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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

or

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-21982

DIAMETRICS MEDICAL, INC.

(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act:         None

Securities registered pursuant to Section 12(g) of the Act:         Common Stock, $.01 par value

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Act).

Yes  x    No  ¨

The aggregate market value of voting stock held by non-affiliates of the Registrant as of June 28, 2002 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $97,100,000 (based upon the last sale price of such stock as quoted on The Nasdaq National Market ($3.68) on such date).

As of February 28, 2003, 27,165,336 shares of Common Stock were outstanding.

Documents Incorporated by Reference

Parts of the Registrant’s definitive Proxy Statement for the 2003 Annual Meeting of Shareholders to be held on May 22, 2003 are incorporated by reference in Part III hereof.

PART I

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

The following federally registered trademarks of the Company are used in this Annual Report on Form 10-K: Diametrics Medical, Inc.^®, IRMA^®SL, Paratrend^® 7+, Neotrend^® L, Neurotrend^® and TrendCare^®. SureStep^®Pro is a registered trademark of LifeScan, a Johnson & Johnson company. Argyle^® is a registered trademark of Tyco Ludlow.

Item 1. Business

Overview

The Company develops, manufactures and commercializes blood and tissue analysis systems that provide immediate or continuous diagnostic results at the point-of-patient care. Since its commencement of operations in 1990, the Company has transitioned from a development stage company to a full-scale development, manufacturing, sales and marketing organization. The Company’s mission is to be a leading provider of innovative sensors to guide therapy of critically ill patients. The Company markets and distributes its products through its direct sales force in the United States, the United Kingdom and Germany, and through nonexclusive third-party distributors outside of these countries. Additionally, with the termination effective November 1, 2002 of the Company’s exclusive worldwide distribution agreement with Philips Medical Systems (“Philips”), a division of Royal Philips Electronics, Philips has the nonexclusive right to distribute the Company’s disposable intermittent testing cartridges, TrendCare sensors and related accessories to Philips’ existing customer base through October 31, 2004. The Company distributes its Neurotrend cerebral tissue monitoring system through Codman & Shurtleff, Inc., a Johnson & Johnson company (“Codman”), under an exclusive worldwide distribution agreement.

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

The Company has two primary product platforms. The first platform includes intermittent blood testing products based primarily on electrochemical sensor technology (the IRMA SL blood analysis system and the Blood Analysis Portal measurement module). The second platform includes continuous monitoring products based upon fiberoptic sensor technology (the TrendCare continuous blood gas monitoring systems and the Neurotrend cerebral tissue monitoring system).

Since its inception in 1990, the Company has developed, manufactured and marketed the IRMA (“Immediate Response Mobile Analysis”) System, an electrochemical-based blood analysis system that provides rapid and accurate diagnostic results at the point-of-patient care. The IRMA SL System consists of a portable, microprocessor-based analyzer that employs single-use, disposable cartridges to perform simultaneously several of the most frequently ordered blood tests in a simple 90-second procedure. The Company’s first disposable electrochemical cartridge, introduced in May 1994, performs three of the most frequently ordered blood tests for critical care patients—the measurement of oxygen, carbon dioxide and acidity (the “blood gases”). In June 1995, the Company expanded the IRMA System test menu with the introduction of its electrolyte cartridge which measures inorganic compounds including sodium, potassium and ionized calcium. The Company further

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expanded its critical or “stat” test menu during the third quarter of 1996 with the release of the second-generation system, IRMA SL, and the addition of the measurement of hematocrit (i.e., the concentration of red blood cells in whole blood) to its electrolyte cartridge. With these measurements and associated calculated values, the IRMA SL System is able to perform the majority of the critical or stat tests performed annually in the United States, comprising an estimated market in excess of $1 billion annually.

In 1997, the Company introduced its third-generation IRMA SL System, and a new combination cartridge. The combination cartridge is based upon the Company’s “snapfit” cartridge design and gives clinicians the ability to perform all critical blood gas, electrolyte and hematocrit tests using one small blood sample and one single-use cartridge. During 1998, the Company expanded the test menu of the IRMA SL System by integrating the LifeScan (a Johnson & Johnson company) SureStepPro glucose strip testing module into the analyzer. In 2000, the Company introduced its H4 single-use cartridge, which adds both chloride and blood urea nitrogen (“BUN”) to a test panel of sodium, potassium and hematocrit. In 2002, the Company introduced the new “GL” single use cartridge, which panels glucose with sodium, potassium and chloride electrolytes.

During the first quarter of 2002, the Company released its Blood Analysis Portal measurement module, which was co-developed with Philips and provides the analyte measurement capability of Philips’ Blood Analysis Portal System. The Blood Analysis Portal System incorporates the technology of the IRMA SL System and plugs directly into Philips’ monitoring systems to allow for an integration of blood test and physiological measurements at the patient’s bedside. Under development are additional blood tests for lactate and creatinine, which the Company expects will be commercially released in early 2004, and a reusable version of the single-use disposable cartridge which the Company plans to integrate into its next generation analyzer. The Company is also performing feasibility studies for development of blood coagulation and immunoassay tests for use with its next generation analyzer.

In the fourth quarter of 1996, the Company established its second product platform with the introduction of a number of new products through the acquisition of Biomedical Sensors, Ltd. (“BSL”), a Pfizer company. With the acquisition of BSL (now known as Diametrics Medical, Ltd.), the Company acquired a world-class continuous monitoring fiberoptic sensor technology platform, which complements the Company’s existing intermittent testing electrochemical sensor platform. This product line includes continuous monitoring systems, consisting of a monitor, calibrator and intravascular disposable sensors. Primary products include the TrendCare continuous blood gas monitoring systems, consisting of Paratrend 7+, which provides direct continuous monitoring of blood gases and temperature in critically ill adult and pediatric patients; Neotrend L, which provides direct continuous monitoring of blood gases and temperature in critically ill newborn babies; and the Neurotrend cerebral tissue monitoring system, which measures oxygen, carbon dioxide, acidity and temperature in brain tissue and fluids as an indication of cerebral ischemia (i.e., deficient blood supply to the brain) and hypoxia (i.e., inadequate oxygenation of the blood) in patients with severe head injury and in patients undergoing surgical intervention in the brain.

The Company has obtained clearances under Section 510(k) of the Food Drug and Cosmetic Act (the “FDC Act”) to market in hospital laboratories and at the point-of-patient care the IRMA SL System to test blood gases, electrolytes, glucose, lactate, BUN and hematocrit in whole blood, the Paratrend 7+ and Neotrend L to monitor blood gases and temperature, and the Neurotrend system to monitor oxygen, carbon dioxide, acidity and temperature in the brain. Additionally, in the first quarter of 1998, the Company received clearance from the United States Food and Drug Administration (the “FDA”) to market the multi-use cartridge for its IRMA SL System. The multi-use cartridge is planned to be available on the Company’s next generation analyzer. The Company has also gained CE Mark under the applicable directives, allowing the IRMA SL System and the Paratrend 7+, Neotrend L and Neurotrend continuous monitoring products to be marketed in the countries of the European Union.

In October 1998, the Company entered into an exclusive distribution agreement with Codman for worldwide market development and distribution of the Company’s Neurotrend monitoring system. The term of the agreement is for six years and is renewable for two years. If minimum sales levels are not achieved by Codman,

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certain payments may 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 June 1999, the Company and Hewlett Packard Company (“HP”) entered into an exclusive worldwide distribution agreement to market, sell and distribute the Company’s TrendCare continuous blood gas monitoring systems and the IRMA SL point-of-care blood analysis system. Under the terms of the distribution agreement, the Company transferred full responsibility for marketing, sales and distribution of these products to HP. The initial term of the distribution agreement was three and a half years, with the option for extensions. The distribution agreement also provided for minimum purchase commitments of the Company’s products, market development commitments, research and development funding and royalty payments. In November 1999, HP assigned the distribution agreement, with all its related rights and obligations, to Agilent Technologies, Inc. (“Agilent”), a subsidiary of HP and a leading provider of test and measurement solutions and communications components. In August 2001, Agilent completed the sale of its healthcare business to Royal Philips Electronics, including its equity investment in the Company. Also as part of this transaction, the exclusive distribution agreement between the Company and Agilent was assigned to Philips Medical Systems, a division of Royal Philips Electronics.

The exclusive distribution agreement between the Company and Philips ended on October 31, 2002. As provided for under the terms of that agreement, Philips maintains a nonexclusive right to sell the Company’s disposable cartridges, sensors and related accessories to its existing customer base through October 31, 2004. Additionally, Philips has a nonexclusive right through October 31, 2004 to distribute the Company’s Blood Analysis Portal measurement module as a component of Philips’ Blood Analysis Portal System. As a result of the change in its distribution relationship with Philips, the Company has reestablished a direct sales force in the United States, the United Kingdom and Germany, as well as nonexclusive third-party distributors outside of these countries for the distribution of its TrendCare continuous blood gas monitoring systems and IRMA intermittent testing point-of-care blood analysis system.

The Company’s principal executive office is located at 2658 Patton Road, Roseville, Minnesota 55113, and its telephone number is (651) 639-8035. The Company’s website is located at www.diametrics.com. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any other amendments to those reports are made available to the public free of charge through the Company’s website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

Principal Products

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

IRMA SL Blood Analysis System.    The third generation IRMA SL System was released in the third quarter 1997. The IRMA SL System is comprised of the IRMA SL analyzer and a variety of electrochemical-based disposable cartridges which perform select combinations of the most frequently ordered critical care diagnostic tests of blood gases, electrolytes, hematocrit, glucose and BUN in a simple 90-second procedure. Additionally, the IRMA SL System provides for the use of LifeScan’s blood glucose test strips as a result of the Company’s integration in 1998 of LifeScan’s SureStepPro Glucose Module into the IRMA SL System. The IRMA SL System also features electronic quality control as an alternative to aqueous quality control measures, eliminating the need for this costly and time-consuming process for many customers.

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

Blood Analysis Portal Measurement Module.    The Blood Analysis Portal measurement module (“Portal measurement module”), released in the first quarter 2002, was co-developed with Philips and provides the analyte measurement capability of Philips’ Blood Analysis Portal System (“Portal System”). The Portal System incorporates the technology of the IRMA SL System and is designed for use with Philips’ monitoring systems, enabling similar benefits available with the IRMA SL System, and additionally providing for an integration of blood test and physiological measurements at the patient’s bedside. The Portal System utilizes the same

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electrochemical-based disposable cartridges available with the IRMA SL System and delivers results in approximately 90 seconds for blood gases, electrolytes, hematocrit, BUN and other calculated values. The Portal System also features electronic quality control, and requires aqueous quality control only before a new cartridge lot is put into use. The Portal System is designed for use with Philips’ monitors in adult, pediatric, and neonatal intensive care, as well as operating room, post-anesthesia and emergency care settings.

The Integrated Data Management System—(“idms”).    Initially released in 1996, the Integrated Data Management System (formerly referred to as “IDMS”) is an advanced software application specially designed to receive, manage and transmit data captured from point-of-care diagnostics instruments. The Integrated Data Management System integrates point-of-care test results and information from multiple devices, and provides convenient sorting, viewing and analysis capabilities for trending, reporting and archiving data. An enhanced version, released in the second quarter of 2001, provides point-of-care program management tools to track operators and devices for quality control and regulatory purposes, and is language-enabled. The Integrated Data Management System was further enhanced with a new release in the first quarter 2002 that accommodates the device settings and information management needs of Philips’ Blood Analysis Portal System, in addition to the IRMA SL System and other point-of-care diagnostic instruments. The Integrated Data Management System also seamlessly transfers point-of-care results to other laboratory, hospital, or clinical information systems.

Capillary Collection Device.    The Capillary Collection Device was initially introduced in 1996 and was enhanced in the third quarter 2000 with a new design. The Capillary Collection Device is a disposable component of the IRMA SL System and provides the capability to collect and inject a capillary blood sample. It is used with the IRMA SL System’s single use cartridges to perform blood gas, electrolyte, hematocrit, glucose and BUN testing. The capillary collection device has applications in neonatal and pediatric intensive care units, and in other situations where a capillary sample is preferred over an arterial or venous sample.

TrendCare Continuous Blood Gas Monitoring System.    The TrendCare continuous blood gas monitoring system (“TrendCare”), consists of a monitor, patient data module and calibration system which provides the platform for the Paratrend 7+ and Neotrend L intravascular disposable sensors (described below). The TrendCare monitor displays trended patient blood gas and temperature data which allows constant surveillance of the patient’s condition, while the patient data module stores critical calibration and patient information which moves with the patient during transfers. The real-time patient information delivered by TrendCare can signal the onset of adverse events and immediately identifies the impact of ventilator and resuscitation therapy.

- Paratrend 7+.    Paratrend 7+ is the Company’s third generation sensor for its continuous monitoring products, and is the only multi-parameter sensor for in-vivo direct continuous monitoring of blood gases and temperature in critically ill adult and pediatric patients. Inserted via an arterial catheter, the sensor provides constant, precise measurement of vital blood gas parameters. The product utilizes the fluorescent optical sensor technology introduced with the second generation Paratrend 7 sensor, which replaced the electrochemical version of the first generation product. The product was enhanced in 2000 to provide a dial-in introducer which allows single-handed advancement of the sensor into an arterial line, replacing the telescopic introducer system of the Paratrend 7 and facilitating ease-of-use. The Company received FDA clearance in October 1997 to market the Paratrend 7+ in the United States, and received CE Mark approval in May 1998, allowing the system to be marketed in the countries of the European Union.

- Neotrend L.    Neotrend L replaced its predecessor, Neotrend, during 2002. Based upon the same fluorescent optical sensor technology used with Neotrend and Paratrend 7+, Neotrend L is the only multi-parameter system for direct continuous monitoring of blood gases and temperature in critically ill newborn babies, delivering real-time respiratory and metabolic information at the point-of-care. The sensor was enhanced in early 2001 to provide compatibility with Argyle 3.7-Fr. and 5.0-Fr. umbilical artery catheters, offering the convenience of use with this widely accepted and utilized

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catheter brand. The Company received FDA clearance in December 1997 to market Neotrend L in the United States, and received CE Mark approval in May 1998, allowing the product to be marketed in the countries of the European Union.

Neurotrend Cerebral Tissue Monitoring System.    The Neurotrend cerebral tissue monitoring system (“Neurotrend”) is designed for direct continuous monitoring of oxygen, carbon dioxide, acidity and temperature in brain tissue and fluids as an indication of cerebral ischemia and hypoxia in patients with severe head injury, and also for use during surgical intervention in the brain. Neurotrend continuously measures these parameters through a small fiberoptic sensor placed directly into the brain tissue or fluids. CE Mark approval was received in the second quarter 1998, allowing the system to be marketed in the countries of the European Union, and the Company received clearance from the FDA in November 1999, allowing the system to be marketed in the United States.

Regulatory Status

The Company and its products are regulated by the FDA under the FDC Act. The FDC Act provides two basic review procedures for medical devices. Certain products may qualify for a submission authorized by Section 510(k) of the FDC Act, wherein the manufacturer gives the FDA a pre-market notification of the manufacturer’s intention to commence marketing the product. The manufacturer must, among other things, establish that the product to be marketed is substantially equivalent to another legally marketed product. Marketing may commence when the FDA issues a letter finding substantial equivalence. A 510(k) clearance is subject to continual review, and later discovery of previously unknown problems may result in restrictions on the product’s marketing or withdrawal of the product from the market. If a medical device does not qualify for the 510(k) procedure, the manufacturer must file a pre-market approval (“PMA”) application. This procedure requires more extensive prefiling testing than the 510(k) procedure and involves a significantly longer FDA review process.

The Company has obtained clearances under Section 510(k) of the FDC Act to market the IRMA SL System for professional use in the testing of blood gases, electrolytes, hematocrit, glucose, lactate and BUN in whole blood. During the fourth quarter 2002, the Company filed a 510(k) application with the FDA for a creatinine test for use with the IRMA SL System, which along with the lactate test, is expected to be commercially released in early 2004. A multi-use cartridge, which allows multiple patient tests to be performed on a single cartridge, received clearance during 1998. The multi-use cartridge is planned to be available on the Company’s next generation IRMA analyzer. Continuous monitoring products which have been cleared under Section 510(k) include the monitoring systems used with the Paratrend 7+ sensor for direct continuous monitoring of blood gases and temperature in adults and pediatric patients, the Neotrend L sensor for monitoring of blood gases and temperature in critically ill newborn babies, and the Neurotrend sensor designed for direct continuous monitoring of oxygen, carbon dioxide, acidity and temperature in brain tissue or fluids as an indication of cerebral ischemia and hypoxia in patients with severe head injury and also for use during surgical intervention in the brain.

Prior to marketing in Europe, the Company’s products must also meet regulations governing its products outlined in directives administered by the European Union. In order for manufacturers to affix the CE Mark to their products, allowing the products to be marketed in the countries of the European Union, they must follow the conformity assessment procedures in the directive applicable to the product, and prepare a declaration of conformity. The CE Mark requires updating when significant changes are made to the product. The Company’s full quality system is also subject to annual audit by its notified body in the United Kingdom and by the International Organization for Standardization (“ISO”) Quality System Regulations Registrar in the United States.

The Company has obtained a CE Mark under the applicable directives for all of its marketed products that currently require it, including the Paratrend 7+, Neotrend L and Neurotrend continuous monitoring products, and the IRMA SL System.

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The Company’s long-term business strategy includes development of cartridges and sensors for performing additional blood and tissue chemistry tests, and any such additional tests will be subject to the same regulatory process. No assurance can be given that the Company will be able to develop such additional products or uses on a timely basis, if at all, or that the necessary clearances for such products and uses will be obtained by the Company on a timely basis or at all, or that the Company will not be subjected to a more extensive prefiling testing and FDA approval process. The Company also markets its products in several foreign markets. Requirements vary widely from country to country, ranging from simple product registrations to detailed submissions such as those required by the FDA. Manufacturing facilities are also subject to FDA inspection on a periodic basis and the Company and its contract manufacturers must demonstrate compliance with current Quality System Regulations promulgated by the FDA.

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

Research and Development

The Company owns two complementary sensor technology platforms; an electrochemical platform, on which the IRMA and Portal intermittent testing products are based, and a fiberoptic platform, on which the Paratrend 7+, Neotrend L and Neurotrend continuous monitoring products are primarily based. The Company is pursuing product line extensions from both of these core technology platforms.

The Company intends to continue to expand its cartridge and test menus available on the IRMA SL System. Currently under development are new cartridge tests for creatinine and lactate, both scheduled for market release in early 2004. During the fourth quarter 2002, the Company filed a 510(k) application with the FDA for the creatinine test; the lactate test has already been cleared by the FDA. The creatinine test is planned to be released initially as a creatinine-only cartridge, with additional analytes added to its test panel over the course of 2004. The measurement of creatinine aids clinicians in the diagnosis and treatment of renal diseases and in monitoring the renal status of patients in intensive care units, who are commonly administered potent antibiotics that may be toxic to the kidneys. The lactate test will be added to the Company’s existing GL cartridge, which panels glucose with sodium, potassium and chloride electrolytes. In the critical care setting, lactate testing is used to detect, treat and monitor decreased tissue oxygenation, primarily associated with shock, hypovolemia, and heart failure, and to monitor certain metabolic conditions. The Company is also performing feasibility studies for development of blood coagulation and immunoassay tests for use with its next generation IRMA analyzer. The Company’s multi-use cartridge, which incorporates the Company’s sensor and calibration technologies into products that can perform multiple blood test panels on different patients over a period of days before disposal, is also expected to be available on the Company’s next generation analyzer. The Company believes that the IRMA SL System and related core technologies provide a flexible platform which is capable of performing an even wider variety of blood chemistry tests.

Development efforts also include further enhancements to the Company’s Integrated Data Management System. The Integrated Data Management System is an advanced data management software application that provides a comprehensive data management system for point-of-care technologies. It also provides point-of-care program management tools to track operators and devices for quality control and regulatory purposes, and is

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language enabled. The new version of the Integrated Data Management System, released in the first quarter of 2002, supports the device settings and information management needs of the Portal System and the IRMA SL System.

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

For its continuous monitoring product line, the Company continued development work during 2002 to consolidate into one device the technology and certain functionalities of the TrendCare monitor and patient data module for integration directly with other patient monitoring and/or ventilatory systems. The resulting integration of technologies is intended to create a communications interface that facilitates monitor display of both continuous biochemical and physiological information at the patient’s bedside when integrated with a patient monitoring system, and help direct improved ventilation therapies when integrated with a ventilatory system.

As the continuous monitoring product line achieves more widespread use in the market, the Company has increased its focus on product ease-of-use enhancements to further increase market penetration. The Company’s future development plans include further expansion of the blood and tissue analysis test menu available on the continuous monitoring platform as well as an extension of the technology to new neurological and tissue applications.

The Company has incurred research and development expenses of approximately $4.8 million, $5.1 million and $5 million, net of funding from Philips of $1.7 million, $2.2 million and $2 million, for the years ended December 31, 2002, 2001 and 2000, respectively.

Sales and Marketing

The Company markets and distributes its products through both direct and indirect distribution channels. With the termination effective November 1, 2002 of the Company’s agreement with Philips for exclusive worldwide distribution of the Company’s TrendCare continuous blood gas monitoring systems and intermittent testing blood analysis systems, the Company began establishing a direct sales force in the United States, the United Kingdom and Germany, as well as nonexclusive third-party distributors outside of these countries for sale of these products. As of March 31, 2003, the Company has expanded its direct sales organization to 12 sales personnel and clinical application specialists based in the United States, the United Kingdom and Germany, with future additions dependent upon the rate and timing of sales growth. Further, the Company has expanded its global distribution network with the appointment of 15 third-party distributors primarily addressing markets in Europe, the Far East and the Middle East. Approximately five additional nonexclusive distributor appointments in these and other regions are expected during 2003. The Company continues to sell disposables to Philips for Philips’ nonexclusive distribution to its customer base through October 31, 2004. Philips also has a nonexclusive right through October 31, 2004 to distribute the Company’s Portal measurement module as a component of Philips’ Blood Analysis Portal System. The Company also continues to distribute its Neurotrend cerebral tissue monitoring system through Codman, under an exclusive distribution agreement entered into effective October 1, 1998. Additionally, the Company distributes its products to the veterinary market through direct end-user sales and regional distributors. Information concerning the Company’s export sales is contained in note 15 to the consolidated financial statements included in Part II, Item 8 of this Form 10-K.

Sales and marketing efforts for the Company’s blood analysis and monitoring systems have been primarily directed at hospitals’ critical care units where blood tests are frequently requested on a stat (immediate) basis. The Company’s objectives also include increased penetration of hospitals and broader use within hospitals that have purchased the Company’s products. The Company believes that the advantages of its blood analysis and monitoring systems will help acute care hospitals overcome their possible reluctance to change historical laboratory procedures for performing blood analysis, enabling faster adoption of point-of-care diagnostic testing

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and monitoring. Market development efforts are also currently focused on clinical studies to demonstrate the cost effectiveness of the Company’s continuous monitoring products and to establish these products as the standard of care for the ventilation therapy market.

The Company’s originally instituted arrangements with hospital systems, healthcare facilities and other influential healthcare buying groups establishing the Company as a sole, preferred or dual source supplier of its blood analysis systems are currently being reestablished by its direct and indirect distribution channels. These arrangements were transferred to and administered by Philips during the three and a half year term of the Philips distribution agreement.

Manufacturing

The Company’s manufacturing facilities support its intermittent testing and continuous monitoring platforms and are located in Roseville, Minnesota and High Wycombe, United Kingdom, respectively. The Company manufactures its electrochemical thick-film cartridges used with the IRMA and Portal Systems in its Roseville, Minnesota facility. Components for the Company’s continuous monitoring sensors used in the Paratrend 7+, Neotrend L and Neurotrend products are sourced from a variety of outside vendors, but the unique assembly and testing of the sensing elements is performed in the Company’s High Wycombe facility. The sub-assembly of external plastic assemblies for the intermittent testing cartridges and the injection molding of plastic components for the continuous monitoring sensors is sub-contracted to outside vendors. The Company uses external manufacturers to produce a range of hardware items, including the TrendCare and Neurotrend monitors and patient data module. The Company assembles in-house the IRMA SL analyzer and the Portal measurement module at its Roseville facility, and the continuous monitoring calibrator at its High Wycombe facility. These devices could be manufactured by a number of microelectronics assembly companies, using primarily off-the-shelf components. The Company anticipates that the current level of completed hardware products in finished goods inventory or otherwise expected to be available to the Company from other sources will significantly reduce the Company’s assembly requirements in 2003 for the IRMA SL analyzer, Portal measurement module and continuous monitoring calibrator. Software for the intermittent testing products is developed and maintained by the Company, and software for the continuous monitoring products is jointly developed with an external source, with acceptance and validation performed by the Company.

The majority of the raw materials and purchased components used to manufacture the Company’s products are readily available. Most of the Company’s raw materials are or may be obtained from more than one source. Some components are manufactured to the Company’s specifications and supplied by a single source. Plans are ongoing to add additional second sourcing where appropriate. Components used to manufacture the Company’s hardware products are subject to obsolescence. The Company monitors on an ongoing basis the need to make product design changes to accommodate new replacement components for obsolete parts and to transition its materials procurement to the replacement components as necessary.

The Company’s manufacturing facilities include three clean rooms in Roseville which range from Class 1,000 to Class 100,000, and two clean rooms in High Wycombe, both rated as Class 10,000. The Company believes its current facilities, with ongoing additional investments in production equipment to increase automation and capacity, can support production of required cartridges and sensors for the foreseeable future.

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

The Company continues to successfully undergo required inspections of its manufacturing facilities by the FDA (most recently in May 2001 and July 2002 for Roseville and High Wycombe facilities, respectively), and by the British Standards Institution for the High Wycombe facility (most recently in October 2001). Additionally,

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the Roseville facility’s quality systems have been ISO 9001 certified since 1997 by the Management Service division of TÜV America Inc. (“TUV”), a technical inspection association which provides testing and certification services. The Company successfully completed its most recent TUV audit in April 2002. As a result of these inspections, the Company’s manufacturing facilities and documentation and quality control systems are deemed satisfactory and in compliance with the related quality regulations issued by these agencies.

Patents and Proprietary Rights

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

For its intermittent testing platform, the Company currently maintains fourteen U.S. patents. These consist of four patents issued for its calibration technology, four related to its sensor technology, four for companion technology and two patents covering the IRMA SL analyzer and disposable cartridge designs. Several of the fourteen U.S. patents have also been issued in the major European countries, Canada, Australia and Japan, while others are pending issuance in these jurisdictions. Additionally, the Company has filed five patent applications in the U.S.

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

Material patents have expirations ranging from the year 2006 to 2018. The Company is not currently a party to any patent litigation.

The Company has federally registered the trademarks “Diametrics Medical, Inc.,” “Diametrics Medical, Incorporated,” “IRMA,” “Neocath,” “Paratrend,” “Tissutrak,” “Neotrend,” “Neurotrend” and “TrendCare.”

Competition

The Company believes that potential purchasers of point-of-care blood and tissue analysis systems will base their purchase decision upon a combination of factors, including the product’s test menu, ease-of-use, accuracy, reliability, price and ability to manage the data collected. The Company is aware of one other company, i-STAT, that is marketing a bedside point-of-care blood analysis system. The Company believes that its intermittent blood analysis systems possess distinct competitive advantages over i-STAT’s products including ease-of-use, closed instead of open handling of blood samples, and room temperature instead of refrigerated storage of cartridges.

The Company also competes with companies that market near-patient multi-use blood analysis systems. These companies include Roche/AVL Scientific Corporation, Radiometer, Inc., Instrumentation Laboratory and Bayer. However, the Company believes that to be successful in the point-of-care market, a device must not only be able to perform a variety of commonly ordered blood chemistry tests, but also be very portable to facilitate ease-of-use at the patient’s bedside.

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

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The Company’s products are competitively priced with other point-of-care product offerings and are lower in price than centralized testing labs when the full cost of implementation is considered (i.e., equipment, maintenance, facilities and trained lab personnel). Centralized testing labs also do not provide the convenience and fast turnaround time for test results that point-of-care products offer.

Many of the companies in the medical technology industry have substantially greater capital resources, research and development staffs and facilities than the Company. Such entities may be developing or could in the future attempt to develop additional products competitive with the Company’s blood and tissue analysis systems. Many of these companies also have substantially greater experience than the Company in research and development, obtaining regulatory approvals, manufacturing and marketing, and may therefore represent significant competition for the Company. There can be no assurance that the Company’s competitors will not succeed in developing or marketing technologies and products that will be more effective or less expensive than those being sold by the Company or that would render the Company’s technology and products obsolete or noncompetitive.

Executive Officers

Mr. Kaysen has been President, Chief Executive Officer and a director of the Company since December 2002. Mr. Kaysen has more than 25 years of executive management and sales and marketing experience in the medical products and services industry, most recently serving ten years as President, Chief Executive Officer and a director of Rehabilicare Inc. (now Compex Technologies, Inc.), a manufacturer and marketer of home electrotherapy equipment for the physical therapy, rehabilitation, occupational and sports medicine markets. From 1988 to 1989 Mr. Kaysen served as President, Chief Executive Officer and a director of Surgidyne, Inc. Mr. Kaysen has also held senior management positions in sales and marketing at several medical products and services companies including Redline Healthcare, American Hospital Supply Corporation, Emeritus Corporation and Lectec/NDM Corporation.

Mr. Johnson joined the Company in November 1996 as an Executive Vice President, and the President and Managing Director of Diametrics Medical, Ltd. (“DML”), a subsidiary of the Company established in conjunction with the acquisition in November 1996 of Biomedical Sensors, Ltd. (“BSL”). DML develops, manufactures and markets the Company’s continuous blood and tissue monitoring systems. Beginning in 1977, Mr. Johnson served in a number of executive management positions for the predecessors of the BSL business, most recently when it was an operating unit of Pfizer Inc., and prior to that, while it was a subsidiary of Orange Medical Instruments, Inc. Mr. Johnson started his career in 1974 with Burroughs Wellcome in pharmaceutical production management and was the head of manufacturing in Burroughs’ Sydney, Australia subsidiary.

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

Mr. Emery joined the Company in October 2002 as Senior Vice President of Worldwide Sales, Marketing and Business Development after a 26-year career at Philips Medical Systems (a division of Royal Philips

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Electronics) and a predecessor business, the Healthcare Solutions Group of Agilent Technologies, Inc., formerly part of Hewlett-Packard Company. During his 26-year tenure, Mr. Emery held a number of senior management level marketing and business development positions, most recently as Director of Marketing in the Cardiac and Monitoring System’s Point-of-Care Diagnostics group.

Employees

As of December 31, 2002, the Company had a total of 131 full-time employees, including 35 in research and development and 18 in sales and marketing. None of the Company’s employees are covered by a collective bargaining agreement and Diametrics believes it maintains good relations with its employees.

Cautionary Statement Relevant to Forward-Looking Information

This Annual Report on Form 10-K and the Company’s financial statements, “Management’s Discussion and Analysis of Results of Operations and Financial Condition” in Item 7 of this report and other documents incorporated by reference contain certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent the Company’s expectations, beliefs, intentions or strategies concerning future events, including, but not limited to, any statements regarding its current assumptions about future financial performance; the continuation of historical trends; the sufficiency of its cash balances and cash generated from operating activities for future liquidity and capital resource needs; the expected impact of changes in accounting policies on the Company’s results of operations, financial condition or cash flows; anticipated problems and its plans for future operations; and the economy in general or the future of the medical device industry, all of which are subject to various risks and uncertainties.

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

The Company cautions that these statements by their nature involve risks and uncertainties, certain of which are beyond its control, and actual results may differ materially depending on a variety of important factors, including, but not limited to such factors as market demand and pressures on the pricing for its products; changing market conditions, competition and growth rates within the medical device industry; changes in accounting policies; risks associated with operations outside of the U.S.; changing economic conditions such as general economic slowdown, decreased consumer confidence and the impact of war on the economy; and other risks and uncertainties, including those described in Exhibit 99.1 to this Form 10-K.

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Item 2.    Properties

The Company’s principal properties are as follows:

The Company believes that its facilities are sufficient for its projected needs through 2004.

Item 3.    Legal Proceedings

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

Item 4.    Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2002.

PART II

Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters

On January 9, 2003, the Company received a Nasdaq Staff Determination indicating that the Company did not comply with the minimum stockholders’ equity requirement for continued listing on the Nasdaq National Market set forth in Marketplace Rule 4450(a)(3), and that its securities were subject to delisting from that market. The Company subsequently applied and received approval to transfer the listing of its securities to the Nasdaq SmallCap Market effective February 26, 2003. The Company’s Common Stock, $.01 par value, will continue to trade under the symbol “DMED,” and the move should not affect how shares are bought or sold. The following table sets forth, for the periods indicated, the high and low quarterly closing prices for the Common Stock as quoted on The Nasdaq National Market:

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There were 365 common shareholders of record and the Company estimates approximately 5,100 shareholders holding stock in “street name” accounts as of December 31, 2002. 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.

Item 6.    Selected Financial Data

SELECTED FIVE-YEAR FINANCIAL DATA