<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.

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       (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 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

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             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 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

                                       3
<PAGE>

             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, 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

                                       4
<PAGE>

             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 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.

                                       5
<PAGE>

       (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 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

                                       6
<PAGE>

             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 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

                                       7
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             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 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

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<PAGE>

                    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):

             (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

                                       9
<PAGE>

                    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 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

                                       10
<PAGE>

                    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) One Hundred Percent (100%) of the proceeds to the
             Company or its shareholders from the Change in Control transaction
             between Fifteen Million Dollars ($15,000,000) and Sixteen Million
             Dollars ($16,000,000) plus (B) Ten Percent (10%) of the proceeds to
             the Company or its shareholders from the Change in Control
             transaction between Sixteen Million Dollars ($16,000,000) and
             Twenty Million Dollars ($20,000,000). 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

                                       11
<PAGE>

                    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; or

             (vi)   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 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

                                       12
<PAGE>

     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 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

                                       13
<PAGE>

             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]

                                       14
<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___________________________________

                                       15
<PAGE>

                                   SCHEDULE A



Investor

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

                                       16
<PAGE>

                                   SCHEDULE A


                                                             BONUS
                                                          DESIGNATION

                             EMPLOYEES
                             ---------
                        Paulita LaPlante                       1
                        Wes Peterson                           1
                        Dan Bartnik                            1
                        Victor Kimball                         1
                        ***                                   ***
                        ***                                   ***
                        ***                                   ***
                        ***                                   ***
                        ***                                   ***
                        ***                                   ***
                        ***                                   ***
                        ***                                   ***
                        ***                                   ***
                        ***                                   ***
                        ***                                   ***
                        ***                                   ***
                        ***                                   ***
                        ***                                   ***
                        ***                                   ***
                        ***                                   ***


                                    Totals


                        Bonus Breakout:
                          Tier 1 = 60%
                          Tier 2 = 30%
                          Tier 3 = 10%

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

                                       17