<PAGE>
 
                         OPTICAL SENSORS INCORPORATED

                            1993 STOCK OPTION PLAN

                     (AS AMENDED THROUGH NOVEMBER 6, 1998)

                                    ARTICLE
                                    -------
                                       1.
                          ESBTABLISHMENT AND PURPOSE.
                          ---------------------------


     1.1.  Establishment.  Optical Sensors Incorporated (the "Company") hereby
           -------------                                                      
establishes a plan providing for stock-based compensation incentive awards for
the performance by certain eligible employees of services for the Company.  This
plan shall be known as the Optical Sensors Incorporated 1993 Stock Option Plan
(the "Plan").

     1.2.  Purpose.  The purpose of the Plan is to advance the interests of the
           -------                                                             
Company and its shareholders by enabling the Company to attract and retain
persons of ability to perform services for the Company, by providing an
incentive to such persons through equity participation in the Company and by
rewarding such persons who contribute to the achievement by the Company of its
economic objectives.
                                    ARTICLE
                                   --------
                                       2.
                                  DEFINITIONS.
                                  ------------

     The following terms shall have the meanings set forth below, unless the
context clearly otherwise requires:

     2.1.  "Board" means the Board of Directors of the Company.
            -----                                              
     2.2.  "Broker Exercise Notice" means the written notice described in
            ---------------------- 
Section 6.6(b) of the Plan.

     2.3.  "Change in Control" means an event described in Section 9.1 of the
            -----------------
Plan.

     2.4.  "Code" means the Internal Revenue Code of 1986, as amended.
            ----                                                      
     2.5.  "Committee" means the group of individuals administering the Plan, as
            ---------                                                           
provided in Article 3 of the Plan.

     2.6.  "Common Stock" means the common stock of the Company, par value $.01
            ------------  
per share, or the number and kind of shares of stock or other securities into
which such Common Stock may be changed in accordance with Section 4.3 of the
Plan.

     2.7.  "Disability" means the disability of the Participant as defined in
            ----------
the long-term disability plan of the Company then covering the Participant or,
if no such plan exists, the
<PAGE>
 
permanent and total disability of the Participant within the meaning of Section
22(e)(3) of the Code.

     2.8.  "Eligible Recipient" means all employees (including, without
            ------------------
limitation, officers and directors who are also employees) and Non-Employee
Directors, consultants and independent contractors of the Company or any
Subsidiary.

     2.9.  "Exchange Act" means the Securities Exchange Act of 1934, as amended.
            ------------                                                        
     2.10. "Fair Market Value" means, with respect to the Common Stock, the
            -----------------                                              
following:

       (a)  If the Common Stock is listed or admitted to unlisted trading
     privileges on any national securities exchange or is not so listed or
     admitted but transactions in the Common Stock are reported on the NASDAQ
     National Market System, the reported closing sale price of the Common Stock
     on such exchange or by the NASDAQ National Market System as of such date
     (or, if no shares were traded on such day, as of the next preceding day on
     which there was such a trade).

       (b)  If the Common Stock is not so listed or admitted to unlisted trading
     privileges or reported on the NASDAQ National Market System, and bid and
     asked prices therefor in the over-the-counter market are reported by the
     NASDAQ System or the National Quotation Bureau, Inc. (or any comparable
     reporting service), the mean of the closing bid and asked prices as of such
     date, as so reported by the NASDAQ System, or, if not so reported thereon,
     as reported by the National Quotation Bureau, Inc. (or such comparable
     reporting service).

       (c)  If the Common Stock is not so listed or admitted to unlisted trading
     privileges, or reported on the NASDAQ National Market System, and such bid
     and asked prices are not so reported, such price as the Committee
     determines in good faith in the exercise of its reasonable discretion.

     2.11.  "Incentive Stock Option" means a right to purchase Common Stock
             ----------------------
granted to an Eligible Recipient pursuant to Article 6 of the Plan that
qualifies as an "incentive stock option" within the meaning of Section 422 of
the Code.

     2.12.  "Non-Employee Director" means any member of the Board who is not an
             ---------------------                                             
employee of the Company or any subsidiary.

     2.13.  "Non-Statutory Stock Option" means a right to purchase Common Stock
             --------------------------                                        
granted to an Eligible Recipient pursuant to Article 6 of the Plan that does not
qualify as an Incentive Stock Option.

     2.14.  "Option" means an Incentive Stock Option or a Non-Statutory Stock
             ------ 
Option.

     2.15. "Participant" means an Eligible Recipient who receives one or more
            -----------                                                      
Options under the Plan.

                                       2
<PAGE>
 
     2.16.  "Person" means any individual, corporation, partnership, group,
             ------                                                        
association or other "person" (as such term is used in Section 14(d) of the
Exchange Act), other than the Company, a wholly owned subsidiary of the Company
or any employee benefit plan sponsored by the Company or a wholly owned
subsidiary of the Company.

     2.17.  "Previously Acquired Shares" mean shares of Common Stock that are
             --------------------------
already owned by the Participant and shares of Common Stock that are to be
acquired by the Participant pursuant to the exercise of an Option.

     2.18.  "Retirement" means the retirement of a Participant pursuant to and
             ----------
in accordance with the regular or, if approved by the Board for purposes of the
Plan, early retirement/pension plan or practice of the Company or Subsidiary
then covering the Participant.

     2.19.  "Securities Act" means the Securities Act of 1933, as amended.
             --------------                                               
     2.20.  "Subsidiary" means any subsidiary corporation of the Company within
             ----------
the meaning of Section 424(f) of the Code.

     2.21.  "Tax Date" means the date any withholding tax obligation arises
             --------
under the Code for a Participant with respect to an Option.

                                    ARTICLE
                                   --------
                                       3.
                             PLAN ADMINISTRATION.
                             --------------------
                                        
     3.1.  The Committee.  The Plan will be administered by the Board or by a
           -------------                                                     
committee of the Board consisting of not less than two persons; provided,
however, that from and after the date on which the Company first registers a
class of its equity securities under Section 12 of the Exchange Act, the Plan
will be administered by the Board, all of whom will be "disinterested persons"
within the meaning of Rule 16b-3 under the Exchange Act, or by a committee
consisting solely of not fewer than two members of the Board who are such
"disinterested persons."  As used in the Plan, the term "Committee" will refer
to the Board or to such a committee, if established.  To the extent consistent
with corporate law, the Committee may delegate to any officers of the Company
the duties, power and authority of the Committee under the Plan pursuant to such
conditions or limitations as the Committee may establish; provided, however,
that only the Committee may exercise such duties, power and authority with
respect to Eligible Recipients who are subject to Section 16 of the Exchange
Act.  Each determination, interpretation or other action made or taken by the
Committee pursuant to the provisions of the Plan will be conclusive and binding
for all purposes and on all persons, and no member of the Committee will be
liable for any action or determination made in good faith with respect to the
Plan or any Incentive Award granted under the Plan.

     3.2.  Authority of the Committee.
           -------------------------- 
     (a)  In accordance with and subject to the provisions of the Plan, the
Committee shall have the authority to determine (i) the Eligible Recipients who
shall be selected as Participants,

                                       3
<PAGE>
 
(ii) the nature and extent of the Options to be made to each Participant
(including the number of shares of Common Stock to be subject to each Option,
the exercise price and the manner in which Options will vest or become
exercisable), (iii) the time or times when Options will be granted, (iv) the
duration of each Option, (v) the restrictions and other conditions to which the
exercisability or vesting of Options may be subject, and (vi) such other
provisions of the Options as the Committee may deem necessary or desirable and
as consistent with the terms of the Plan. The Committee shall determine the form
or forms of the agreements with Participants which shall evidence the particular
terms, conditions, rights and duties of the Company and the Participants with
respect to Options granted pursuant to the Plan, which agreements shall be
consistent with the provisions of the Plan.

     (b)  With the consent of the Participant affected thereby, the Committee
may amend or modify the terms of any outstanding Option in any manner, provided
that the amended or modified terms are permitted by the Plan as then in effect.
Without limiting the generality of the foregoing sentence, the Committee may,
with the consent of the Participant affected thereby, modify the exercise price,
number of shares or other terms and conditions of an Option, extend the term of
an Option, accelerate the exercisability or vesting or otherwise terminate any
restrictions relating to an Option, accept the surrender of any outstanding
Option, or, to the extent not previously exercised or vested, authorize the
grant of new Options in substitution for surrendered Options.

     (c)  The Committee shall have the authority, subject to the provisions of
the Plan, to establish, adopt and revise such rules and regulations relating to
the Plan as it may deem necessary or advisable for the administration of the
Plan. The Committee's decisions and determinations under the Plan need not be
uniform and may be made selectively among Participants, whether or not such
Participants are similarly situated. Each determination, interpretation or other
action made or taken by the Committee pursuant to the provisions of the Plan
shall be conclusive and binding for all purposes and on all persons, including,
without limitation, the Company and its Subsidiaries, the shareholders of the
Company, the Committee and each of its members, the directors, officers and
employees of the Company and its Subsidiaries, and the Participants and their
respective successors in interest. No member of the Committee shall be liable
for any action or determination made in good faith with respect to the Plan or
any Option granted under the Plan.

                                    ARTICLE
                                    -------
                                       4.
                          STOCK SUBJECT TO THE PLAN.
                          --------------------------
                                        

     4.1.  Number of Shares.  Subject to adjustment as provided in Section 4.3
           ----------------
below, the maximum number of shares of Common Stock that shall be authorized and
reserved for issuance under the Plan shall be 1,727,240 shares of Common Stock
or such greater number as may be approved by the Board pursuant to this Section
4.1. The Board may increase the number of shares of Common Stock that will be
available for issuance under the Plan, without the approval of the Company's
shareholders; provided, however, that the aggregate number of shares reserved
for issuance under the Plan and the Company's 1989 Omnibus Stock Option Plan,
1991 Stock Option Plan and any similar stock option plan that the Company may
adopt in the future may not

                                       4
<PAGE>
 
exceed 20.0% of the number of shares of Common Stock outstanding as of the end
of the calendar quarter immediately preceding the date on which the Board
increases the number of shares available for issuance under the Plan (assuming
the exercise or conversion of all options, warrants, securities or other rights
to acquire Common Stock) without approval of the Company's shareholders.
Notwithstanding any other provision of the Plan to the contrary, (a) no more
than 944,444 shares of Common Stock may be cumulatively available for issuance
under the Plan pursuant to the exercise of Incentive Stock Options, and (b) no
Participant in the Plan may be granted, during any calendar year, Options
relating to more than an aggregate of 277,777 shares of Common Stock, in each
case subject to adjustment as provided in Section 4.3 of the Plan. To the extent
permitted by applicable corporate law, the shares available for issuance under
the Plan may, at the election of the Committee, be either treasury shares or
shares authorized but unissued, and, if treasury shares are used, all references
in the Plan to the issuance of shares will, for corporate law purposes, be
deemed to mean the transfer of shares from treasury.

     4.2.  Shares Available for Use.  Shares of Common Stock that may be issued
           ------------------------
upon exercise of Options shall be applied to reduce the maximum number of shares
of Common Stock remaining available for use under the Plan. Any shares of Common
Stock that are subject to an Option (or any portion thereof) that lapses,
expires or for any reason is terminated unexercised shall automatically again
become available for use under the Plan.

     4.3.  Adjustments to Shares.  In the event of any reorganization, merger,
           ---------------------                                              
consolidation, recapitalization, liquidation, reclassification, stock dividend,
stock split, combination of shares, rights offering, extraordinary dividend or
divestiture (including a spin-off) or any other change in the corporate
structure or shares of the Company, the Committee (or, if the Company is not the
surviving corporation in any such transaction, the board of directors of the
surviving corporation) shall make appropriate adjustment (which determination
shall be conclusive) as to the number and kind of securities subject to and
reserved under the Plan and, in order to prevent dilution or enlargement of the
rights of Participants, the number, kind and exercise price of securities
subject to outstanding Options.  Without limiting the generality of the
foregoing, in the event that any of such transactions are effected in such a way
that holders of Common Stock shall be entitled to receive stock, securities or
assets, including cash, with respect to or in exchange for such Common Stock,
all Participants holding outstanding Options shall upon the exercise of such
Options receive, in lieu of any shares of Common Stock they may be entitled to
receive, such stock, securities or assets, including cash, as would have been
issued to such Participants if their Options had been exercised and such
Participants had received Common Stock prior to such transaction.

                                       5
<PAGE>
 
                                    ARTICLE
                                    -------
                                      5.
                                PARTICIPATION.
                                --------------
                                        
     Participants in the Plan shall be those Eligible Recipients who, in the
judgment of the Committee, have performed, are performing, or during the term of
an Option will perform, services in the management, operation and development of
the Company or any Subsidiary, and significantly contributed, are significantly
contributing or are expected to significantly contribute to the achievement of
corporate economic objectives.  Eligible Recipients may be granted from time to
time one or more Options, as may be determined by the Committee in its sole
discretion.  The number, type, terms and conditions of Options granted to
various Eligible Recipients need not be uniform, consistent or in accordance
with any plan, regardless of whether such Eligible Recipients are similarly
situated.  Upon determination by the Committee that an Option is to be granted
to an Eligible Recipient, written notice shall be given such person, specifying
the terms, conditions, rights and duties related thereto.  Each Eligible
Recipient to whom an Option is to be granted shall, if requested by the
Committee, enter into an agreement with the Company, in such form as the
Committee shall determine and which is consistent with the provisions of the
Plan, specifying such terms, conditions, rights and duties.  Options shall be
deemed to be granted as of the date specified in the grant resolution of the
Committee, which date shall be the date of the related agreement with the
Participant.

                                    ARTICLE
                                    -------
                                       6.
                                STOCK OPTIONS.
                                --------------
                                        
     6.1.  Grant.  An Eligible Recipient may be granted one or more Options
           -----
under the Plan, and such Options shall be subject to such terms and conditions,
consistent with the other provisions of the Plan, as shall be determined by the
Committee in its sole discretion. The Committee may designate whether an Option
is to be considered an Incentive Stock Option or a Non-Statutory Stock Option;
provided, however, that an Incentive Stock Option shall be granted only to an
Eligible Recipient who is an employee of the Company or a Subsidiary. The terms
of the agreement relating to a Non-Statutory Stock Option shall expressly
provide that such Option shall not be treated as an Incentive Stock Option.

     6.2.  Exercise.  An Option shall become exercisable at such times and in
           -------- 
such installments (which may be cumulative) as shall be determined by the
Committee in its sole discretion at the time the Option is granted. Upon the
completion of its exercise period, an Option, to the extent not then exercised,
shall expire.

     6.3.  Exercise Price.
           -------------- 

     (a)  Incentive Stock Options.  The per share price to be paid by the
          -----------------------
Participant at the time an Incentive Stock Option is exercised shall be
determined by the Committee, in its discretion, at the date of its grant;
provided, however, that such price shall not be less than (i) 100% of the Fair
Market Value of one share of Common Stock on the date the Incentive Stock Option
is granted, or (ii) 110% of the Fair Market Value of one share of Common Stock
on the

                                       6
<PAGE>
 
date the Incentive Stock Option is granted if, at that time the Incentive Stock
Option is granted, the Participant owns, directly or indirectly (as determined
pursuant to Section 424(d) of the Code), more than 10% of the total combined
voting power of all classes of stock of the Company or any subsidiary or parent
corporation of the Company (within the meaning of Sections 424(f) and 424(e),
respectively, of the Code).

     6.4.  Non-Statutory Stock Options.  The per share price to be paid by the
           ---------------------------                                        
Participant at the time a Non-Statutory Stock Option is exercised shall be
determined by the Committee in its sole discretion at the time the Option is
granted; provided, however, that such price shall not be less than 85% of the
Fair Market Value of one share of Common Stock on the date the Non-Statutory
Stock Option is granted.

     6.5.  Duration.
           -------- 
           (a)  Incentive Stock Options.  The period during which an Incentive
                -----------------------
     Stock Option may be exercised shall be fixed by the Committee in its sole
     discretion at the time such Option is granted; provided, however, that in
     no event shall such period exceed 10 years from its date of grant or, in
     the case of a Participant who owns, directly or indirectly (as determined
     pursuant to Section 424(d) of the Code), more than 10% of the total
     combined voting power of all classes of stock of the Company or any
     subsidiary or parent corporation of the Company (within the meaning of
     Sections 424(f) and 424(e), respectively, of the Code), five years from its
     date of grant.

           (b)  Non-Statutory Stock Options.  The period during which a Non-
                ---------------------------
     Statutory Stock Option may be exercised shall be fixed by the Committee in
     its sole discretion at its date of grant.

           (c)  Effect of Termination of Employment or Other Service.
                ----------------------------------------------------
     Notwithstanding this Section 6.4, except as provided in Articles 8 and 9 of
     the Plan, all Options granted to a Participant shall terminate and may no
     longer be exercised if the Participant's employment or other service with
     the Company and all Subsidiaries ceases.

     6.6.  Manner of Exercise.  An Option may be exercised by a Participant in
           ------------------
whole or in part from time to time, subject to the conditions contained herein
and in the agreement evidencing such Option, by delivery, in person or through
certified or registered mail, of written notice of exercise to the Company at
its principal executive office in Minneapolis, Minnesota (Attention: Chief
Financial Officer), and by paying in full the total Option exercise price for
the shares of Common Stock purchased. Such notice shall be in a form
satisfactory to the Committee and shall specify the particular Option (or
portion thereof) that is being exercised and the number of shares with respect
to which the Option is being exercised. Subject to compliance with Section 12.1
of the Plan, the exercise of the Option shall be deemed effective upon receipt
of such notice and payment complying with the terms of the Plan and the
agreement evidencing such Option. As soon as practicable after the effective
exercise of the Option, the Participant shall be recorded on the stock transfer
books of the Company as the owner of the shares purchased, and the Company shall
deliver to the Participant one or more duly issued stock certificates evidencing
such ownership. If a Participant exercises any Option with respect to some, but
not all, of the shares of

                                       7
<PAGE>
 
Common Stock subject to such Option, the right to exercise such Option with
respect to the remaining shares shall continue until it expires or terminates in
accordance with its terms. An Option shall only be exercisable with respect to
whole shares.

     6.7.  Payment of Exercise Price.
           ------------------------- 
           (a)  The total purchase price of the shares to be purchased upon
     exercise of an Option shall be paid entirely in cash (including check, bank
     draft or money order); provided, however, that the Committee, in its sole
     discretion, may allow such payments to be made, in whole or in part, by
     delivery of a Broker Exercise Notice or a promissory note (containing such
     terms and conditions as the Committee may in its discretion determine), by
     transfer from the Participant to the Company of Previously Acquired Shares,
     or by a combination thereof. In determining whether or upon what terms and
     conditions a Participant will be permitted to pay the purchase price of an
     Option in a form other than cash, the Committee may consider all relevant
     facts and circumstances, including, without limitation, the tax and
     securities law consequences to the Participant and the Company, the
     financial accounting consequences to the Company and any contractual
     restrictions applicable to the Company. In the event the Participant is
     permitted to pay the total purchase price of an Option in whole or in part
     with Previously Acquired Shares, the value of such shares shall be equal to
     their Fair Market Value on the date of exercise of the Option.

           (b)  For purposes of this Section 6.6, a "Broker Exercise Notice"
     shall mean a written notice from a Participant to the Company at its
     principal executive office in Minneapolis, Minnesota (Attention: Chief
     Financial Officer), made on a form and in the manner as the Committee may
     from time to time determine, pursuant to which the Participant irrevocably
     elects to exercise all or any portion of an Option and irrevocably directs
     the Company to deliver the Participant's stock certificates to be issued to
     such Participant upon such Option exercise directly to a broker or dealer.
     A Broker Exercise Notice must be accompanied by or contain irrevocable
     instructions to the broker or dealer (i) to promptly sell a sufficient
     number of shares of such Common Stock or to loan the Participant a
     sufficient amount of money to pay the exercise price for the Options and,
     if not otherwise satisfied by the Participant, to fund any related
     employment and withholding tax obligations due upon such exercise, and (ii)
     to promptly remit such sums to the Company upon the broker's or dealer's
     receipt of the stock certificates.

     6.8.  Rights as a Shareholder.  The Participant shall have no rights as a
           -----------------------                                            
shareholder with respect to any shares of Common Stock covered by an Option
until the Participant shall have become the holder of record of such shares, and
no adjustments shall be made for dividends or other distributions or other
rights as to which there is a record date preceding the date the Participant
becomes the holder of record of such shares, except as the Committee may
determine pursuant to Section 4.3 of the Plan.

     6.9.  Disposition of Common Stock Acquired Pursuant to the Exercise of
           ----------------------------------------------------------------
Incentive Stock Options. Prior to making a disposition (as defined in Section
-----------------------
424(c) of the Code) of any shares of Common Stock acquired pursuant to the
exercise of an Incentive Stock Option granted

                                       8
<PAGE>
 
under the Plan before the expiration of two years after its date of grant or
before the expiration of one year after its date of exercise and the date on
which such shares of Common Stock were transferred to the Participant pursuant
to exercise of the Option, the Participant shall send written notice to the
Company of the proposed date of such disposition, the number of shares to be
disposed of, the amount of proceeds to be received from such disposition and any
other information relating to such disposition that the Company may reasonably
request. The right of a Participant to make any such disposition shall be
conditioned on the receipt by the Company of all amounts necessary to satisfy
any federal, state or local withholding and employment-related tax requirements
attributable to such disposition. The Committee shall have the right, in its
sole discretion, to endorse the certificates representing such shares with a
legend restricting transfer and to cause a stop transfer order to be entered
with the Company's transfer agent until such time as the Company receives the
amounts necessary to satisfy such withholding and employment-related tax
requirements or until the later of the expiration of two years from its date of
grant or one year from its date of exercise and the date on which such shares
were transferred to the Participant pursuant to the exercise of the Option.

     6.10.  Aggregate Limitation of Stock Subject to Incentive Stock Options. To
            ---------------------------------------------------------------- 
the extent that the aggregate Fair Market Value (determined as of the date an
Incentive Stock Option is granted) of the shares of Common Stock with respect to
which incentive stock options (within the meaning of Section 422 of the Code)
are exercisable for the first time by a Participant during any calendar year
(under the Plan and any other incentive stock option plans of the Company or any
subsidiary or any parent corporation of the Company (within the meaning of
Sections 424(f) and 424(e), respectively, of the Code)) exceeds $100,000 (or
such other amount as may be prescribed by the Code from time to time), such
excess Options shall be treated as Non-Statutory Stock Options. The
determination shall be made by taking incentive stock options into account in
the order in which they were granted. If such excess only applies to a portion
of an Incentive Stock Option, the Committee, in its discretion, shall designate
which shares shall be treated as shares to be acquired upon exercise of an
Incentive Stock Option.

                                    ARTICLE
                                    -------
                                       7.
                                 CASH BONUSES.
                                 -------------
                                        
     In connection with any grant of Options or at any time thereafter, the
Committee may, in its sole discretion, grant a cash bonus to a Participant in
connection with the grant or vesting or exercise of an Option.  The
determination of whether to grant such a cash bonus, the nature and amount of
any such cash bonus and the terms and conditions of such cash bonus shall be
within the sole discretion of the Committee.

                                    ARTICLE
                                    -------
                                       8.
             EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE
             ----------------------------------------------------
                                        
     8.1.  Termination of Employment or Other Service Due to Death, Disability
           -------------------------------------------------------------------
or Retirement. Except as otherwise provided in Article 9 of the Plan, in the
-------------
event a Participant's employment or other service with the Company and all
Subsidiaries is terminated by reason of

                                       9
<PAGE>
 
such Participant's death, Disability or Retirement, all outstanding Options then
held by the Participant shall remain exercisable to the extent exercisable as of
such termination for a period of one year after such termination in the case of
death or Disability and three months in the case of Retirement (but in no event
after the expiration date of any such Option).

     8.2.  Termination of Employment or Other Service for Reasons Other than
           -----------------------------------------------------------------
Death, Disability or Retirement. Except as otherwise provided in Article 9 of
-------------------------------
the Plan, in the event a Participant's employment or other service is terminated
with the Company and all Subsidiaries for any reason other than death,
Disability or Retirement, all rights of the Participant under the Plan shall
immediately terminate without notice of any kind, and no Options then held by
the Participant shall thereafter be exercisable; provided, however, that if such
termination is due to any reason other than termination by the Company or any
Subsidiary for "cause," all outstanding Options then held by such Participant
shall remain exercisable to the extent exercisable as of such termination for a
period of three months after such termination (but in no event after the
expiration date of any such Option). For purposes of this Article 8, "cause"
shall be as defined in any employment or other agreement or policy applicable to
the Participant or, if no such agreement or policy exists, shall mean (a)
dishonesty, fraud, misrepresentation, embezzlement or material or deliberate
injury or attempted injury, in each case related to the Company or any
Subsidiary, (b) any unlawful or criminal activity of a serious nature, (c) any
willful breach of duty, habitual neglect of duty or unreasonable job
performance, or (d) any material breach of a confidentiality or noncompete
agreement entered into with the Company or any Subsidiary.

     8.3.  Death Following Termination.  If a Participant dies within three
           ---------------------------
months following termination of employment or other service to the Company for
any reason other than cause, as defined above, all outstanding Options held by
the Participant at the time of termination shall remain exercisable to the
extent exercisable as of such termination for a period of one year after such
termination.

     8.4.  Modification of Effect of Termination.  Notwithstanding the
           -------------------------------------
provisions of this Article 8, upon a Participant's termination of employment or
other service with the Company and all Subsidiaries, the Committee may, in its
sole discretion (which may be exercised before or following such termination),
cause Options, or any portions thereof, then held by such Participant to become
exercisable and remain exercisable following such termination in the manner
determined by the Committee; provided, however, that no Option shall be
exercisable after the expiration date thereof and any Incentive Stock Option
that remains unexercised more than three months following employment termination
by reason of Retirement or more than one year following employment termination
by reason of Disability shall thereafter be deemed to be a Non-Statutory Stock
Option.

     8.5.  Breach of Confidentiality or Non-Compete Agreements.  Notwithstanding
           ---------------------------------------------------
anything in the Plan to the contrary, in the event that a Participant materially
breaches the terms of any confidentiality or non-compete agreement entered into
with the Company or any Subsidiary, whether such breach occurs before or after
termination of such Participant's employment or other service with the Company
or any Subsidiary, the Committee in its sole discretion may immediately
terminate all rights of the Participant under the Plan and any agreements
evidencing an Option then held by the Participant without notice of any kind.

                                       10
<PAGE>
 
     8.6.  Date of Termination.  Unless the Committee shall otherwise determine
           -------------------
in its sole discretion, a Participant's employment or other service shall, for
purposes of the Plan, be deemed to have terminated on the date such Participant
ceases to perform services for the Company and all Subsidiaries, as determined
in good faith by the Committee.

                                    ARTICLE
                                    -------
                                       9.
                              CHANGE OF CONTROL.
                              ------------------
                                        
     9.1.  Change in Control.  For purposes of this Article 9, a "Change in
           -----------------
Control" of the Company shall mean (a) the sale, lease, exchange or other
transfer of all or substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to a corporation that is not
controlled by the Company, (b) the approval by the shareholders of the Company
of any plan or proposal for the liquidation or dissolution of the Company, or
(c) a change in control of the Company of a nature that would be required to be
reported (assuming such event has not been "previously reported") in response to
Item 1(a) of the Current Report on Form 8-K, as in effect on the effective date
of the Plan, pursuant to Section 13 or 15(d) of the Exchange Act, whether or not
the Company is then subject to such reporting requirement; provided, however,
that, without limitation, such a Change in Control shall be deemed to have
occurred at such time as (x) any Person becomes after the effective date of the
Plan the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of 50% or more of the combined voting power of the
Company's outstanding securities ordinarily having the right to vote at
elections of directors, or (y) individuals who constitute the board of directors
of the Company on the effective date of the Plan cease for any reason to
constitute at least a majority thereof, provided that any person becoming a
director subsequent to the effective date of the Plan whose election, or
nomination for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors comprising the board of directors of the
Company on the effective date of the Plan (either by a specific vote or by
approval of the proxy statement of the Company in which such person is named as
a nominee for director, without objection to such nomination) shall be, for
purposes of this clause (y), considered as though such person were a member of
the board of directors of the Company on the effective date of the Plan.

     9.2.  Acceleration of Vesting.  If a Change of Control of the Company shall
           -----------------------                                              
occur, then, without any action by the Committee or the Board, all outstanding
Options shall become immediately exercisable in full and shall remain
exercisable during the remaining term thereof, regardless of whether the
employment or other status of the Participants with respect to which Options
have been granted shall continue with the Company or any subsidiary.

     9.3.  Cash Payment.  If a Change in Control of the Company shall occur,
           ------------
then the Committee, in its discretion, and with the consent of any Participant
effected thereby, may determine that some or all Participants holding
outstanding Options shall receive, with respect to some or all of the shares of
Common Stock subject to such Options, as of the effective date of any such
Change in Control of the Company, cash in an amount equal to the excess of the
Fair Market Value of such shares immediately prior to the effective date of such
Change in Control of the Company over the exercise price per share of such
Options.

                                       11
<PAGE>
 
     9.4.  Limitation on Acceleration of Vesting.  Notwithstanding anything in
           -------------------------------------                              
Sections 9.2 or 9.3 above to the contrary, if, with respect to a Participant,
acceleration of the vesting of Options as provided in Section 9.2 or the payment
of cash in exchange for all or part of an Option and as provided in Section 9.3
above (which acceleration or payment could be deemed a "payment" within the
meaning of Section 280G(b)(2) of the Code), together with any other payments
which such Participant has the right to receive from the Company or any
corporation which is a member of an "affiliated group" (as defined in Section
1504(a) of the Code without regard to Section 1504(b) of the Code) of which the
Company is a member, would constitute a "parachute payment" (as defined in
Section 280G(b)(2) of the Code), then the acceleration of exercisability and the
payments to such Participant pursuant to Sections 9.2 and 9.3 above shall be
reduced to the largest amount as, in the sole judgment of the Committee, will
result in no portion of such payments being subject to the excise tax imposed by
Section 4999 of the Code.

                                    ARTICLE
                                    -------
                                       10.
               RIGHT TO WITHHOLD; PAYMENT OF WITHHOLDING TAXES.
               ------------------------------------------------
                                        
     10.1.  General Rules.  The Company is entitled to (a) withhold and deduct
            ------------- 
from future wages of the Participant (or from other amounts that may be due and
owing to the Participant from the Company or a Subsidiary), or make other
arrangements for the collection of, all legally required amounts necessary to
satisfy any and all federal, state and local withholding and employment-related
tax requirements attributable to an Option, including, without limitation, the
grant, exercise or vesting of an Option or a disqualifying disposition of stock
received upon exercise of an Incentive Stock Option, or (b) require the
Participant promptly to remit the amount of such withholding to the Company
before taking any action, including issuing any shares of Common Stock, with
respect to an Option.

     10.2.  Special Rules.  The Committee may, in its sole discretion and upon
            -------------
terms and conditions established by the Committee, permit or require a
Participant to satisfy, in whole or in part, any withholding or employment-
related tax obligation described in Section 10.1 of the Plan by electing to
tender Previously Acquired Shares, a Broker Exercise Notice or a promissory note
(on terms acceptable to the Committee in its sole discretion), or by a
combination of such methods.

                                    ARTICLE
                                    -------
                                       11.
       RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS; TRANSFERABILITY.
       ----------------------------------------------------------------
                                        
     11.1.  .Employment or Service.  Nothing in the Plan shall interfere with or
             ---------------------
limit in any way the right of the Company or any Subsidiary to terminate the
employment or service of any Eligible Recipient or Participant at any time, nor
confer upon any Eligible Recipient or Participant any right to continue in the
employ or service of the Company or any Subsidiary.

     11.2.  Restrictions on Transfer.  Other than pursuant to a qualified
            ------------------------
domestic relations order (as defined by the Code), no right or interest of any
Participant in an Option prior to the exercise of such Option shall be
assignable or transferrable, or subjected to any lien, during the

                                       12
<PAGE>
 
lifetime of the Participant, either voluntarily or involuntarily, directly or
indirectly, by operation of law or otherwise, including execution, levy,
garnishment, attachment, pledge, divorce or bankruptcy. A Participant shall,
however, be entitled to designate a beneficiary to receive an Option upon such
Participant's death. In the event of a Participant's death, such Participant's
rights and interest in Options shall be transferrable by testamentary will or
the laws of descent and distribution, and payment of any amounts due under the
Plan shall be made to, and exercise of any Options (to the extent permitted
pursuant to Article 8 of the Plan) may be made by, the Participant's legal
representatives, heirs or legatees. If in the opinion of the Committee a
Participant holding an Option is disabled from caring for his or her affairs
because of mental condition, physical condition or age, any payments due the
Participant may be made to, and any rights of the Participant under the Plan
shall be exercised by, such Participant's guardian, conservator or other legal
personal representative upon furnishing the Committee with evidence satisfactory
to the Committee of such status.

     11.3.  Non-Exclusivity of the Plan.  Nothing contained in the Plan is
            ---------------------------
intended to amend, modify or rescind any previously approved compensation plans
or programs entered into by the Company. The Plan will be construed to be in
addition to any and all such other plans or programs. Neither the adoption of
the Plan nor the submission of the Plan to the shareholders of the Company for
approval will be construed as creating any limitations on the power or authority
of the Board to adopt such additional or other compensation arrangements as the
Board may deem necessary or desirable.

                                    ARTICLE
                                    -------
                                       12.
                         SECURITIES LAW RESTRICTIONS.
                         --------------------------- 
                                        
     12.1.  Share Issuances.  Notwithstanding any other provision of the Plan or
            ---------------
any agreements entered into pursuant hereto, the Company shall not be required
to issue or deliver any certificate for shares of Common Stock under this Plan,
and an Option shall not be considered to be exercised notwithstanding the tender
by the Participant of any consideration therefor, unless and until each of the
following conditions has been fulfilled:

            (a)  (i) There shall be in effect with respect to such shares a
     registration statement under the Securities Act and any applicable state
     securities laws if the Committee, in its sole discretion, shall have
     determined to file, cause to become effective and maintain the
     effectiveness of such registration statement; or (ii) if the Committee has
     determined not to so register the shares of Common Stock to be issued under
     the Plan, (A) exemptions from registration under the Securities Act and
     applicable state securities laws shall be available for such issuance (as
     determined by counsel to the Company) and (B) there shall have been
     received from the Participant (or, in the event of death or disability, the
     Participant's heir(s) or legal representative(s)) any representations or
     agreements requested by the Company in order to permit such issuance to be
     made pursuant to such exemptions; and

                                       13
<PAGE>
 
            (b)  There shall have been obtained any other consent, approval or
     permit from any state or federal governmental agency which the Committee
     shall, in its sole discretion upon the advice of counsel, deem necessary or
     advisable.

     12.2.  Share Transfers.  Shares of Common Stock issued pursuant to Options
            ---------------
granted under the Plan may not be sold, assigned, transferred, pledged,
encumbered or otherwise disposed of, whether voluntarily or involuntarily,
directly or indirectly, by operation of law or otherwise, except pursuant to
registration under the Securities Act and applicable state securities laws or
pursuant to exemptions from such registrations. The Company may condition the
sale, assignment, transfer, pledge, encumbrance or other disposition of such
shares not issued pursuant to an effective and current registration statement
under the Securities Act and all applicable state securities laws on the receipt
from the party to whom the shares of Common Stock are to be so transferred of
any representations or agreements requested by the Company in order to permit
such transfer to be made pursuant to exemptions from registration under the
Securities Act and applicable state securities laws.

     12.3.  Legends.
            ------- 

            (a)  Unless a registration statement under the Securities Act is in
     effect with respect to the issuance or Transfer of shares of Common Stock
     under the Plan, each certificate representing any such shares shall be
     endorsed with a legend in substantially the following form, unless counsel
     for the Company is of the opinion as to any such certificate that such
     legend is unnecessary:

            THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
            SECURITIES ACT OF 1933, AS AMENDED ("THE ACT"), OR UNDER APPLICABLE
            STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR
            INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, ASSIGNED,
            TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT
            PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND
            SUCH STATE LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
            THE ACT AND SUCH STATE LAWS, THE AVAILABILITY OF WHICH IS TO BE
            ESTABLISHED TO THE SATISFACTION OF THE COMPANY.

            (b)  The Committee, in its sole discretion, may endorse certificates
     representing shares issued pursuant to the exercise of Incentive Stock
     Options with a legend in substantially the following form:

            THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
            TRANSFERRED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF ON OR
            BEFORE [THE LATER OF THE ONE-YEAR OR TWO-YEAR INCENTIVE STOCK OPTION

                                       14
<PAGE>
 
            HOLDING PERIODS], WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY.

                                    ARTICLE
                                    -------
                                       13.
                 PLAN AMENDMENT, MODIFICATION AND TERMINATION.
                 ---------------------------------------------
                                        
     The Board may suspend or terminate the Plan or any portion thereof at any
time, and may amend the Plan from time to time in such respects as the Board may
deem advisable in order that Options under the Plan shall conform to any change
in applicable laws or regulations or in any other respect the Board may deem to
be in the best interests of the Company; provided, however, that no such
amendment shall be effective, without approval of the shareholders of the
Company, if shareholder approval of the amendment is then required pursuant to
Rule 16b-3 under the Exchange Act or any successor rule or Section 422 of the
Code or under the applicable rules or regulations of any securities exchange or
the NASD.  No termination, suspension or amendment of the Plan shall alter or
impair any outstanding Option without the consent of the Participant affected
thereby; provided, however, that this sentence shall not impair the right of the
Committee to take whatever action it deems appropriate under Section 4.3 or
Article 9 of the Plan.

                                    ARTICLE
                                    -------
                                       14.
                          EFFECTIVE DATE OF THE PLAN.
                          -------------------------- 
                                        
     14.1.  Effective Date.  The Plan is effective as of October 5, 1993, the
            --------------  
date it was adopted by the Board.

     14.2.  Duration of the Plan.  The Plan shall terminate at midnight on
            --------------------
October 4, 2003, and may be terminated prior thereto by Board action, and no
Option shall be granted after such termination. Options outstanding upon
termination of the Plan may continue to be exercised in accordance with their
terms.
                                    ARTICLE
                                    -------
                                       15.
                                MISCELLANEOUS.
                                --------------
                                        
     15.1.  Construction and Headings.  The use of the masculine gender shall
            -------------------------
also include within its meaning the feminine, and the singular may include the
plural and the plural may include the singular, unless the context clearly
indicates to the contrary. The headings of the Articles, Sections and subparts
of the Plan are for convenience of reading only and are not meant to be of
substantive significance and shall not add or detract from the meaning of such
Article, Section or subpart.

     15.2.  Public Policy.  No person shall have any claim or right to receipt
            -------------
of an Option if, in the opinion of counsel to the Company, such receipt
conflicts with law or is opposed to governmental or public policy.

                                       15
<PAGE>
 
     15.3.  Governing Law.  The place of administration of the Plan shall be
            -------------                                                   
conclusively deemed to be within the State of Minnesota, and the rights and
obligations of any and all persons having or claiming to have had an interest
under the Plan or under any agreements evidencing Options shall be governed by
and construed exclusively and solely in accordance with the laws of the State of
Minnesota without regard to the conflict of laws provisions of any
jurisdictions.  All parties agree to submit to the jurisdiction of the state and
federal courts of Minnesota with respect to matters relating to the Plan and
agree not to raise or assert the defense that such forum is not convenient for
such party.

     15.4.  Successors and Assigns.  This Plan shall be binding upon and inure
            ----------------------
to the benefit of the successors and permitted assigns of the Company,
including, without limitation, whether by way of merger, consolidation,
operation of law, assignment, purchase or other acquisition of substantially all
of the assets or business of the Company, and any and all such successors and
assigns shall absolutely and unconditionally assume all of the Company's
obligations under the Plan.

     15.5.  Survival of Provisions.  The rights, remedies, agreements,
            ----------------------
obligations and covenants contained in or made pursuant to the Plan, any
agreement evidencing an Option and any other notices or agreements in connection
therewith, including, without limitation, any notice of exercise of an Option,
shall survive the execution and delivery of such notices and agreements and the
delivery and receipt of shares of Common Stock and shall remain in full force
and effect.

                                       16