                                            373,689            344,864
    Interest cost                                                                           279,862            268,596
    Plan participants' contributions                                                         94,316             95,537
    Actuarial (gain) loss                                                                   (16,021)           265,965
    Benefits paid                                                                           (10,352)           (38,192)
    Foreign currency exchange rate changes                                                 (203,544)            33,013
                                                                                   -----------------------------------
    Projected benefit obligation at end of year                                          $5,442,408         $4,924,458
                                                                                   ===================================

Change in Plan Assets
    Fair value of plan assets at beginning of year                                       $3,970,197         $3,234,425
    Actual return on plan assets                                                            830,259            368,134
    Employer contribution                                                                   292,580            284,145
    Plan participants' contributions                                                         94,316             95,537
    Benefits paid                                                                           (10,352)           (38,192)
    Foreign currency exchange rate changes                                                 (165,530)            26,148
                                                                                --------------------------------------
    Fair value of plan assets at end of year                                             $5,011,470         $3,970,197
                                                                                ======================================

    Funded status                                                                        $ (430,938)        $ (954,261)
    Unrecognized actuarial loss                                                             453,534            918,918
                                                                                --------------------------------------
    Net amount recognized                                                                $   22,596         $  (35,343)
                                                                                ======================================

    Amounts recognized in the balance sheet consist of:
           Accrued benefit liability                                                     $   (9,684)        $ (181,764)
           Minimum pension liability                                                         32,280            146,421
                                                                                --------=-----------------------------
           Net amount recognized                                                         $   22,596         $  (35,343)
                                                                                ======================================



    Rate assumptions:
    Discount rate                                                                              5.75%              6.00%
    Rate of salary progression                                                                 3.50%              3.75%
    Long-term rate of return on assets                                                         9.50%              7.75%

<CAPTION>
                                                                                          Years ended December 31,
Components of Net Periodic Benefit Cost                                                   1999                1998
                                                                                --------------------------------------
    Service cost                                                                         $  373,689         $  344,864
    Interest cost                                                                           279,862            268,596
    Expected return on plan assets                                                         (310,598)          (271,912)
    Recognized net actuarial loss                                                            21,030             13,264
                                                                                --------------------------------------
                                                                                         $  363,983         $  354,812
                                                                                ======================================

  </TABLE>

                                      29
<PAGE>

(13) INCOME TAXES

     The Company has incurred net operating losses since inception. The Company
     has not reflected any benefit of such net operating loss carryforwards in
     the accompanying financial statements.

     As of December 31, 1999 the Company had U.S. tax net operating loss and
     research and development tax credit carryforwards of approximately
     $112,842,000 and $1,181,000, respectively. 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 a three-year period. In
     connection with prior sales by the Company of its securities in private and
     public 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 estimates that as of December 31, 1999, U.S. net
     operating loss carryforwards of $2,900,000 are not available due to these
     annual limitations. Net operating losses incurred since August 4, 1995 are
     not currently subject to the "change in ownership" limitations. If not
     used, these net operating loss carryforwards begin to expire in 2005.

     The Company's foreign subsidiary also has a net operating loss carryforward
     of approximately $46,693,000 which can be carried forward indefinitely.

     The tax effects of temporary differences that give rise to significant
     portions of the deferred tax assets and deferred tax liabilities are as
     follows at December 31:

<TABLE>
<CAPTION>
                                                 1999              1998
                                             -----------------------------------
<S>                                          <C>                 <C>
Tax credits                                  $  1,181,000          $    939,000
Federal net operating loss carryforward        41,752,000            38,424,000
Foreign net operating loss carryforward        15,409,000            15,089,000
Fixed asset depreciation                          705,000               895,000
Amortization of goodwill                          371,000               254,000
Accrued expenses                                  163,000               195,000
Other differences                                 100,000               141,000
Valuation allowance                           (59,681,000)          (55,937,000)
                                             ----------------------------------

Net deferred tax asset                       $          -          $          -
                                             ----------------------------------
</TABLE>

     The provision for income taxes differs from the expected tax expense,
     computed by applying the federal corporate rate of 34% to earnings before
     income taxes as follows:

<TABLE>
<S>                                          <C>                   <C>                  <C>
Expected federal benefit                     $ (3,483,000)         $ (5,912,000)        $ (7,152,000)
State tax, net of federal benefit                (293,000)             (522,000)            (493,000)
Other                                              32,000               (70,000)             (88,000)
Increase in valuation allowance                 3,744,000             6,504,000            7,733,000
                                             -------------------------------------------------------

                                             $          -          $          -           $        -
                                             -------------------------------------------------------
</TABLE>

(14) RESTRUCTURING AND OTHER CHARGES

     During 1997, the Company continued to make operational changes initiated
     in 1996 which were intended to better align its resources with its evolving
     strategy, improve its efficiency, and achieve a more competitive cost
     structure.  Restructuring and other charges totaled $463,816 in 1997.
     Charges consisted of severance costs of approximately $319,000 associated
     with work force reductions, primarily in the Company's U.S. manufacturing,
     research and development and general and administrative areas, and $145,000
     for the write-down of excess and obsolete equipment resulting from the work
     force reductions and process changes. These restructuring activities were
     completed before or shortly after the end of the quarter in which charges
     were incurred, and the Company does not have any material future cash
     obligations relative to the described restructuring activities. The impact
     of work force reductions on future operating results and cash flows is not
     expected to be material in future periods, 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.

                                      30
<PAGE>

(15) RELATED PARTY TRANSACTIONS

     In August 1998, the Company completed the sale in a private placement of
     2,142,858 shares of Common Stock at a price of $7.00 per share as part of a
     Common Stock Purchase Agreement, resulting in aggregate proceeds to the
     Company of $15,000,006. The purchasers also received five-year warrants to
     purchase 714,286 shares of Common Stock at $8.40 per share. In addition,
     the Company issued Convertible Senior Secured Fixed Rate Notes, with
     proceeds aggregating $7,300,000, which were used to retire other debt of
     the Company. The investor group in both transactions was lead by BCC
     Acquisition II LLC.

     Two of the directors of the Company are affiliated with BCC Acquisition II
     LLC, and one of these directors participated in the Common Stock Purchase
     Agreement and the related sale of Convertible Senior Secured Fixed Rate
     Notes. This director is also a director of DVI, Inc., a health care finance
     company with which the Company has outstanding notes payable as of December
     31, 1999 and an available receivable backed credit line. See note 8 for
     further detail on the credit line, notes payable and Convertible Senior
     Secured Fixed Rate Notes.

     The Company's exclusive distributors, CODMAN and Agilent, are shareholders
     of the Company. Sales to these parties were approximately $12.8 million
     for the year ended December 31, 1999.

(16) BUSINESS SEGMENT INFORMATION

     The Company develops, manufactures and markets blood and tissue analysis
     systems that provide immediate or continuous diagnostic results at the
     point-of-patient care. The Company's blood and tissue analysis systems
     consist of two technology platforms. The first platform includes
     intermittent blood testing products based on electrochemical and optical
     technology, and the second platform includes continuous monitoring products
     based on fiberoptic technology. Effective November 1, 1999, the Company's
     products are sold primarily to acute care hospitals via third party
     distribution channels including corporate partners strategically positioned
     to access foreign markets. Prior to this, sales in the U.S., United Kingdom
     and Germany were made through the Company's direct sales force. The
     Company's disposable cartridges and sensors for the intermittent and
     continuous monitoring technology platforms, respectively, are manufactured
     at the Company's facilities. Hardware components of both technology
     platforms are sub-contracted to outside vendors with portions of the
     hardware assembly performed internally at the Company's facilities. Both
     technology platforms are subject to similar regulatory monitoring by the
     United States Food and Drug Administration and comparable agencies in other
     countries. The Company's long term outlook for the two technology platforms
     is that with increased sales volumes, they will exhibit similar financial
     performance in terms of sales trends and gross margins. Based upon the
     above, the Company has identified one reportable operating segment
     consisting of medical diagnostic products which provide blood and tissue
     analysis at the point-of-patient care.

     Information regarding the Company's operations in different geographies for
     the years ended December 31 is as follows:

<TABLE>
<CAPTION>
                                              1999                   1998              1997
                                   ------------------------------------------------------------
<S>                                <C>                   <C>                   <C>
Sales to unaffiliated customers
    United States                          $10,281,646           $ 4,879,367        $ 3,947,287
    Germany                                  6,250,366               150,101            596,000
    Japan                                      968,118             1,215,037          2,222,610
    All other foreign countries              1,187,054             5,911,021          3,668,469
                                   ------------------------------------------------------------
                                           $18,687,184           $12,155,526        $10,434,366
                                   ------------------------------------------------------------

Long-lived assets
    United States                          $ 3,301,162           $ 3,682,879        $ 4,053,383
    United Kingdom                           2,473,335             3,239,914          3,332,589
                                   ------------------------------------------------------------
                                           $ 5,774,497           $ 6,922,793        $ 7,385,972
                                   ------------------------------------------------------------
</TABLE>

     Sales attributed to geographic areas are based upon customer location.
     Long-lived assets consist of property and equipment located at the
     Company's facilities in the United States and the United Kingdom.

     Sales to major customers that exceeded 10% of total net sales for the years
     ended December 31 were as follows:

              1999     1998     1997
           -----------------------------
Customer A     62%        -        -
Customer B      -        14%      22%


     The customers for which the above sales were generated are distributors of
     the Company operating in the medical diagnostic device industry.

                                      31
<PAGE>

(17) COMMITMENTS

     The Company leases its facilities and some of its equipment under non-
     cancelable operating lease arrangements.  The rental payments under these
     leases are charged to expense as incurred.  Rent expense included in the
     accompanying consolidated statements of operations was $873,687, $940,027
     and $829,106 for the years ended December 31, 1999, 1998 and 1997,
     respectively.

     The following is a schedule of future minimum rental payments, excluding
     property taxes and other operating expenses, required under all non-
     cancelable operating leases:

Year ending December 31:
 2000                                       $   847,639
 2001                                           757,519
 2002                                           618,918
 2003                                           548,558
 2004                                           231,444
 Thereafter                                     127,103
                                            -----------

     Total minimum lease payments           $ 3,131,181
                                            -----------

(18) LEGAL PROCEEDINGS

     There are no legal proceedings pending, threatened against or involving the
     Company, which, in the opinion of management, will have a material adverse
     effect upon consolidated results of operations or financial condition.

(19) CHANGE IN YEAR-END OF SUBSIDIARY

     Effective January 1, 1998, the Company changed the year-end of its wholly-
     owned subsidiary, DML, to December 31 from November 30 to produce a
     consistent reporting period for the consolidated entity.  As a result of
     this change in year-end, DML's net results of operations for the month of
     December 1997 were closed to beginning accumulated deficit on the balance
     sheet as of January 1, 1998.  The impact of this change was an increase in
     the beginning accumulated deficit of approximately $677,000.

(20) QUARTERLY RESULTS OF OPERATIONS (unaudited)

<TABLE>
<CAPTION>
                                  First           Second          Third           Fourth
                                 Quarter         Quarter         Quarter         Quarter
                            ---------------------------------------------------------------
<S>                       <C>                 <C>             <C>             <C>
1999
   Net sales                  $ 4,243,187     $ 4,639,746     $ 4,694,294     $ 5,109,957
   Gross profit                   726,281         723,373         603,890         853,946
   Operating loss              (3,736,242)     (2,718,719)     (1,983,824)     (1,605,014)
   Net loss                    (3,907,742)     (2,782,173)     (1,981,187)     (1,572,445)
   Net loss per common share        (0.17)          (0.11)          (0.08)          (0.06)

1998
   Net sales                  $ 2,416,703     $ 3,052,048     $ 3,102,430     $ 3,584,345
   Gross profit                    14,013         241,980         155,952         408,860
   Operating loss              (4,240,007)     (4,094,835)     (4,710,851)     (4,129,578)
   Net loss                    (4,303,193)     (4,326,440)     (4,792,354)     (3,965,675)
   Net loss per common  share       (0.21)          (0.20)          (0.21)          (0.17)
</TABLE>

                                      32
<PAGE>

REPORT  OF INDEPENDENT AUDITORS



The Board of Directors and Shareholders
Diametrics Medical, Inc.:


We have audited the accompanying consolidated balance sheets of Diametrics
Medical, Inc. and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Diametrics Medical,
Inc. and subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.



                                    /s/ KPMG LLP

Minneapolis, Minnesota
January 27, 2000

                                      33
<PAGE>

CORPORATE AND SHAREHOLDER INFORMATION


     EXECUTIVE OFFICERS

     David T. Giddings
     President, Chief Executive Officer and Chairman of the Board

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

     Laurence L. Betterley
     Senior Vice President and Chief Financial Officer

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



     DIRECTORS

     Andre de Bruin (2)
     President and Chief Executive Officer
     QUIDEL Corporation


     Gerald L. Cohn (1) (2)
     Consultant and Private Investor

     David T. Giddings

     Hans-Guenter Hohmann (1)
     Managing Director,
     Agilent Technologies, GmbH and
     General Manager, Point-of-Care Diagnostics Division, Agilent Technologies

     Roy S. Johnson

     Mark B. Knudson, Ph.D. (1)
     Chairman and CEO
     Venturi Group, LLC and
     Chairman and Founder
     HeartStent

     David V. Milligan, Ph.D. (2)
     Vice President
     Bay City Capital



     (1) Member of the Compensation Committee of the Board of Directors

     (2) Member of the Audit Committee of the Board of Directors

                                      34
<PAGE>

SHAREHOLDER INFORMATION

     STOCK LISTING

     The Company's common stock is traded on The Nasdaq National Market under
     the symbol DMED.

     STOCK TRANSFER AGENT

     American Stock Transfer & Trust Company
     40 Wall Street
     New York, NY  10005
     Phone: (800) 937-5449

     FORM 10-K

     A copy of the Company's annual report on Form 10-K as filed with the
     Securities and Exchange Commission is available to stockholders free of
     charge by writing to Diametrics Medical, Inc.

     ANNUAL MEETING

     The annual meeting of Diametrics Medical, Inc. shareholders will be held
     May 17, 2000, at 3:30 p.m. at the Minneapolis Marriott City Center, 30
     South Seventh Street, Minneapolis, Minnesota.  All shareholders and other
     interested parties are invited to attend.

     INVESTOR INQUIRIES

     Please direct all inquiries to Laurence L. Betterley, Senior Vice President
     and Chief Financial Officer, at the Company's corporate offices.

     STOCK INFORMATION

     High and low quarterly closing prices for Diametrics Medical, Inc., common
     stock as quoted on The Nasdaq National Market were:

<TABLE>
<CAPTION>
                                                                 1999
                                                       High                Low
     ---------------------------------------------------------------------------------------
     <S>                                       <C>                         <C>
     First Quarter                                    $  8 9/16               $  4 1/32
     Second Quarter                                      6 3/4                   4 13/16
     Third Quarter                                       7 1/2                   5 5/16
     Fourth Quarter                                      6 13/16                 3 3/4

                                                                 1998
                                                       High                Low
     ---------------------------------------------------------------------------------------
     First Quarter                                    $  8 1/4                $  5 1/4
     Second Quarter                                      8 7/8                   6 5/8
     Third Quarter                                       7 15/16                 3 5/8
     Fourth Quarter                                      5 1/2                   2 3/4
</TABLE>

     There were 463 common shareholders of record and the Company estimates
     approximately 7,100 shareholders holding stock in "street name" accounts as
     of December 31, 1999.  The Company has not paid any stock dividends on its
     common stock since its inception, and management does not anticipate paying
     cash dividends in the foreseeable future.

     CORPORATE ADDRESS                  INTERNATIONAL SUBSIDIARY

     Diametrics Medical, Inc.           Diametrics Medical, Ltd.
     2658 Patton Road                   5 Manor Court Yard, Hughenden Ave.
     St. Paul, Minnesota 55113          High Wycombe, Bucks. HP13 5RE
     Phone: (651) 639-8035              England
     Website:  www.diametrics.com       Phone: +44(0)1494 446651

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