OPTICAL SENSORS INC
SECURITIES PURCHASE AGREEMENT
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>SECURITIES PURCHASE AGREEMENT
<TEXT>

<PAGE>
                                                                    EXHIBIT 10.2


***  Portions of this Exhibit have been omitted pending a confidential treatment
     request by the Company.


                          SECURITIES PURCHASE AGREEMENT

         THIS SECURITIES PURCHASE AGREEMENT ("Agreement") is made and entered
into effective as of August 11, 2000, by and among Optical Sensors Incorporated,
a Delaware corporation (the "Company"), with its principal place of business at
7615 Golden Triangle Drive, Suite A, Eden Prairie, Minnesota 55344, and the
investor listed on Schedule A hereto (the "Investor").

         A.       The Company desires to raise up to $1,500,000 of additional
capital in order to fund its operations.

         B.       The Investor desires to make an investment in the Company on
the terms and conditions set forth in this Agreement.

         Accordingly, in consideration of the foregoing, the mutual promises set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

1.       Authorization of Securities. The Company proposes to authorize, issue
         and sell the number of shares of Series A Convertible Preferred Stock,
         $.01 par value (the "Series A Preferred") as provided herein, which
         will be entitled to the preferences, rights and benefits set forth in
         the capital stock provisions of the Company's Certificate of
         Designation, which has been filed in the form set forth in Exhibit A
         attached hereto (the "Certificate of Designation"). The Series A
         Preferred will be convertible into shares of the Company's common
         stock, $.01 par value, as set forth in the Certificate of Designation.

2.       Purchase of Securities.

         (a)      Subject to the terms and conditions hereof, the Company agrees
                  to sell to the Investor, and the Investor agrees to purchase
                  from the Company in accordance with this Agreement, up to Four
                  Million Thirty Three Thousand Three Hundred Thirty Four
                  (4,333,334) shares of the Company's Series A Preferred (the
                  "Shares") in the amounts set forth on Schedule A. The purchase
                  price for the first One Million (1,000,000) shares of Series A
                  Preferred purchased by the Investor (in the aggregate) will be
                  Fifty Cents ($.50) per share, the purchase price for the next
                  One Million Three Hundred Thirty Three Thousand Three Hundred
                  Thirty Four (1,333,334) shares of Series A Preferred purchased
                  by the Investor (in the aggregate) will be Thirty Seven and
                  One-Half Cents ($.375) per share and the purchase price for
                  the next Two Million (2,000,000) purchased shares by the
                  Investor (in the aggregate) of Series A Preferred will be
                  Twenty-Five Cents ($.25) per share.

         (b)      From time to time after the date of this Agreement, the
                  Company will send a written notice to the Investor indicating
                  the number of shares of Series A Preferred that the Company
                  wishes to sell to the Investor (the "Notice") and the
                  applicable per share price in accordance with Section 2(b).
                  Within five (5) business days after the receipt of the Notice,
                  the Investor shall purchase the
<PAGE>

                  number of shares of Series A Preferred specified in the Notice
                  (the "Purchased Shares") by delivering to the Company within
                  such five (5) day period a certified check or wire transfer in
                  an amount equal to the number of Purchased Shares multiplied
                  by the applicable price, as determined by reference to Section
                  2(a) (the "Purchase Price"); provided, however, that the
                  Investor (in the aggregate) shall be required to purchase a
                  maximum of Four Million Thirty Three Thousand Three Hundred
                  Thirty Four (4,333,334) shares of Series A Preferred (the
                  "Maximum Commitment") with an aggregate maximum purchase price
                  of One Million Five Hundred Thousand Dollars ($1,500,000).


         (c)      At the time of delivery of the Purchase Price, the Company
                  shall deliver to the Investor stock certificate(s) for the
                  number of shares of Series A Preferred being purchased by such
                  Investor, which such shares will be registered in the
                  Investor's name or as otherwise designated by the Investor.

         (d)      Notwithstanding any other provision of this Agreement to the
                  contrary, the ability of the Company to sell shares of Series
                  A Preferred to the Investor is subject to the existing
                  contractual right of Instrumentation Laboratory Company
                  ("ILC") to participate in equity financings of the Company. In
                  the event that ILC elects to purchase any or all of the shares
                  of the Series A Preferred that would otherwise be offered to
                  the Investor under this Agreement, the number of shares so
                  purchased will reduce the Maximum Commitment by an equal
                  number. Any shares of Series A Preferred purchased by ILC will
                  be deemed to have been purchased by the Investor for purposes
                  of determining the Purchase Price for any shares of Series A
                  Preferred sold to the Investor.

3.       Adjustment of Notes and Warrants.
         --------------------------------

         (a)      Conversion Price of Notes. The conversion price of the
                  convertible promissory notes (the "Notes") issued to the
                  Investor pursuant to the Investment Agreement by and among the
                  Company and the other investors named therein dated March 10,
                  2000 (the "Investment Agreement"), as specified in Section 2.1
                  of the Note, is hereby amended so that such conversion price
                  at any time is equal to Fifty Thousand (50,000) multiplied by
                  the lowest price at which the Company sells any shares of its
                  capital stock (other than a sale pursuant to the exercise of
                  an option, right or warrant to subscribe for shares of Common
                  Stock that are outstanding on the date hereof or options
                  granted under the Company's stock option plan) after the first
                  date on which the Investor purchases shares of Series A
                  Preferred (the "Lowest Issue Price"). Subject to the foregoing
                  amendment, the foregoing conversion price otherwise remains
                  subject to adjustment as provided in Section 2.4 of the Note.

         (b)      Exercise Price of Warrants. The Exercise Price (as defined in
                  the warrant issued to the Investor pursuant to the Investment
                  Agreement (the "Warrant")) of the Warrant is hereby amended so
                  that the Exercise Price at any time is equal to the Lowest
                  Issue Price. Subject to the foregoing amendment, the foregoing


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                  conversion price otherwise remains subject to adjustment as
                  provided in Section 4 of the Warrant.

4.       Representations and Warranties of the Company. The Company represents
         and warrants to the Investor as follows:

         (a)      Organization. The Company is a corporation duly organized,
                  validly existing and in good standing under the laws of the
                  State of Delaware and has the requisite corporate power and
                  authority to own, lease or operate its properties and to carry
                  on its business as it is now being conducted and as it is
                  proposed to be conducted. The Company has no subsidiaries or
                  direct or indirect ownership in any firm, corporation or
                  business which either, individually or in the aggregate, is
                  material to the business of the Company. The Company is
                  qualified to do business and is in good standing as a foreign
                  corporation in every jurisdiction in which its ownership of
                  property or conduct of business requires it so to be qualified
                  and in which the failure to so qualify would have a material
                  adverse effect on the financial condition or business of the
                  Company.

         (b)      Authorization. The Company has the corporate power and
                  authority to execute and deliver this Agreement, the Shares
                  and to perform its obligations hereunder and thereunder,
                  including the issuance of the Shares and the Conversion
                  Securities (as defined below). This Agreement and the Shares
                  have been duly authorized by all necessary corporate action on
                  behalf of the Company, have been duly executed and delivered
                  by authorized officers of the Company, are valid and binding
                  agreements on the part of the Company and are enforceable
                  against the Company in accordance with their respective terms,
                  except as the enforceability thereof may be limited by
                  bankruptcy, insolvency, moratorium, reorganization or other
                  similar laws affecting the enforcement of creditors rights
                  generally and to judicial limitations on the enforcement of
                  the remedy of specific performance and other equitable
                  remedies. All corporate actions necessary for reservation and
                  issuance of the shares of Common Stock issuable upon
                  conversion of the Shares ("Conversion Securities") has been
                  taken. The Conversion Securities when issued pursuant to the
                  Certificate of Designation will be duly authorized, validly
                  issued, fully paid and nonassessable, free and clear of any
                  and all liens, charges, claims, encumbrances and preemptive
                  rights.

         (c)      No Violation. Neither the execution and delivery of this
                  Agreement nor any of the Shares by the Company, nor the
                  performance by the Company of its obligations hereunder or
                  thereunder, nor the consummation of the transactions
                  contemplated hereby or thereby will: (a) conflict with or
                  result in any breach of any provision of the Certificate of
                  Incorporation or By-Laws of the Company; (b) result in a
                  default (or give rise to any right of termination,
                  cancellation or acceleration) under any of the terms,
                  conditions or provisions of any note, lease, mortgage,
                  license, agreement or other instrument or obligation to which
                  the Company is a party or by which any of its assets may be
                  bound, except for such defaults (or rights of termination,
                  cancellation or acceleration) as to which requisite waivers or
                  consents have been obtained or which, in the aggregate,


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                  would not result in a material adverse effect on the Company;
                  (c) violate any order, writ, injunction, decree, statute, rule
                  or regulation applicable to the Company or any of its assets,
                  except for violations which would not result in a material
                  adverse effect on the Company; or (d) result in the creation
                  or imposition of any liens, charges or encumbrances upon any
                  assets of the Company.


         (d)      SEC Reports. The Company has filed all reports, registration
                  statements and other filings with the Securities and Exchange
                  Commission (the "Commission") required to be filed by it
                  pursuant to the Securities Act of 1933, as amended (the
                  "Securities Act"), and the Securities Exchange Act of 1934, as
                  amended (the "Exchange Act"). All such reports, registration
                  statements and other filings (including all notes, exhibits
                  and schedules thereto, all documents incorporated by reference
                  therein, and any amendments thereto) are collectively referred
                  to herein as the "SEC Reports." As of their respective dates
                  of filing with the Commission, the SEC Reports complied in all
                  material respects with all of the rules and regulations of the
                  Commission and did not contain any untrue statement of a
                  material fact or omit to state a material fact required to be
                  stated therein or necessary in order to make the statements
                  made therein, in light of the circumstances under which they
                  were made, not misleading.

         (e)      Financial Statements. The financial statements of the Company
                  included in the SEC Reports (the "Financial Statements") have
                  been prepared in accordance with United States generally
                  accepted accounting principles consistently applied and fairly
                  present the financial position of the Company at the dates
                  thereof and the results of the Company's operations and cash
                  flows for the periods then ended (subject, in the case of
                  unaudited statements, to normal adjustments and the omission
                  of footnotes). The Company has no material liabilities, known
                  or unknown, absolute, contingent or otherwise, except for (i)
                  liabilities that are set forth in the Financial Statements,
                  the notes thereto or the SEC Reports and (ii) liabilities that
                  have been incurred in the ordinary course of business since
                  June 30, 2000.


         (f)      No Material Adverse Change. There have not been any changes in
                  the assets, properties, liabilities, financial condition,
                  business or operations of the Company from that reflected in
                  the Financial Statements except for (i) changes in the
                  ordinary course of business which have not been, either
                  individually or in the aggregate, materially adverse and (ii)
                  the Company's continued operating losses and negative cash
                  flow.

         (g)      Authorized Capital Stock. The authorized capital stock of the
                  Company is as set forth in the SEC Reports. The issued and
                  outstanding shares of capital stock of the Company have been
                  duly authorized, validly issued and are fully paid and
                  nonassessable. As of the date hereof, the Company has
                  outstanding options and warrants to purchase 755,109 shares of
                  Common Stock, and there are no other outstanding warrants,
                  options or other rights to acquire any shares of capital stock
                  of the Company, except for the shares issued upon conversion
                  of the Notes, the Warrants issuable upon conversion of the
                  Notes and as disclosed in the SEC


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                  Reports. All of the above securities of the Company were
                  issued in compliance with all applicable federal and state
                  securities laws and were not issued in violation of or subject
                  to any preemptive rights or other rights to subscribe for or
                  purchase securities. Except for IL, no holder of any security
                  of the Company is entitled to any preemptive or similar rights
                  to purchase any securities of the Company.


         (h)      Intellectual Property. The Company owns or possesses adequate
                  rights to use all patents, patent rights, inventions,
                  trademarks, trade names, copyrights, licenses, domain names,
                  governmental authorizations, trade secrets and know-how that
                  are used or necessary for the conduct of its business; neither
                  the Company nor any of its subsidiaries has received any
                  notice of, or has any knowledge of, any infringement of or
                  conflict with asserted rights of others with respect to any
                  patents, patent rights, inventions, trademarks, trade names,
                  copyrights, licenses, governmental authorizations, trade
                  secret or know-how that, individually or in the aggregate, if
                  the subject of an unfavorable decision, ruling or finding,
                  would have a material adverse effect on the condition
                  (financial or otherwise), earnings, operations or business of
                  the Company and its subsidiaries considered as a whole.

         (i)      Securities Laws. Subject to the accuracy of the
                  representations of the Investor in Section 5, no consent,
                  authorization, approval, permit or order of or filing with any
                  governmental or regulatory authority is required under current
                  laws and regulations in connection with the execution and
                  delivery of this Agreement or the offer, issuance, sale or
                  delivery to the Investor of the Shares or the Conversion
                  Securities other than (i) the filing with the Commission of a
                  Form D pursuant to Regulation D under the Securities Act, and
                  the qualification thereof, if required, under applicable state
                  securities laws, which qualification has been or will be
                  effected as a condition of the sale of the Shares and the
                  issuance of the Conversion Securities, and (ii) the filing of
                  a registration statement or statements pursuant to Section 7.
                  Under the circumstances contemplated by this Agreement, the
                  offer, issuance, sale and delivery of the Shares will not,
                  under current laws and regulations, require compliance with
                  the prospectus delivery or registration requirements of the
                  Securities Act.

         (j)      Litigation. Except for the informal investigation by the
                  Commission regarding recent trading in the Company's Common
                  Stock there are no actions, suits, proceedings or
                  investigations pending or, to the best of the Company's
                  knowledge, threatened against the Company or any of its
                  properties before or by any court or arbitrator or any
                  governmental body, agency or official in which there is a
                  reasonable likelihood (in the judgment of the Company) of an
                  adverse decision that (a) would have a material adverse effect
                  on the Company's properties or assets or the business of the
                  Company as presently conducted or proposed to be conducted or
                  (b) would impair the ability of the Company to perform in any
                  material respect its obligations under this Agreement. The
                  Company is not in default with respect to any judgment, order
                  or decree of any court or governmental agency or
                  instrumentality which, individually or in the


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                  aggregate, would have a material adverse effect on the assets,
                  properties or business of the Company.

         (k)      Properties. The Company has good and marketable title to all
                  the properties and assets reflected as owned in the Financial
                  Statements, subject to no lien, mortgage, pledge, charge or
                  encumbrance of any kind except (i) those, if any, reflected in
                  such Financial Statements, or (ii) those which are not
                  material in amount and do not adversely affect the use made
                  and promised to be made of such property by the Company. The
                  Company holds its leased properties under valid and binding
                  leases, with such exceptions as are not materially significant
                  in relation to the business of the Company. The Company owns
                  or leases all such properties as are necessary to its
                  operations as now conducted or as proposed to be conducted.

         (l)      Brokers or Finders. To the knowledge of the Company, no
                  person, firm or corporation has or will have, as a result of
                  any act or omission of the Company, any right, interest or
                  valid claim against any Investor for any commission, fee or
                  other compensation as a finder or broker in connection with
                  the transactions contemplated by this Agreement. The Company
                  shall indemnify and hold the Investor harmless for any claims
                  made for any commission, fee or other compensation concerning
                  the transactions contemplated by this Agreement.

5.       Representations and Warranties of the Investor. The Investor represents
         and warrants to the Company as follows:

         (a)      The Shares are being purchased for investment for such
                  Investor's own account and not with the view to, or for resale
                  in connection with, any distribution or public offering
                  thereof. Each Investor understands that neither the Shares nor
                  the Conversion Securities have been registered under the
                  Securities Act or any state securities laws by reason of their
                  contemplated issuance in transactions exempt from the
                  registration requirements of the Securities Act and applicable
                  state securities laws and that the reliance of the Company and
                  others upon these exemptions is predicated in part upon this
                  representation by the Investor. The Investor further
                  understands that its shares of Series A Preferred and the
                  Conversion Securities may not be transferred or resold without
                  registration under the Securities Act and any applicable state
                  securities laws, or pursuant to an exemption from the
                  requirements of the Securities Act and applicable state
                  securities laws.

         (b)      The Investor's principal place of business is located at the
                  address set forth on Schedule A. The Investor qualifies as an
                  "accredited investor," as defined in Rule 501 of Regulation D
                  under the Securities Act. The Investor acknowledges that the
                  Company has made available to such Investor at a reasonable
                  time prior to the execution of this Agreement the opportunity
                  to ask questions and receive answers concerning the business,
                  operations and financial condition of the Company and the
                  terms and conditions of the sale of securities contemplated by
                  this Agreement and to obtain any additional information
                  requested by such


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                  Investor. The Investor is able to bear the loss of its entire
                  investment in the Shares and the Conversion Securities and has
                  such knowledge and experience of financial and business
                  matters that he is capable of evaluating the merits and risks
                  of the investment to be made pursuant to this Agreement.
                  However, neither the foregoing nor any other due diligence
                  investigation conducted by such Investor or on its behalf
                  shall limit, modify or affect the representations and
                  warranties of the Company set forth in Section 4 of this
                  Agreement or the right of such Investor to rely thereon.


         (c)      This Agreement has been duly authorized by all necessary
                  action on the part of the Investor, has been duly executed and
                  delivered by such Investor and is a valid and binding
                  agreement of such Investor.

6.       Use of Proceeds. The Company will use the proceeds from the sale of the
         Shares for general corporate purposes, including obtaining regulatory
         clearance for the Company's CapnoProbe sublingual CO2 monitor and
         disposable sensors.

7.       Registration Rights.
         -------------------

         (a)      Filing of Registration Statement. Within one hundred twenty
                  (120) days of the issuance of at least Two Million Five
                  Hundred Thousand shares of Series A Preferred, the Company
                  will file a registration statement with the Commission under
                  the Securities Act covering the Conversion Securities issuable
                  upon conversion of all of the Shares. The Company may, on not
                  more than one occasion, delay the filing of any registration
                  statement required hereunder for a period of not more than 90
                  days in the event that the Company has furnished the Investor
                  with a certificate executed by the Company's President or
                  Chief Executive Officer stating that such delay is necessary
                  in order to (i) not significantly adversely affect financing
                  efforts then underway at the Company or (ii) avoid disclosure
                  of material non-public information. Any registration of
                  Conversion Securities hereunder shall cover any additional
                  Conversion Securities issued or issuable pursuant to
                  anti-dilution or other similar rights.

         (b)      Registration Procedures. If and whenever the Company is
                  required by the provisions of Section 7(a) to effect the
                  registration of any Conversion Securities under the Securities
                  Act, the Company will:

                  (i)      prepare and file with the Commission a registration
                           statement (on any available form to effect
                           registration) with respect to such securities, and
                           use its best efforts to cause such registration
                           statement to become and remain effective until such
                           securities are sold pursuant to such registration
                           statement or are eligible to be sold pursuant to Rule
                           144(k);


                  (ii)     prepare and file with the Commission such amendments
                           to such registration statement and supplements to the
                           prospectus contained therein as may be necessary to
                           keep such registration statement effective until


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                  such securities are sold pursuant to such registration
                  statement or are eligible to be sold pursuant to Rule 144(k);

                  (iii)    furnish to the Investor and to any underwriters of
                           the securities being registered such reasonable
                           number of copies of the registration statement,
                           preliminary prospectus, final prospectus and such
                           other documents as the Investor and underwriters may
                           reasonably request in order to facilitate the public
                           offering of such securities;

                  (iv)     use its best efforts to register or qualify the
                           securities covered by such registration statement
                           under such state securities or blue sky laws of such
                           jurisdictions as the Investor may reasonably request,
                           except that the Company shall not for any purpose be
                           required to execute a general consent to service of
                           process or to qualify to do business as a foreign
                           corporation in any jurisdiction wherein it is not so
                           qualified;

                  (v)      prepare and promptly file with the Commission and
                           promptly notify the Investor of the filing of such
                           amendment or supplement to such registration
                           statement or prospectus as may be necessary to
                           correct any statements or omissions if, at the time
                           when a prospectus relating to such securities is
                           required to be delivered under the Securities Act,
                           any event shall have occurred as the result of which
                           any such prospectus or any other prospectus as then
                           in effect would include an untrue statement of a
                           material fact or omit to state any material fact
                           necessary to make the statements therein, in the
                           light of the circumstances in which they were made,
                           not misleading; and

                  (vi)     use its best efforts to cause all securities covered
                           by such registration statement to be listed on any
                           securities exchange, quotation system, market or
                           over-the-counter bulletin board, if any, on which the
                           Common Stock shall then be listed and trading.

(c)      Expenses. Except as set forth in the last sentence of this Section
         7(c), with respect to any registration of securities pursuant to
         Section 7(a), the Company shall bear all fees, costs and expenses,
         including, without limitation: all registration, filing and NASD fees,
         printing expenses, fees and disbursements of counsel and accountants
         for the Company, all internal Company expenses, the premiums and other
         costs of policies of insurance against liability arising out of the
         public offering, and all legal fees and disbursements and other
         expenses of complying with state securities or blue sky laws of any
         jurisdictions in which the securities to be offered are to be
         registered or qualified. Fees and disbursements of counsel and
         accountants for the Investor, underwriting discounts and commissions
         and transfer taxes for the Investor and any other expenses incurred by
         the Investor not expressly included above shall be borne by the
         Investor.

(d)      Indemnification. In the event that any Conversion Securities owned by
         the Investor are included in a registration statement under Section
         7(a):


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         (i)      The Company will indemnify and hold harmless the Investor
                  (including for this purpose its directors, officers and
                  partners) and any underwriter (as defined in the Securities
                  Act) from and against any and all loss, damage, liability,
                  cost and expense (including, subject to Section 7(d)(iii),
                  reasonable fees and expenses of counsel) to which any such
                  Investor or any such underwriter may become subject under the
                  Securities Act or otherwise, insofar as such losses, damages,
                  liabilities, costs or expenses are caused by any untrue
                  statement or alleged untrue statement of any material fact
                  contained in such registration statement, any prospectus
                  contained therein or any amendment or supplement thereto, or
                  arise out of or are based upon the omission or alleged
                  omission to state therein a material fact required to be
                  stated therein or necessary to make the statements therein, in
                  light of the circumstances in which they were made, not
                  misleading; provided, however, that the Company will not be
                  liable in any such case to the extent that any such loss,
                  damage, liability, cost or expense arises out of or is based
                  upon an untrue statement or alleged untrue statement or
                  omission or alleged omission so made in conformity with
                  written information furnished by such Investor or such
                  underwriter.

         (ii)     The Investor will indemnify and hold harmless the Company and
                  any underwriter from and against any and all loss, damage,
                  liability, cost or expense (including, subject to Section
                  7(d)(iii), reasonable fees and expenses of counsel) to which
                  the Company or any underwriter may become subject under the
                  Securities Act or otherwise, insofar as such losses, damages,
                  liabilities, costs or expenses are caused by any untrue or
                  alleged untrue statement of any material fact contained in
                  such registration statement, any prospectus contained therein
                  or any amendment or supplement thereto, or arise out of or are
                  based upon the omission or the alleged omission to state
                  therein a material fact required to be stated therein or
                  necessary to make the statements therein, in light of the
                  circumstances in which they were made, not misleading, in each
                  case to the extent, but only to the extent, that such untrue
                  statement or alleged untrue statement or omission or alleged
                  omission was so made in reliance upon and in strict conformity
                  with written information furnished by such Investor.
                  Notwithstanding the provisions of this clause (ii), no
                  Investor shall be required to indemnify any person pursuant to
                  this Section 7 in an amount in excess of the amount of the
                  aggregate net proceeds received by such Investor in connection
                  with any such registration under the Securities Act.


         (iii)    Promptly after receipt by an indemnified party pursuant to the
                  provisions of paragraph (i) or (ii) of this Section 7(d) of
                  notice of the commencement of any action involving the subject
                  matter of the foregoing indemnity provisions, such indemnified
                  party will, if a claim thereof is to be made against the
                  indemnifying party pursuant to the provisions of said
                  paragraph (i) or (ii), promptly notify the indemnifying party
                  of the commencement thereof; but the omission to so notify the
                  indemnifying party will not relieve the indemnifying


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                  party from any liability which it may have to any indemnified
                  party otherwise than hereunder nor of its obligations or
                  liabilities pursuant to this Agreement, except to the extent
                  that the failure to so notify materially prejudices the
                  indemnifying party. In case such action is brought against any
                  indemnified party and it notifies the indemnifying party of
                  the commencement thereof, the indemnifying party shall have
                  the right to participate in, and, to the extent that it may
                  wish, jointly with any other indemnifying party similarly
                  notified, to assume the defense thereof, with counsel
                  satisfactory to such indemnified party; provided, however, if
                  the defendants in any action include both the indemnified
                  party and the indemnifying party and there is a conflict of
                  interest which would prevent counsel for the indemnifying
                  party from also representing the indemnified party, the
                  indemnified party or parties shall have the right to select
                  one separate counsel to participate in the defense of such
                  action on behalf of such indemnified party or parties, which
                  counsel shall be reasonably satisfactory to the indemnifying
                  party. After notice from the indemnifying party to such
                  indemnified party of its election so to assume the defense
                  thereof, the indemnifying party will not be liable to such
                  indemnified party pursuant to the provisions of said paragraph
                  (i) or (ii) for any legal or other expense subsequently
                  incurred by such indemnified party in connection with the
                  defense thereof other than reasonable costs of investigation,
                  unless (x) the indemnified party shall have employed counsel
                  in accordance with the proviso of the preceding sentence, (y)
                  the indemnifying party shall not have employed counsel
                  satisfactory to the indemnified party to represent the
                  indemnified party within a reasonable time after the notice of
                  the commencement of the action, or (z) the indemnifying party
                  has authorized the employment of counsel for the indemnified
                  party at the expense of the indemnifying party. No
                  indemnifying party shall, without the prior written consent of
                  the indemnified party, consent to entry of any judgment or
                  enter into any settlement which does not include as an
                  unconditional term thereof the giving by the claimant or the
                  plaintiff to such indemnified party of a release from all
                  liability in respect of such action, and no indemnified party
                  shall consent to entry of any judgment or settle such action
                  without the prior written consent of the indemnifying party.

(e)      SEC Reports. The Company will file with the Commission, on a timely
         basis, all SEC Reports required to be filed under the Exchange Act and
         any other documents required to meet the public information
         requirements of Rule 144(c) under the Securities Act.

(f)      Bonus. Upon a Change in Control, as defined below, the Company's
         employees, in the aggregate, will be paid a bonus (the "Bonus") equal
         to (A) *** of the proceeds to the Company or its shareholders from the
         Change in Control transaction between *** and *** plus (B) *** of the
         proceeds to the Company or its shareholders from the Change in Control

***  Portions of this Exhibit have been omitted pending a confidential
     treatment request by the Company.

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<PAGE>

         transaction between *** and ***. The allocation of the Bonus among the
         individual employees of the Company shall be as set forth in Schedule
         A, as amended from time to time by the President and Chief Executive
         Officer of the Company as necessary to reflect changes in personnel.
         For purposes of this Agreement, Change in Control shall mean the
         occurrence of any of the following on or after the date hereof:


         (i)      the sale, lease, exchange or other transfer, directly or
                  indirectly, of all or substantially all of the assets of the
                  Company, in one transaction or in a series of related
                  transactions, to any Person;

         (ii)     the approval by the shareholders of the Company of any plan or
                  proposal for the liquidation or dissolution of the Company;

         (iii)    any Person is or becomes the "beneficial owner" (as defined in
                  Rule 13d-3 under the Exchange Act), directly or indirectly, of
                  (a) 20 percent or more, but not more than 50 percent, of the
                  combined voting power of the Company's outstanding securities
                  ordinarily having the right to vote at elections of directors,
                  unless the transaction resulting in such ownership has been
                  approved in advance by the "continuity directors," as defined
                  at Subsection (b), or (b) more than 50 percent of the combined
                  voting power of the Company's outstanding securities
                  ordinarily having the right to vote at elections of directors
                  (regardless of any approval by the continuity directors);

         (iv)     a merger or consolidation to which the Company is a party if
                  the shareholders of the Company immediately prior to the
                  effective date of such merger or consolidation have, solely on
                  account of ownership of securities of the Company at such
                  time, "beneficial ownership" (as defined in Rule 13d-3 under
                  the Exchange Act) immediately following the effective date of
                  such merger or consolidation of securities of the surviving
                  company representing (a) 50 percent or more, but not more than
                  80 percent, of the combined voting power of the surviving
                  corporation's then outstanding securities ordinarily having
                  the right to vote at elections of directors, unless such
                  merger or consolidation has been approved in advance by the
                  continuity directors, or (b) less than 50 percent of the
                  combined voting power of the surviving corporation's then
                  outstanding securities ordinarily having the right to vote at
                  elections of directors (regardless of any approval by the
                  continuity directors);


         (v)      the continuity directors cease for any reason to constitute at
                  least a majority the Board;

         (vi)     or a change in control of a nature that is determined by
                  outside legal counsel to the Company, in a written opinion
                  specifically referencing this provision of the Plan, to be
                  required to be reported (assuming such event

***  Portions of this Exhibit have been omitted pending a confidential treatment
     request by the Company.

                                       11
<PAGE>

                  has not been "previously reported") pursuant to section 13 or
                  15(d) of the Exchange Act, whether or not the Company is then
                  subject to such reporting requirement, as of the effective
                  date of such change in control.

         The sale, lease, exchange or other transfer, directly or indirectly, of
         the assets comprising the Company's CapnoProbe Product Line, in one
         transaction or in a series of related transactions, to any Person shall
         constituted a Change in Control under Subsection (a)(i).

         For purposes of this section: "continuity director" means any
         individual who is a member of the Board on the date hereof, while he or
         she is a member of the Board, and any individual who subsequently
         becomes a member of the Board whose election or nomination for election
         by the Company's shareholders was approved by a vote of at least a
         majority of the directors who are continuity directors (either by a
         specific vote or by approval of the proxy statement of the Company in
         which such individual is named as a nominee for director without
         objection to such nomination). For example, if a majority of the four
         individuals constituting the Board on the date hereof, approved a proxy
         statement in which two different individuals were nominated to replace
         two of the individuals who were members of the Board on the date
         hereof, upon their election by the Company's shareholders, the two
         newly elected directors would join the two remaining directors who were
         members of the Board on date hereof as continuity directors. Similarly
         if a majority of those four directors approved a proxy statement in
         which two different individuals were nominated to replace the two other
         directors who were members of the Board on date hereof, upon their
         election by the Company's shareholders, the two newly elected directors
         would also become, along with the two other directors, continuity
         directors. Individuals subsequently joining the Board could become
         continuity directors under the principles reflected in this example.

8.       Repricing of Options. As soon as practicable after each sale of any of
         the Shares to the Investor, the exercise price of all option agreements
         held by current employees and current directors of the Company will be
         changed to the figure equal to (i) the aggregate purchase price that
         was paid for all shares of Series A Preferred issued to the Investor
         prior to the date of determination (whether or not all such shares are
         then outstanding) divided by (ii) the aggregate number of shares of
         Series A Preferred that were issued to the Investor prior to the date
         of determination (whether or not all such shares are then outstanding).

9.       Miscellaneous.
         -------------

         (a)      This Agreement and the rights and obligations of the parties
                  hereunder shall not be assignable, in whole or in part, by the
                  Company without the prior written consent of the Investor.
                  This Agreement and the rights and obligations of the parties
                  hereunder shall not be assignable, in whole or in part, by an
                  Investor without the prior written consent of the Company,
                  except that any Investor may assign its rights under this
                  Agreement to any affiliate without the prior written


                                       12
<PAGE>

                  consent of the Company. This Agreement shall inure to the
                  benefit of and be binding upon and be enforceable by the
                  successors and permitted assigns of the parties hereto.
                  Neither this Agreement nor any provision hereof may be
                  amended, modified, waived or discharged without the written
                  consent of the parties hereto.

         (b)      This Agreement, including the exhibits attached hereto,
                  constitutes the entire agreement of the parties relative to
                  the subject matter hereof and supersedes any and all other
                  agreements and understanding, whether written or oral,
                  relative to the matters discussed herein.

         (c)      All representations and warranties contained herein shall
                  survive after the execution and delivery of this Agreement for
                  a period of two (2) years from the date hereof. All covenants
                  and agreements which by their terms are to be performed after
                  the date hereof will survive indefinitely, unless such
                  covenants and agreements by their terms expire at an earlier
                  date, in which case they will expire on such earlier date.


         (d)      All notices, requests, consents and other communications
                  required or permitted hereunder shall be in writing and shall
                  be given in writing by personal delivery, facsimile,
                  commercial air delivery service or by registered or certified
                  mail, postage prepaid, return receipt requested, addressed to
                  the Company at the address set forth in the introductory
                  paragraph to this Agreement and to the Investor at the
                  addresses set forth on Schedule A, or at such other address as
                  the respective parties may designate by like notice from time
                  to time. Notices so given shall be effective upon the earlier
                  of: (a) receipt by the party to which notice is given (which,
                  in the instance of a facsimile, shall be deemed to have
                  occurred at the time that the machine transmitting the
                  facsimile verifies a successful transmission of the
                  facsimile); (b) on the fifth business day following the date
                  such notice was deposited in the mail; or (c) on the second
                  business day following the date such notice was delivered to a
                  commercial air delivery service.

         (e)      This Agreement shall be construed and enforced in accordance
                  with the laws of the State of Minnesota.

         (f)      This Agreement may be executed in two or more counterparts,
                  each of which shall be deemed an original, but all of which
                  together shall constitute one and the same instrument. This
                  Agreement may be executed by facsimile.

                          [Next Page is Signature Page]


                                       13
<PAGE>

         IN WITNESS WHEREOF, the Company and the Investor have executed this
Agreement effective as of the date first written above.

                                       OPTICAL SENSORS INCORPORATED


                                       By
                                         ---------------------------------------
                                         Paulita LaPlante,
                                         President and Chief Executive Officer


                                       CIRCLE F VENTURES LLC


                                       By
                                         ---------------------------------------

                                       Its
                                          --------------------------------------


                                       14
<PAGE>

                                   SCHEDULE A



Investor

Circle F Ventures LLC
17797 North Perimeter Drive
Suite 105
Scottsdale, Arizona 85255



                                       15
<PAGE>

                                  SCHEDULE A


                                       BONUS
EMPLOYEES                           DESIGNATION
---------                           -----------
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***
***                                     ***


             Totals


Bonus Breakout:

***
***
***


***  Portions of this Exhibit have been omitted pending a confidential treatment
     request by the Company.
</TEXT>
</DOCUMENT>
