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================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------


                                  FORM 10-KSB/A
                                (Amendment No. 1)


(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

                   For the Fiscal Year Ended December 31, 2002

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

     For the transition period from ________________ to __________________.

                           Commission File No. 0-27600

                                   ----------

                          OPTICAL SENSORS INCORPORATED
             (Exact name of registrant as specified in its charter)

                   DELAWARE                             41-1643592
        (State or other jurisdiction of              (I.R.S. Employer
        incorporation or organization)             Identification No.)

      7615 Golden Triangle Drive, Suite C
               Technology Park V
            Minneapolis, Minnesota                      55344-3733
    (Address of principal executive offices)            (Zip code)

       Registrant's telephone number, including area code: (952) 944-5857

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

           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.01 par value
                         Preferred Share Purchase Rights

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.[X]

         The issuer's revenues for the fiscal year ended December 31, 2002 were
$1,574,796.

         As of February 20, 2003, 3,190,047 shares of common stock of the
registrant were outstanding, and the aggregate market value of the common stock
of the registrant as of that date (based upon the last reported sale price of
the common stock at that date as reported by the OTC Bulletin Board System),
excluding outstanding shares beneficially owned by directors, executive officers
and affiliates, was $5,905,207.

    Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]

================================================================================

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                                EXPLANATORY NOTE


This Amendment No. 1 on Form 10-KSB/A to our annual report on Form 10-KSB for
the year ended December 31, 2002 is being filed solely for the purposes of
responding to comments received by us from the Staff of the Securities and
Exchange Commission. This Amendment speaks as of the original filing date of our
annual report on Form 10-KSB and has not been updated to reflect events
occurring subsequent to the original filing date. For the convenience of the
reader, we have restated our annual report on Form 10-KSB in its entirety.


                                     PART I

         This Form 10-KSB contains certain forward-looking statements. For this
purpose, any statements contained in this Form 10-KSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"estimate" or "continue" or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending on a
variety of factors, including those set forth in the section below entitled
"Certain Important Factors."

         As used in this Form 10-KSB, references to "Optical Sensors," the
"Company," "we" or "us" refer to Optical Sensors Incorporated, unless the
context otherwise indicates. We own or have the rights to use various
trademarks, trade names or service marks, including the Optical Sensors name.

ITEM 1.           DESCRIPTION OF BUSINESS.

GENERAL

Optical Sensors Incorporated is a technology development company specializing in
low-cost, fiber optic sensors and instruments. Our mission is to leverage our
proprietary sensor platform technology into innovative and low cost applications
for minimally-to-non invasive medical diagnostic and management products. We
have created a springboard technology platform for continued intellectual
property development, rapid research and development of proprietary sensor
applications and a source of hardware inventory for clinical evaluation and
laboratory test equipment. Our core technology of sensors, hardware and software
systems can be incorporated into a variety of low-cost, fluid, blood and
tissue-contacting measurement systems.

We were originally founded in 1989 to develop a point-of-care monitoring system
using proprietary fiber-optic chemical and manufacturing technology. In January
1997, we introduced our first product, the SensiCath(TM) Blood Gas Monitoring
System. The SensiCath System was a unique, bedside monitor for use in measuring
three critical blood parameters: pH (the acid/base balance), PCO(2) (carbon
dioxide) and PO(2) (oxygen). These parameters are commonly referred to as
arterial blood gases or "ABGs". In January 1999, we suspended sales activity of
the SensiCath System and reduced expenses and personnel (including sales and
marketing personnel) in order to focus our resources on development and
commercialization of the CapnoProbe Sensor System, which is a handheld device
with a carbon dioxide, or CO(2), probe that is slipped under the tongue like a
thermometer. It non-invasively measures the tissue CO(2) of the mucous
membrane in the mouth -- a sensitive measure that can indicate reduced blood
flow to non-vital organs. Reduced blood flow, or "hypoperfusion," can be an
early manifestation of clinical shock, even when traditional vital signs may
still appear relatively normal. Diagnosis of inadequate tissue perfusion

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may be difficult in its early stages when the signs and symptoms are masked by
the body's natural compensatory mechanisms that preserve blood supply to vital
organs by reducing blood flow to other organs. If treatment is delayed to the
point that the body's compensatory systems can no longer maintain adequate
circulation and vital tissue perfusion, the consequences can be disastrous for
the patient. To date, there has been no rapid, low-cost, noninvasive method to
objectively determine when a patient has inadequate tissue perfusion.

In December 2000, we received 510(k) clearance from the FDA to market an early
version of the CapnoProbe Sensor System with a disposable sensor and a bench top
instrument. In April 2001, we received 510(k) clearance from the FDA to market a
hand-held, battery-operated version of the bench top instrument.


On September 28, 2001, we entered into an exclusive license agreement with
Nellcor Puritan Bennett, or Nellcor, under which Nellcor will be the exclusive
worldwide manufacturer and distributor of our CapnoProbe(TM) product. Nellcor
began the initial phase of commercial release of the CapnoProbe system in the
fourth quarter of 2002. We also entered into a supply agreement with Nellcor
under which we will manufacture the CapnoProbe for Nellcor for a transition
period, of up to one year, or a certain quantity has been produced, while
Nellcor establishes its own manufacturing operations. We received $2 million in
milestone payments in 2001, 2002 and 2003 under the license agreement. We
receive manufacturing revenues from Nellcor for the disposable components of the
CapnoProbe system under the supply agreement. We expect to transfer disposable
component manufacturing to a Nellcor manufacturing facility beginning in the
second half of 2003. We expect our manufacturing revenues from CapnoProbe to end
when this transfer is completed. Future CapnoProbe revenues will be from royalty
payments from Nellcor to us, less a portion to be paid by Nellcor on our behalf
to the Institute of Critical Care Medicine, or ICCM, pursuant to a July 1998
license agreement between us and ICCM and subsequent agreements among us, ICCM
and Nellcor. The royalty rates are based upon a net gross margin calculation for
the disposable components and an aggregate gross margin calculation for the
instrument.


On April 16, 2002, our Board of Directors approved a one-for-six reverse split
of our outstanding common stock. We submitted the reverse stock split to our
shareholders for approval at a special meeting of shareholders on August 19,
2002. The reverse split became effective September 13, 2002. All share and per
share amounts have been adjusted to reflect the reverse stock split.


On October 1, 2002, we acquired from Vasamedics LLC certain assets related to
medical instrumentation for patient monitoring of laser Doppler blood flow and
related measurements. The purchase price was approximately $158,000 and
consisted of paying off certain debt of Vasamedics. In addition, two former
owners of Vasamedics are eligible for cash payments and options that vest
contingent on achieving certain future sales milestones over the first three
years following the acquisition. The maximum cash payment that can be earned is
$220,000 and the maximum number of options is 75,000, which will be accounted
for as additional purchase price when, and if, such milestones are met. We
funded the purchase price with advances from Circle F. We also hired four
employees of Vasamedics and retained one former employee of Vasamedics as an
independent contractor. The acquisition enables the Company to incorporate
mechanical assessment of perfusion (the use of a laser Doppler sensor and
velocimeter combined with pressure) with its proprietary metabolic means of
assessing perfusion (the use of carbon dioxide, pH, oxygen and hematocrit sensor
systems). Inadequate tissue perfusion (blood flow into the tissues) is a
clinical syndrome known as shock. Additionally, the acquisition provides direct
sales contact with customers in areas of future market interest to the Company.


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We do not expect to incur any significant liabilities for equipment, real estate
or leasehold improvements during this period nor do we plan to significantly
increase or decrease our current number of employees. We do expect to increase
spending for patent filings in major countries around the world.

THE CAPNOPROBE

The CapnoProbe is a handheld device with a CO(2) probe that is slipped under
the tongue like a thermometer that non-invasively measures the tissue CO(2) of
the mucous membrane in the mouth -- a sensitive measure that can indicate
reduced blood flow to non-vital organs. Reduced blood flow, or "hypoperfusion,"
can be an early manifestation of clinical shock, even when traditional vital
signs may still appear relatively normal, as in compensated shock cases. The
CapnoProbe's disposable CO(2) probe is self-calibrating and is planned to
provide CO(2) readings in approximately one minute. One CapnoProbe sensor will
be used on one patient for a single measurement. Multiple measurements would be
made depending on the severity of the patient's state and response to therapy.
The CapnoProbe instrument is portable, rugged and battery operated.

VASAMEDIC PRODUCT LINE

Vasamedics provides laser Doppler instrumentation for blood flow and skin
perfusion pressure monitoring. Patients served by this technology include those
with chronic foot ulcers, diabetics, and candidates for amputation. Vasamedics
LASERDOPP(R) PV2000 measures Skin Perfusion Pressure to provide a quantitative
evaluation of small vessel disease in these patients. Other competing test
methods provide only qualitative information or they are too time consuming and
insensitive. The PV2000 also provides Pulse Volume waveform analysis; this
allows caregivers to interpret intraluminal changes in connection with occlusive
disease. Vasamedics Laserflo BPM2 technology allows monitoring of microvascular
blood flow in tissue at risk of ischemic injury. This product provides
information via laser and fiber optics technology.

SALES AND MARKETING


We do not maintain any sales or marketing personnel for CapnoProbe. We excluded
from the license we granted to Nellcor forward military applications of the
CapnoProbe. Specifically, the Company's business development function is
investigating sales of CapnoProbe to military organizations for use in triage of
soldiers in combat situations.

We have sales and marketing personnel that support sales of the Vasamedics
product through a group of five independent U.S. dealer representatives and one
independent contractor. We also have distributors that sell Vasamedics product
in Mexico, Germany, Turkey, Canada, Singapore and Japan.


RESEARCH AND DEVELOPMENT

Our research and development staff completed the incorporation of the Nellcor
product and market specifications into the design of the CapnoProbe technology
and is currently developing other non-invasive metabolic perfusion systems such
as a local/regional tissue perfusion system. The Vasamedics technology
compliments these activities because the laser Doppler technology provides a
means to assess mechanical blood flow. Our research and development expenses for
the fiscal years ended December 31, 2002 and 2001 were $1,883,366, and
$2,531,740, respectively. We anticipate that we will continue to spend
significant amounts on research and development activities for the foreseeable
future.

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MANUFACTURING AND SUPPLY


We maintain approximately 4,000 square feet of manufacturing space, which
includes a Class 10,000 clean room. This space and capability is used to
manufacture the disposable component of the CapnoProbe, which we sell to Nellcor
to comply with the manufacturing supply terms of the Nellcor agreement, to
manufacture Vasamedics product and to provide prototype manufacturing for new
products.


COMPETITION

Competition in the medical device industry in general is intense and expected to
increase. To our knowledge, however, there are no commercially available
products that would be directly competitive with the CapnoProbe. The CapnoProbe
would indirectly compete with the Datex-Ohmeda (Instrumentariun Corporation)
TONOCAP system. This product measures CO(2) in the tissue of the stomach wall
as an indicator of shock and has only recently been introduced to critical care
medicine. The TONOCAP system requires placement of a balloon catheter into the
stomach and measures air or saline from the balloon at regular intervals.
However, the administration of a histamine-2 receptor (e.g., Tagamet) and a
stomach free of food are required for accurate measurements, making the TONOCAP
a difficult product to use in emergency situations where it is most needed. Even
with its limitations, there is a growing body of literature that reinforces the
importance of measuring gastrointestinal CO(2) as a method of diagnosing shock
since there is evidence that if elevated CO(2) cannot be reversed within six
to 24 hours, aggressive treatment will not be effective.

We believe that the principal competitive factors for our CapnoProbe will be
accuracy, rapid results, cost-effectiveness and price. Our competitors have
significantly greater financial, technical, research, marketing, sales,
distribution and other resources than we do. There can be no assurance that our
competitors will not succeed in developing or marketing technologies and
products that are more effective or less expensive than those developed or
marketed by us or that would render our technology and products obsolete or
noncompetitive. Furthermore, there can be no assurance that the emergence of new
products, technologies or procedures will not reduce the need for the
CapnoProbe.

Vasamedics has four main competitors: Perimed AB, Moor Instruments Ltd.,
Transonic Systems Inc and Oxfor Optronix Ltd. Each company has different
capabilities and approaches to the determination of local/regional tissue
perfusion. Optical Sensors believes that the incorporation of its technology
into the Vasamedics instrument will result in a differentiable and improved
perfusion diagnostic system in comparison to Vasamedics competition. There can
be no assurance that Vasamedics competitors will not succeed in developing or
marketing technologies and products that are more effective or less expensive
than those developed or marketed by us or that would render our technology and
products obsolete or noncompetitive. Furthermore, there can be no assurance that
the emergence of new products, technologies or procedures will not reduce the
need for the Vasamedics product.

PATENTS AND PROPRIETARY RIGHTS


We seek to protect technology, inventions and improvements that we consider
important through the use of patents and trade secrets. We currently hold or
have a license to practice 32 U.S. patents covering our technology, eight of
which are specifically related to the CapnoProbe and four of which specifically
cover Vasamedics products. One material patent will expire in 2013, and all of
our other material patents expire in 2018 or later. We have filed a number of
patent


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applications in the United States, Japan and key European countries. There can
be no assurance, however, that our patents will provide competitive advantages
for our products, or that such rights will not be challenged or circumvented by
competitors. In addition, there can be no assurance that any patents covered
under any pending patent applications will be issued. Claims made under patent
applications may be denied or significantly narrowed and the issued patents, if
any, may not provide significant commercial protection to us. We could incur
substantial costs in proceedings before the U.S. Patent and Trademark Office,
including interference proceedings. These proceedings could result in adverse
decisions as to the priority of our inventions.


In July 1998, we entered into a patent license agreement with Institute of
Critical Care Medicine ("ICCM"), which provides us with the exclusive, worldwide
right under ICCM's pending and issued patents to use our technology to assess
tissue perfusion under the tongue (sublingually) and in the esophagus to aid in
the diagnosis and monitoring of shock. The CapnoProbe product being developed by
us is expected to be subject to royalties under the license agreement. We paid
ICCM a minimum annual royalty of $400,000 in 2002 and are obligated to pay ICCM
a minimum annual royalty of $400,000 from 2003 through 2005 in order to maintain
exclusivity. We may elect, on one years' written notice, not to make the annual
minimum royalty payment of $400,000, but ICCM would have the right to terminate
the license agreement. We are obligated to pay ICCM a customary royalty equal to
a percentage of sales, which varies depending on the selling price to the
customer of the CapnoProbe.


On September 28, 2001, we entered into an exclusive license agreement with
Nellcor Puritan Bennett under which Nellcor will be the exclusive worldwide
manufacturer and distributor of our CapnoProbe(TM) product. We granted Nellcor
exclusive manufacturing and distribution rights to the CapnoProbe product for
the "assessment of systemic hypoperfusion" or, in lay terms, shock. We excluded
from the license we granted to Nellcor forward military applications of the
CapnoProbe product. We expect our manufacturing revenues from CapnoProbe to end
when we transfer disposable component manufacturing to a Nellcor manufacturing
facility in the second half of 2003. Future CapnoProbe revenues will be from
royalty payments from Nellcor to us, less a portion to be paid by Nellcor on our
behalf to the Institute of Critical Care Medicine, or ICCM, pursuant to a July
1998 license agreement between us and ICCM and subsequent agreements among us,
ICCM and Nellcor. The royalty rates are based upon a net gross margin
calculation for the disposable components and an aggregate gross margin
calculation for the instrument.


On October 1, 2002, we acquired from Vasamedics LLC certain assets related to
medical instrumentation for patient monitoring of laser Doppler blood flow and
related measurements. As part of that acquisition we acquired four patents
related to skin perfusion pressure and laser Doppler flow monitoring.

While we do not believe that any of our products infringe any valid claims of
patents or other proprietary rights held by third parties, there can be no
assurance that we do not infringe any patents or other proprietary rights held
by third parties. If an infringement claim were made, the costs incurred to
defend the claim could be substantial and adversely affect our business, even if
we were ultimately successful in defending the claim. If our products were found
to infringe any proprietary right of a third party, we could be required to pay
significant damages or license fees to the third party or cease production.
Litigation may also be necessary to enforce patent rights held by us, or to
protect trade secrets or techniques owned by us. Any such claims or litigation
could result in substantial costs and diversion of effort by management.

We also rely on trade secrets and other unpatented proprietary technology. There
can be no assurance that we can meaningfully protect our rights in such
unpatented proprietary technology

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or that others will not independently develop substantially equivalent
proprietary products or processes or otherwise gain access to our proprietary
technology. We seek to protect our trade secrets and proprietary know-how, in
part, with confidentiality agreements with employees and consultants. There can
be no assurance that the agreements will not be breached, that we will have
adequate remedies for any breach or that our trade secrets will not otherwise
become known to or independently developed by competitors.

GOVERNMENT REGULATION

Our products, development activities and manufacturing processes are subject to
regulation by numerous governmental authorities, principally the United States
Food and Drug Administration and corresponding foreign agencies. In the United
States, the FDA administers the Federal Food, Drug and Cosmetics Act and
amendments thereto, including the Safe Medical Devices Act of 1990. We are
subject to the standards and procedures respecting manufacture and marketing of
medical devices contained in the Federal Food, Drug and Cosmetics Act and the
regulations promulgated thereunder and are subject to inspection by the FDA for
compliance with such standards and procedures. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing approvals and criminal
prosecution.

In the United States, medical devices are classified into one of three classes
(class I, II or III), on the basis of the controls deemed necessary by the FDA
to reasonably assure their safety and effectiveness. Under FDA regulations,
class I devices are subject to general controls (e.g., labeling, premarket
notification and adherence to good manufacturing practices) and class II devices
are subject to general and special controls (e.g., performance standards,
postmarket surveillance, patient registries and FDA guidelines). In general,
class III devices (e.g., life-sustaining, life-supporting and implantable
devices, or new devices which have not been found substantially equivalent to a
legally marketed device), in addition to being subject to general and special
controls, must receive premarket approval ("PMA") by the FDA to ensure their
safety and effectiveness.

Before a new or significantly modified device can be introduced into the market,
the manufacturer must generally obtain marketing clearance through a 510(k)
notification or approval of a PMA application. A 510(k) clearance will be
granted if the proposed device is "substantially equivalent" to a predicate
device (i.e., a legally marketed class I or class II medical device, or a class
III medical device for which the FDA has not called for the submission of a PMA
application). Commercial distribution of a device for which a 510(k)
notification is required can begin only after the FDA issues a written
determination that the device is "substantially equivalent" to a predicate
device. The process of obtaining a 510(k) clearance typically can take several
months to a year or longer. A PMA application must be filed if a proposed device
is not substantially equivalent to a legally marketed class I or class II
device, or if it is a class III device for which the FDA has called for a PMA
application. Certain class III devices that were on the market before May 28,
1976 ("preamendments class III devices"), and devices that are substantially
equivalent to them, can be brought to market through the 510(k) process until
the FDA calls for the submission of PMA applications for preamendments class III
devices. The process of obtaining a PMA can be expensive, uncertain and lengthy,
frequently requiring anywhere from one to several years from the date the PMA is
submitted to the FDA, if approval is obtained at all.

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In December 2000, we received 510(k) clearance from the FDA to market the early
version of the CapnoProbe Sensor System with a disposable sensor and a bench top
instrument. In April 2001, we received 510(k) clearance from the FDA to market a
hand-held, battery-operated version of the bench top instrument.

We also have 510(k) clearance to market for both the Vasamedics LASERDOPP PV2000
and BPM(2) products. Both systems consist of reusable components and bench top
instruments.

We are also subject to regulation in each of the foreign countries in which we
sell our products with regard to product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. Many of the regulations applicable to our products in such
countries are similar to those of the FDA. The national health or social
security organizations of certain of such countries require our products to be
qualified before they can be marketed in those countries. Delays in receipt of,
or a failure to receive such approvals or clearances, or the loss of any
previously received approvals or clearances, could have a material adverse
effect on our business. To date, we have not experienced significant difficulty
in complying with these regulations. In February 1997, we received the European
Medical Devices Directorate ("MDD") approval to place the "CE" mark on our
products. The CE mark enables our products to be marketed, sold and used
throughout the European Union, subject to limited "safeguard" powers of member
states.

We are subject to periodic inspections by the FDA, which is charged with
auditing our compliance with good manufacturing practices established by the FDA
and other applicable government standards. Strict regulatory action may be
initiated in response to audit deficiencies or to product performance problems.
Although our manufacturing facility is not currently ISO 9001 certified, we
believe that it is ISO 9001 compliant. We also believe that our manufacturing
and quality control procedures are in compliance with the requirements of the
FDA and MDD regulations. Failure to maintain good manufacturing practices could
have a material adverse effect on our business.

EMPLOYEES

As of January 1, 2003, we had 21 full-time employees and two part-time
employees. None of our employees are covered by a collective bargaining
agreement, and we consider our relationship with our employees to be good.

ADDITIONAL INFORMATION ON OPTICAL SENSORS

We are currently subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. As a result, we are required to file periodic
reports and other information with the SEC, such as annual, quarterly, and
current reports, and proxy and information statements. You are advised to read
this Form 10-KSB in conjunction with the other reports, proxy statements, and
other documents we file from time to time with the SEC. If you would like more
information regarding Optical Sensors, you may read and copy the reports, proxy
and information statements and other documents we file with the SEC, at
prescribed rates, at the SEC's public reference room at 450 Fifth Street, NW,
Washington, DC 20549. You may obtain information regarding the operation of the
SEC's public reference rooms by calling the SEC at 1-800-SEC-0330. Our SEC
filings are also available to the public free of charge at the SEC's website.
The address of this website is http://www.sec.gov. We also maintain a link on
our website at www.opsi.com to the location on SEC's website containing the
reports, proxy and information statements and other documents we file with the
SEC.

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We will provide electronic or paper copies of our SEC filings (excluding
exhibits) to any stockholder free of charge upon receipt of a written request
for any such filing. All requests for our SEC filings should be sent to Optical
Sensors Incorporated, 7615 Golden Triangle Drive, Suite C, Technology Park VI,
Minneapolis, Minnesota 55344; Attn: Stockholder Information.

ITEM 2.           PROPERTIES.

Our facilities are located at 7615 Golden Triangle Drive, Suite C, Technology
Park V, Minneapolis, Minnesota, and consist of approximately 18,300 square feet.
We lease these facilities pursuant to a lease that expires on March 31, 2005.
The lease provides for rent of approximately $18,600 per month, including base
rent and a pro rata share of operating expenses and real estate taxes.

ITEM 3.           LEGAL PROCEEDINGS.

There are no material pending or threatened legal, governmental, administrative
or other proceedings to which we are a party or of which any of our property is
subject.

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.

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                                     PART II

ITEM 5.           MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
                  STOCKHOLDER MATTERS.

From February 14, 1996, the date of our initial public offering, through May 11,
2000, our common stock was traded on The Nasdaq National Market. Since May 12,
2000, our common stock has traded in the over-the-counter market on the OTC
Bulletin Board currently under the symbol OPTL.OB. The following table sets
forth the quarterly high and low bid prices for our common stock for the periods
indicated as reported by the OTC Bulletin Board. On April 16, 2002, our Board of
Directors approved a one-for-six reverse split of our outstanding common stock.
We submitted the reverse stock split to our shareholders for approval at a
special meeting of shareholders on August 19, 2002. The reverse split became
effective September 13, 2002. All per share numbers in the following table have
been adjusted to reflect the reverse split.

                         QUARTER ENDED              HIGH       LOW
              -----------------------------------  -------   -------

              December 31, 2002                    $  6.00   $  3.32
              September 30, 2002                      3.96      3.12
              June 30, 2002                           4.50      2.70
              March 31, 2002                          4.32      2.22

              December 31, 2001                    $  4.38   $  2.40
              September 30, 2001                      5.40      1.50
              June 30, 2001                           4.02      1.74
              March 31, 2001                          6.00      1.50

The foregoing prices reflect inter-dealer prices, without dealer markup,
markdown or commissions, and may not represent actual transactions.

As of March 15, 2003, we had approximately 2,200 stockholders of record of our
common stock.

We have never paid any cash dividends on our common stock, and do not anticipate
paying any cash dividends on our common stock in the foreseeable future.

See Item 12 "Certain Relationships and Related Transactions" for a description
of all sales of unregistered securities by Optical Sensors since January 1,
2002. All such sales were made in reliance on an exemption from registration
under Section 4(2) of the Securities Act, based on investment representations
given by the purchasers of such securities. Optical Sensors did not pay any
commissions with respect to the sale of such securities.

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ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

OVERVIEW

Since October 1998, we have been focusing our resources on development and
commercialization of the CapnoProbe(TM), which is a handheld device with a CO(2)
probe that is slipped under the tongue like a thermometer. It non-invasively
measures the tissue CO(2) of the mucous membrane in the mouth -- a sensitive
measure that can indicate reduced blood flow to non-vital organs. Reduced blood
flow, or "hypoperfusion," can be an early manifestation of clinical shock, even
when traditional vital signs may still appear relatively normal. Diagnosis of
inadequate tissue perfusion may be difficult in its early stages when the signs
and symptoms are masked by the body's natural compensatory mechanisms that
preserve blood supply to vital organs by reducing blood flow to other organs. If
treatment is delayed to the point that the body's compensatory systems can no
longer maintain adequate circulation and vital tissue perfusion, the
consequences can be disastrous for the patient. To date, there has been no
rapid, low-cost, noninvasive method to objectively determine when a patient has
inadequate tissue perfusion.

In December 2000, we received 510(k) clearance from the FDA to market the
CapnoProbe, configured with a disposable sensor and a bench top instrument. In
April 2001, we received 510(k) clearance from the FDA to market a hand-held,
battery-operated version of the bench top instrument.


On September 28, 2001, we entered into an exclusive license agreement with
Nellcor Puritan Bennett, or Nellcor, under which Nellcor will be the exclusive
worldwide manufacturer and distributor of our CapnoProbe product. Nellcor began
the initial phase of commercial release of the CapnoProbe system in the fourth
quarter of 2002. At the same time, we also entered into a supply agreement with
Nellcor under which we will manufacture the CapnoProbe for Nellcor for a
transition period, of up to one year from commercial launch, or until a certain
quantity has been produced, while Nellcor establishes its own manufacturing
operations. We currently expect to transition manufacturing operations to
Nellcor in the second half of 2003. The terms of the supply agreement with
Nellcor provide that Nellcor will advance funds to us for the purchase of
substantially all the materials and components required to manufacture the
CapnoProbe System. These advances are to be repaid to Nellcor via pro-rated
credits against subsequent billings from us to Nellcor. The intent of this
arrangement is that we will not utilize our own operating capital for materials
and components. Our expenses for manufacturing, labor and overhead will be
recouped from our billings to Nellcor.



On October 1, 2002, we acquired from Vasamedics LLC certain assets related to
medical instrumentation for patient monitoring of laser Doppler blood flow and
related measurements. The purchase price was approximately $158,000 and
consisted of paying off certain debt of Vasamedics. In addition, two former
owners of Vasamedics are eligible for cash payments and options that vest
contingent on achieving certain future sales milestones over the first three
years following the acquisition. The maximum cash payment that can be earned is
$220,000 and the maximum number of options is 75,000, which will be accounted
for as additional purchase price when, and if, such milestones are met. We
funded the purchase price with advances from Circle F. We also hired four
employees of Vasamedics and retained one former employee of Vasamedics as an
independent contractor. The acquisition enables us to incorporate mechanical
assessment of perfusion (the use of a laser Doppler sensor and velocimeter
combined with pressure) with our proprietary metabolic means of assessing
perfusion (the use of carbon dioxide, pH, oxygen and hematocrit sensor systems).
Inadequate tissue perfusion (blood flow into the


                                       10

<PAGE>


tissues) is a clinical syndrome known as shock. Additionally, the acquisition
provides us direct sales contact with customers in areas of future market
interest.


We do not expect to incur any significant liabilities for equipment, real estate
or leasehold improvements during the foreseeable future, nor do we plan to
significantly increase or decrease our current number of employees. We do expect
to increase spending for patent filings in major countries around the world.

On April 16, 2002, our Board of Directors approved a one-for-six reverse split
of our outstanding common stock. We submitted the reverse stock split to our
shareholders for approval at a special meeting of shareholders on August 19,
2002. The reverse split became effective September 13, 2002. All share and per
share amounts have been adjusted to reflect the reverse stock split.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General

The following discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
inventories, income taxes, and contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements.

Revenue Recognition

We recognize revenue in accordance with the Securities and Exchange Commission's
Staff Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial
Statements." SAB 101 requires that four basic criteria must be met before
revenue can be recognized: (1) persuasive evidence of an agreement exists; (2)
delivery has occurred or services rendered; (3) the fee is fixed and
determinable; and (4) collectibility is reasonably assured. Revenues from our
business activities are recognized from net sales of manufactured products upon
delivery to the customer; from product development fees as the contracted
services are rendered; from product development milestones upon completion and
acceptance; from up-front product development license fees as they are amortized
over the expected development term of the proposed products; and from royalties
on the sales of products sold by companies under license from us. The
determination of SAB 101 criteria (3) and (4) for each source of revenue is
based on our judgments regarding the fixed nature and collectibility of each
source of revenue. Revenue recognized for any reporting period could be
adversely affected should changes in conditions cause us to determine that these
criteria are not met for certain future transactions.

                                       11

<PAGE>

Research and Development Supplies

At December 31, 2002, research and development supplies with a carrying value of
approximately $610,650 consisted of electro-optical modules. These modules were
originally a component of our proprietary SensiCath Arterial Blood Gas System.
We discontinued sales of the SensiCath product in January of 1999 and
subsequently disposed of all related inventories, with the exception of these
modules, which we utilize from time to time in prototyping new applications of
our technologies, as components of test equipment, and for use in performing
clinical studies. We believe these modules are important in our development of
products for ourselves and other companies by allowing us to respond quickly and
economically to such needs as they arise. Should we not achieve our expectations
of the net realizable value of these supplies, potential future losses may occur
to the extent of the carrying value at December 31, 2002 of $610,650.

Patents and Impairment Review

At December 31, 2002, we reported patents on our balance sheet, net of
amortization, of $665,206. Accumulated amortization was $314,745 at December 31,
2002. After an individual patent is issued, we amortize the accumulated costs on
a straight-line basis over an estimated average useful life of 60 months.
Periodically we evaluate each patent as to whether it enhances or helps secure
our overall intellectual property portfolio. Whenever events or changes in
circumstances indicate impairment has occurred, values are adjusted
appropriately. Should we not achieve our expectations of the net realizable
value of our investment in patents, potential future losses may occur to the
extent of the carrying value at December 31, 2002 of $665,206.

Variable Accounting Rules and Compensation Expense

Certain stock options issued by us have been re-priced thereby resulting in our
option plan being subject to variable accounting rules. Application of these
rules results in recognizing compensation expense or reductions to compensation
expense whenever the market price of our stock varies from that of the prior
quarter-end. Additional compensation charges and credits will most likely be
recorded in future periods. We are unable to predict the extent of these charges
and credits.

RESULTS OF OPERATIONS

Comparison of fiscal years ended December 31, 2002 and 2001


We earned $1,055,914 in development fee revenues in 2002 as compared to $687,500
in 2001. We earned $962,500 of these fees in 2002 and $687,000 of these fees in
2001 under our license agreement with Nellcor. In January, 2003, we earned a
final development fee of $350,000 from Nellcor under our license agreement with
Nellcor. We have received all of the $2,000,000 in development fees contemplated
from Nellcor under our license agreement.



We expect to begin earning royalty revenues from Nellcor in the third quarter of
2003. While Nellcor has begun the initial phase of commercial release of the
CapnoProbe product, distribution to date has consisted of limited, "no-charge"
placement of product with clinicians for market evaluation purposes. Once
Nellcor commences "for cash" commercial sales of the CapnoProbe product, we
expect to earn a royalty. Ongoing revenues for us from CapnoProbe will be in the
form of royalty payments from Nellcor to us, less a portion to be paid by
Nellcor on behalf of us to the Institute of Critical Care Medicine, or ICCM,
pursuant to a July 1998 license agreement


                                       12

<PAGE>


between us and ICCM and subsequent agreements among us, ICCM and Nellcor. This
royalty will be a varying percentage of Nellcor's CapnoProbe sales.



Net sales for 2002 were $518,882, all of which was in the fourth quarter of
2002. These sales consisted of $277,530 of CapnoProbe product sold to Nellcor
for its initial product launch and $241,352 of Vasamedics product. We had no
sales in 2001.





Cost of goods sold for 2002 was $422,034, all of which was related to CapnoProbe
product sales to Nellcor and Vasamedics product sales. There were no cost of
goods sold in 2001. Under our license agreement with ICCM we are required to pay
ICCM a royalty, based on sales by Nellcor of the CapnoProbe product. We are
required under the license agreement to pay ICCM an annual minimum royalty of
$400,000 through 2005, after which we may elect to continue to pay ICCM an
annual minimum royalty of $400,000 for an exclusive license or to forego the
minimum royalty and retain the license on a non-exclusive basis. These payments
were included in research and development expenses in 2002, but will be recorded
as cost of sales when Nellcor begins commercial release of the CapnoProbe
product in the first quarter of 2003.



Research and development costs for 2002 decreased $648,374 to $1,883,366 or 26%
from $2,531,740 in 2001. Research and development costs for 2001 included a
$554,549 write-off of obsolete research and development supplies. We received
reimbursements under our supply agreement with Nellcor for labor and overhead
costs related to production of Nellcor owned tooling and manufacturing equipment
of $230,762 and $28,335, respectively, in 2002 and 2001. We also capitalized
labor and overhead costs of $84,904 in 2002 related to the production of pilot
plant equipment. In conjunction with efforts towards development of our
CapnoProbe product, we paid third party engineering firms $218,504 and $41,275,
and consumed materials and supplies of $107,819 and $35,850, respectively, in
the 2002 and 2001. We also transferred $262,086 in 2002 and $579,113 in 2001
from cost of sales to research and development for efforts related to CapnoProbe
product development. These costs represent expenditures incurred for
manufacturing personnel, facilities and supplies which have been utilized for
CapnoProbe development efforts rather than for production of product for resale.
Under the license agreement with ICCM, we paid minimum royalties of $400,000 and
$300,000, respectively, in the 2002 and 2001. Research and development
activities in 2002 were directed primarily towards the CapnoProbe product.
Beginning in the first quarter of 2003, we expect to be directing fewer research
and development resources towards the CapnoProbe product and more towards other
product applications of our technology base. We may develop these applications
jointly with other corporate partner(s) or proceed with these developments on
our own. Our research and development costs will vary depending on whether we
develop future applications on our own or with partners. In either case, we do
not expect our research and development cost to materially decrease. The table
below sets forth the various research and development expenses and
reimbursements described above.


                                       13

<PAGE>


<TABLE>
<CAPTION>
                                                            2002             2001
                                                       -------------    -------------
<S>                                                    <C>              <C>
Write-off obsolete research and development supplies   $           -    $     554,549
Nellcor reimbursement                                       (230,762)         (28,335)
Capitalization of labor and overhead for build of
 in-house produced equipment                                 (84,904)               -
Manufacturing infrastructure costs applied to R&D
 activities.                                                 262,086          579,113
Third party engineering firms - CapnoProbe                   218,504           41,275
Materials and supplies consumed in development of
 CapnoProbe                                                  107,819           35,850
Royalty Payments to ICCM                                     400,000          300,000
All other costs of research and development                1,210,623        1,049,228
                                                       -------------    -------------
                                                       $   1,883,366    $   2,531,740
                                                       =============    =============
</TABLE>


Selling, general and administrative expenses for 2002 increased $267,263 to
$1,151,715, or 30%, from $884,452 in 2001. We recognized non-cash compensation
expenses of $257,402 and $104,207, respectively, in 2002 and 2001 related to
stock options. Also, we incurred additional costs of approximately $95,000
related to sales and administration of the Vasamedics product line in the fourth
quarter of 2002. We expect future selling, general and administrative expenses
to increase from 2002 due to the addition of the Vasamedics product line
proportional to our experiences in the fourth quarter of 2002. We also expect to
record charges or credits as a result of non-cash compensation expense, which
will vary depending on the trading price of our stock. Selling, general and
administrative expenses consist primarily of the cost of ongoing administrative
activities, costs of maintaining the Company's public status and selling
expenses related to the Vasamedics product line. The table below sets forth the
various selling, general and administrative expenses described above.

                                       14

<PAGE>

                                                          2002          2001
                                                      -----------   -----------
Non-cash compensation                                 $   257,402   $   104,027
Vasamedics selling and administrative  costs in the
fourth quarter, 2002                                       95,000            --
All other selling, general and administrative costs       799,313       780,425
                                                      -----------   -----------
                                                      $ 1,151,715   $   884,452
                                                      ===========   ===========

Interest expense for 2001 included interest of $709,080 due to beneficial
conversion features relating to our convertible securities. Excluding this
non-cash interest charge as described in Note 7 of the financial statements,
interest expense decreased $76,119 to $428 in 2002 from $76,547 in 2001. The
decrease is the result of interest bearing notes that were converted to stock in
2001 and capitalized leases that expired in 2001.

Interest income in 2002 and 2001 was nominal. We expect interest income to
continue at nominal levels for the foreseeable future.

Other income/expense in the first quarter of 2001 included income of $95,345
from state sales tax refunds. Except for state sales tax refunds, other expense
and income items for 2002 and 2001 were insignificant.

Since our inception, we have experienced significant operating losses. We
incurred a net loss of $1,852,506 in 2002 compared to a net loss of $3,400,022
for 2001. As of December 31, 2002, we had an accumulated deficit of $76,706,032.
We anticipate that our operating losses will continue for the foreseeable
future. Except for historical information contained herein, the disclosures in
this report are forward looking statements. See "Certain Important Factors."

Comparison of fiscal years ended December 31, 2001 and 2000

We received $750,000 and $500,000 in development fee revenues on October 9, 2001
and December 3, 2001, respectively, under our license agreement with Nellcor. We
deferred recognition of $562,500 of these development fees to the first half of
2002, the period during which we completed development work related to the
initial $750,000 payment from Nellcor.

Research and development costs for 2001 included a $554,549 write-off of
component inventories carried over from our previous SensiCath business. These
inventories had been retained for future product development purposes. However,
with improvements made towards miniaturization of instrumentation, we determined
that inventory valued at $554,549 had become obsolete. Notwithstanding this
write-off, research and development costs in 2001 decreased $838,163 or 30% to
$1,977,191 from $2,815,354 in 2000. Research and development spending in 2000
included one time costs for material purchases, contract engineering, clinical
research, consulting and other miscellaneous items related to CapnoProbe Sensor
System development. These nonrecurring costs plus lower personnel levels and
expirations of equipment leases and depreciation combined to reduce research and
development costs from 2000 to 2001. Research and development efforts during
2001 were directed primarily towards enhancements and

                                       15

<PAGE>

commercialization of the CapnoProbe product. Under our July 1998 license
agreement with ICCM, we paid $300,000 in minimum royalties for 2001 and are
obligated to pay minimum annual royalties of $400,000 for years 2002 through
2005. The minimum royalty payments are being recorded as research and
development expenses until such time as royalty revenues exceed minimum
royalties. We are obligated to pay ICCM a customary royalty equal to a
percentage of sales, which varies depending on the selling price to the customer
of the CapnoProbe Sensor System.

Selling, general and administrative expenses for 2001 included non-cash
compensation expenses of $104,207. Notwithstanding this charge, selling, general
and administrative decreased $110,947 or 12% to $780,245 from $891,192 for 2000.
Selling, general and administrative expenses in 2000 included one time costs for
the prosecution of an arbitration proceeding. This nonrecurring cost plus lower
personnel, insurance and other expense levels in 2001 combined to reduce
selling, general and administrative expenses for 2001 as compared to 2000.

Interest expense for 2001 and 2000 includes interest of $709,080 and $1,400,000,
respectively, due to beneficial conversion features relating to our convertible
securities. Excluding these non-cash interest charges as described in Notes 5
and 7 of the financial statements, interest expense increased $2,239 to $76,547
from $74,308 in 2000. The increase is the result of advances from shareholders
offset by capitalized leases that expired in 2000.

Interest income in 2001 decreased $35,098 to $1,016 from $36,114 in 2000. The
decrease in interest income in 2001 is due to declining cash balances.

Other income/expense included a first quarter of 2000 expense of $200,000 to
settle an arbitration proceeding, while the third quarter of 2000 and the first
quarter of 2001 included income of $37,453 and $95,345, respectively, from state
sales tax refunds. Except for these two items, other expense and income items
for 2000 and 2001 were insignificant.

LIQUIDITY AND CAPITAL RESOURCES


To date, we have financed our operations primarily through the sale of equity,
debt securities and advances from Circle F. From inception through December 31,
1995, we raised net proceeds of $30,400,000 from private equity financings and
stock option exercises. In the first quarter of 1996, we completed an initial
public offering of our common stock that resulted in net proceeds to us of
approximately $33,916,000. In January 1998, we sold 73,534 shares of common
stock to Instrumentation Laboratory, which represented 4.99% of our outstanding
common stock following completion of the transaction, at a price of $30.00 per
share for a total price of $2,206,015.



In March 2000, we issued convertible promissory notes in the aggregate principal
amount of $1,400,000, pursuant to an Investment Agreement with Circle F and
Special Situations Fund III, L.P. In December 2001, the $700,000 note held by
Special Situations Fund III converted into units at a conversion price equal to
$25,000 per unit, each unit consisting of 8,333 shares of common stock and a
five-year warrant to purchase 2,083 shares of common stock at an exercise price
of $3.00 per share for a total of 233,333 shares of common stock and a warrant
to purchase 58,333 shares of common stock. In December 2001, the $700,000
principal amount of notes held by Circle F converted into units at a conversion
price equal to $12,500 per unit, each unit consisting of 8,333 shares of common
stock and a five-year warrant to purchase 2,083 shares of common stock at an
exercise price of $1.50 per share for a total of 466,667 shares of common stock
and warrants to purchase 116,666 shares of common stock. Circle F beneficially
owns


                                       16

<PAGE>


approximately 58% of our outstanding common stock, including shares of Series A
preferred stock, which are convertible into common stock and warrants to
purchase common stock, but, excluding any currently outstanding advances that
may be converted into capital stock in the future. Charles Snead, one of our
directors is a consultant and attorney for Circle F, Hayden R. Fleming and their
affiliates and related companies.

On August 11, 2000, we entered into a Securities Purchase Agreement pursuant to
which we agreed to issue, and Circle F agreed to purchase upon our request, up
to 4,333,334 shares of our Series A preferred stock for an aggregate purchase
price of $1,500,000. At that time we agreed to sell, and Circle F agreed to
purchase, 1,000,000, 1,333,334 and 2,000,000 shares of our Series A preferred
stock at $0.50, $0.375 and $0.25, respectively. We sold 1,000,000 shares of the
Series A preferred stock to Circle F at $.50 per share for a total of $500,000
on August 11, 2000, 1,333,334 shares of the Series A preferred stock to Circle F
at $.375 per share for a total of $500,000 on October 3, 2000 and 2,000,000
shares of the Series A preferred stock to Circle F at $.25 per share for a total
of $500,000 on December 28, 2000. As a result of the one-for-six reverse split
of our common stock on September 13, 2002, each share of Series A preferred
stock is now convertible into one-sixth of a share of our common stock, or a
total of 722,222 shares of common stock. The adjusted closing price of our
common stock on August 11, 2000, October 3, 2000 and December 28, 2000 was
$3.56, $3.75 and $1.59, respectively, or $0.59, $0.63 and $0.27, prior to giving
effect for the reverse stock split. The terms of the Securities Purchase
Agreement provide for all options held by our current employees and directors to
be reduced to the weighted average, common stock equivalent price at which
Circle F purchased Series A convertible preferred stock of $2.08, as adjusted
for the reverse stock split. Prior to their amendment, these options had
exercise prices ranging from $54.00 to $5.40 per share. Such reduction resulted
in the option plan being subject to variable accounting rules.

Between March 8, 2001 and October 4, 2001, we entered into a series of Bridge
Loan Agreements with Circle F under which Circle F advanced us $1,489,000 to
fund our operations. These advances were evidenced by convertible promissory
notes, and each advance was due and payable one year after the date of the
advance. On June 12, 2002, Circle F converted these notes into 992,667 shares of
common stock at a conversion price of $1.50 per share. Since March 6, 2002,
Circle F and its affiliate have advanced $2,224,000 to us, of which all was
advanced prior to December 31, 2002.

From March 6, 2002 through March 31, 2003, Circle F has advanced $2,224,000 to
us. These advances are unsecured and recorded as short-term liabilities. We
expect Circle F and its affiliate to convert the $2,224,000 in advances into our
capital stock, but, there are no assurances that this will occur. If Circle F
and its affiliate were to demand payment of these advances, we would be unable
to repay the debt and would be forced to cease operations.

Our cash and cash equivalents were $243,752 and $664,569 at December 31, 2002
and December 31, 2001, respectively. The decrease in our cash balance is due to
the operating losses described above offset by $2,224,000 in advances from our
principal shareholder, Circle F, and its affiliate and advances from Nellcor of
$220,310 for purchases of raw materials and components under our supply
agreement with Nellcor. We incurred cash expenditures of $2,303,653 for
operations and $182,895 for capital expenditures in 2002.

Cash used in operations increased $1,099,129 to $2,303,653 for the year ended
December 31, 2002 from $1,204,524 for the year ended December 31, 2001.
Significant components of this change were:


                                       17

<PAGE>


    .    Loss from operations net of non-cash interest and compensation expense,
         depreciation and amortization, research and development supplies
         write-off, and deferred income increased $870,314 to $2,015,323 for the
         year ended December 31, 2002 from $1,145,009 for the year ended
         December 31, 2001.

    .    Accounts receivable year end balances increased $374,992 to $415,763 at
         December 31, 2002 from $40,761 at December 31, 2001. December 31, 2002
         trade receivable included receivables from Nellcor of $169,978 and
         Vasamedics product sales receivables of $208,610. The December 31, 2001
         accounts receivable balance included a receivable from Nellcor of
         $40,085.

    .    Inventories at December 31, 2002 were $259,706 as compared to zero at
         December 31, 2001. The December 31, 2002 balance consisted of
         CapnoProbe inventories of $143,508 and Vasamedics product inventories
         of $116,197.

    .    Accounts payable and accrued expense balances increased $243,304 to
         $323,460 at December 31, 2002 from $80,156 at December 31, 2001. A
         total of $220,210 of the increase was due to advances from Nellcor,
         $91,698 was the result of higher trade payables for purchases of
         CapnoProbe related materials and services, and $15,691 pertained to
         Vasamedics product payables incurred in the normal course of business.
         The remaining $4,139 decrease was the result of normal fluctuations in
         accounts payable and credit expense balances incurred in the normal
         course of business.



We are currently dependent on development fees, loans and equity infusions from
current shareholders or other investors to continue our operations. In January
2003, we earned the final development fee of $350,000 from Nellcor under our
license agreement. Our current cash balances, anticipated revenues from our
Vasamedics product line, which accounted for $241,352 in net sales in 2002,
manufacturing and royalty payments from Nellcor, and contract development
revenues are insufficient to fund our operations on a short-term and long-term
basis. We will need to obtain additional loans or equity funding in order to
continue to fund operations on both a short-term and long-term basis. We believe
that Circle F will advance sufficient funds to us on a monthly or semi-monthly
basis to enable us to continue operations in order for Circle F to obtain a
return on its significant investment to date. However, there can be no assurance
that Circle F will do so. Furthermore, there can be no assurance that we will be
able to obtain additional loans, equity funding or development fees from other
sources. If we are unable to obtain additional financing and revenues when
needed, we will likely be forced to cease operations. We have estimated that we
will need approximately $2,300,000 from Circle F or other sources after receipt
of our anticipated revenues to meet our cash needs for 2003, assuming Circle F
and/or its affiliate does not demand payment on outstanding advances. As of
March 31, 2003, we have not received any financing from Circle F and its
affiliate in 2003.


CERTAIN IMPORTANT FACTORS

In addition to the factors identified above, there are several important factors
that could cause our actual results to differ materially from those anticipated
by us or which are reflected in any forward-looking statements us. These
factors, and their impact on the success of our operations and our ability to
achieve our goals, include the following:


..   Need for Additional Financing (which has resulted in the report of our
    independent auditors on our 2002 financial statements to contain an
    explanatory paragraph regarding our ability to continue as a going concern).
    Our current cash balances are


                                       18

<PAGE>


    insufficient to fund our operations. The report of the independent auditors
    on our 2002 financial statements contains an explanatory paragraph regarding
    our ability to continue as a going concern. We currently have limited
    revenue from operations that is supplemented in large part from loans and
    equity infusions from our largest stockholder and its affiliates. Since
    March of 2000, Circle F Ventures, LLC and its affiliates, or Circle F, have
    provided $5,913,000 of capital to fund ongoing operations through a series
    of equity financings and bridge loans. We will need to raise additional
    capital or obtain technology development fees in order to continue
    operations. We believe that Circle F will advance sufficient funds to us on
    a monthly or semi-monthly basis to enable us to continue operations in order
    for Circle F to obtain a return on its significant investment to date.
    However, there can be no assurance that Circle F. Furthermore, there can be
    no assurance that we will be able to obtain additional funding or technology
    development fees from other sources. If we are unable to obtain additional
    financing and revenues when needed, we will likely be forced to cease
    operations.


..   Successful Marketing of the CapnoProbe Sensor System. Nellcor is the
    exclusive worldwide distributor of our CapnoProbe product and will be the
    exclusive manufacturer of the CapnoProbe. We do not have control over the
    manufacturing and distribution actions of Nellcor. Nellcor began the initial
    phase of commercial release of the CapnoProbe system in the fourth quarter
    of 2002. Although we expect to receive royalties from Nellcor, if Nellcor
    fails to generate meaningful sales of our CapnoProbe product, we will not
    receive significant revenues under our license agreement with Nellcor, which
    would substantially harm our business and our operations.

..   OTC Bulletin Board. On May 12, 2000, our common stock ceased to be quoted on
    The Nasdaq National Market and was transferred to the Over-The-Counter
    ("OTC") Bulletin Board because we no longer met, and currently do not meet,
    standards for continued listing on The Nasdaq National Market or The Nasdaq
    SmallCap Market. Consequently, the liquidity of our common stock is
    impaired, not only in the number of shares that are bought and sold, but
    also through delays in the timing of transactions, and coverage by security
    analysts and the news media, if any, of our company. As a result, prices for
    shares of our common stock may be lower than might otherwise prevail if our
    common stock was traded on Nasdaq or a national securities exchange.

..   Competition. Competition among medical device companies is intense and
    increasing. There can be no assurance that our competitors will not succeed
    in developing or marketing technologies and products that are more effective
    or less expensive than our products or that would render our products
    obsolete or non-competitive.

..   Regulatory Approvals. Our ability to market our current products and any
    products that we may develop in the future requires clearances or approvals
    from the FDA and other governmental agencies, including, in some instances,
    foreign and state agencies. The process for maintaining and obtaining
    necessary regulatory clearances and approvals can be expensive and time
    consuming. There can be no assurance that we will be able to maintain or
    obtain necessary regulatory approvals and clearances in the future.

..   Key Employees. Our success is substantially dependent on the ability,
    experience and performance of our senior management and other key personnel,
    including, in particular, Paulita M. LaPlante, our President and Chief
    Executive Officer. We cannot guarantee that she will remain employed with
    us. If we lose one or more of the members of our senior management or other
    key employees, our business could suffer.

                                       19

<PAGE>

ITEM 7.           FINANCIAL STATEMENTS.


<TABLE>
<CAPTION>
Description                                                                                       Page
-----------                                                                                       ----
<S>                                                                                                 <C>
Independent Auditors' Report........................................................................21

Balance Sheet as of December 31, 2002...............................................................22

Statements of Operations for the years ended December 31, 2002 and 2001.............................23

Statements of Shareholders' Equity (Deficit) for the years ended December 31, 2002 and 2001.........24

Statements of Cash Flows for the years ended December 31, 2002 and 2001.............................25

Notes to the Financial Statements for the years ended December 31, 2002 and 2001....................26
</TABLE>


                                       20

<PAGE>

                         Report of Independent Auditors

The Board of Directors
Optical Sensors Incorporated

We have audited the accompanying balance sheet of Optical Sensors Incorporated
as of December 31, 2002, and the related statements of operations, shareholders'
equity (deficit), and cash flows for each of the two years in the period ended
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Optical Sensors Incorporated at
December 31, 2002, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.

As discussed in Note 15 to the financial statements, the Company's recurring net
losses from operations and its accumulated deficit raise substantial doubt about
its ability to continue as a going concern. Management's plans as to these
matters are also described in Note 15. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

                                             /s/ Ernst & Young LLP

Minneapolis, Minnesota
February 28, 2003

                                       21

<PAGE>

                          Optical Sensors Incorporated

                                  Balance Sheet

                                December 31, 2002

ASSETS
Current assets:
   Cash and cash equivalents                              $      243,752
   Accounts receivable                                           415,753
   Inventories                                                   259,706
   Prepaid expenses and other current assets                     122,373
                                                          --------------
Total current assets                                           1,041,584

Property and equipment:
   Leased equipment                                            1,157,989
   Research and development equipment                            916,053
   Leasehold improvements                                        340,802
   Furniture and equipment                                       206,425
   Production equipment                                          509,576
                                                          --------------
                                                               3,130,845
   Less accumulated depreciation                              (2,842,964)
                                                          --------------
                                                                 287,881
Other assets:
   Research and development supplies                             610,650
   Patents, net of accumulated amortization of $314,745          665,206
   Other assets                                                    9,723
                                                          --------------
                                                               1,285,579
                                                          --------------
Total assets                                              $    2,615,044
                                                          ==============

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
   Advances from shareholders                             $    2,224,000
   Customer deposits                                             220,310
   Accounts payable                                              212,942
   Employee compensation                                          98,140
   Other liabilities and accrued expenses                        104,299
   Accrued interest payable                                       54,849
                                                          --------------
Total current liabilities                                      2,914,540

Shareholders' equity (deficit):
   Preferred stock, par value $0.01 per share
     Authorized shares - 5,000,000
     Issued and outstanding shares - 4,333,334                    43,333
   Common stock, par value $0.01 per share:
     Authorized shares - 30,000,000
     Issued and outstanding shares - 3,190,047                    31,901
   Additional paid-in capital                                 76,367,608
   Accumulated deficit                                       (76,706,032)
   Unearned compensation                                         (36,306)
                                                          --------------
Total shareholders' equity (deficit)                            (299,496)
                                                          --------------
Total liabilities and shareholders' equity (deficit)      $    2,615,044
                                                          ==============

See accompanying notes.

                                       22

<PAGE>

                          Optical Sensors Incorporated

                            Statements of Operations

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31
                                                            2002              2001
                                                       --------------------------------
<S>                                                    <C>               <C>
Revenues
   Product development fees                            $    1,055,914    $      687,500
   Sales                                                      518,882                 -
                                                       --------------------------------
                                                            1,574,796           687,500

Costs and expenses:
   Cost of goods sold                                         422,034                 -
   Research and development                                 1,883,366         2,531,740
   Selling, general, and administrative                     1,151,715           884,452
                                                       --------------------------------
Total operating expenses                                    3,457,115         3,416,192
                                                       --------------------------------

Operating loss                                             (1,882,319)       (2,728,692)

Interest expense                                                 (428)         (785,627)
Interest income                                                   960             1,016
Other income                                                   29,281           113,281
                                                       --------------------------------
                                                               29,813          (671,330)
                                                       --------------------------------
Net loss                                               $   (1,852,506)   $   (3,400,022)
                                                       ================================

Net loss per common share:
   Basic and diluted                                   $        (0.67)   $        (2.24)

Shares used in calculation of net loss per share:
   Basic and diluted                                        2,746,746         1,516,854
</TABLE>

See accompanying notes.

                                       23

<PAGE>

                          Optical Sensors Incorporated

                   Statement of Shareholders' Equity (Deficit)

                          Year Ended December 31, 2002

<TABLE>
<CAPTION>
                                                        PREFERRED STOCK           COMMON STOCK         ADDITIONAL
                                                    ----------------------------------------------      PAID-IN        ACCUMULATED
                                                      SHARES       AMOUNT      SHARES      AMOUNT       CAPITAL          DEFICIT
                                                    -------------------------------------------------------------------------------
<S>                                                  <C>         <C>         <C>         <C>         <C>             <C>
Balance at December 31, 2000                         4,333,334   $  43,333   1,496,973   $  14,970   $  72,387,497   $  (71,453,504)
Issuance of common stock upon exercise of options            -           -         407           4           1,043                -
Beneficial conversion on convertible notes payable           -           -           -           -         709,080                -
Variable compensation on stock options                       -           -           -           -         104,207                -
Conversion of notes payable                                  -           -     700,000       7,000       1,393,000                -
Net loss                                                     -           -           -           -               -       (3,400,022)
                                                    -------------------------------------------------------------------------------
Balance at December 31, 2001                         4,333,334      43,333   2,197,380      21,974      74,594,827      (74,853,526)
Conversion of notes payable                                  -           -     992,667       9,927       1,479,073                -
Variable compensation on stock options                       -           -           -           -         254,981                -
Fair value of options granted to consultant                  -           -           -           -          38,727                -
Amortization of unearned compensation                        -           -           -           -               -                -
Net loss                                                     -           -           -           -               -       (1,852,506)
                                                    -------------------------------------------------------------------------------
Balance at December 31, 2002                         4,333,334   $  43,333   3,190,047   $  31,901   $  76,367,608   $  (76,706,032)
                                                    ===============================================================================

<CAPTION>
                                                      UNEARNED
                                                    COMPENSATION         TOTAL
                                                    ------------------------------
<S>                                                 <C>             <C>
Balance at December 31, 2000                        $          -    $      992,296
Issuance of common stock upon exercise of options              -             1,047
Beneficial conversion on convertible notes payable             -           709,080
Variable compensation on stock options                         -           104,207
Conversion of notes payable                                    -         1,400,000
Net loss                                                       -        (3,400,022)
                                                    ------------------------------
Balance at December 31, 2001                                   -          (193,392)
Conversion of notes payable                                    -         1,489,000
Variable compensation on stock options                         -           254,981
Fair value of options granted to consultant              (38,727)                -
Amortization of unearned compensation                      2,421             2,421
Net loss                                                       -        (1,852,506)
                                                    ------------------------------
Balance at December 31, 2002                        $    (36,306)   $     (299,496)
                                                    ==============================
</TABLE>

See accompanying notes.

                                       24

<PAGE>

                          Optical Sensors Incorporated

                            Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31
                                                                                2002              2001
                                                                           --------------------------------
<S>                                                                        <C>               <C>
OPERATING ACTIVITIES
Net loss                                                                   $   (1,852,506)   $   (3,400,022)
Adjustments to reconcile net loss to net cash used in operating
 activities:
     Noncash interest expense                                                           -           709,080
     Noncash compensation on stock options                                        254,981           104,207
     Depreciation and amortization                                                144,702           324,677
     Write-off of inventories                                                           -           554,549
     Changes in operating assets and liabilities net of acquisitions:
         Receivables                                                             (342,972)          (32,390)
         Inventories                                                             (122,853)           15,906
         Prepaid expenses and other assets                                       (145,965)         (123,187)
         Accounts payable and accrued expenses                                    323,460            80,156
         Deferred income                                                         (562,500)          562,500
                                                                           --------------------------------
Net cash used in operating activities                                          (2,303,653)       (1,204,524)

INVESTING ACTIVITIES
Purchases of property and equipment                                              (182,895)           (9,827)
Acquisition of business                                                          (158,269)                -
                                                                           --------------------------------
Net cash used in investing activities                                            (341,460)           (9,827)

FINANCING ACTIVITIES
Advances from shareholder                                                       2,224,000                 -
Proceeds from convertible notes payable                                                 -         1,489,000
Net proceeds from issuance of common stock                                              -             1,047
Payments on obligations under capital leases                                            -          (104,109)
                                                                           --------------------------------
Net cash provided by financing activities                                       2,224,000         1,385,938
                                                                           --------------------------------

(Decrease) increase in cash and cash equivalents                                 (420,817)          171,587
Cash and cash equivalents at beginning of year                                    664,569           492,982
                                                                           --------------------------------
Cash and cash equivalents at end of year                                   $      243,751    $      664,569
                                                                           ================================
</TABLE>


Supplemental disclosure of non-cash transactions: In 2002, the Company had
$1,489,000 of notes payable converted into common stock. In 2001, the Company
had $1,400,000 of notes payable converted into common stock. The Company also
reclassified $688,835 from inventories to research and development supplies in
2001.

The Company paid $16,154 and $5,972 in interest in 2002 and 2001, respectively.

See accompanying notes.

                                       25

<PAGE>

                          Optical Sensors Incorporated

                          Notes to Financial Statements

                                December 31, 2002


1. BUSINESS ACTIVITY

Optical Sensors Incorporated (the Company) is a technology development and
manufacturing company specializing in low-cost, minimally-to-non invasive tissue
diagnostic systems. The Company's mission is to leverage its proprietary sensor
technologies into innovative and low cost applications. The Company's core
technology of optochemically based sensors and its optical platform and software
systems can be incorporated into a variety of low-cost fluid, blood, and tissue
contacting measurement systems. The Company's distribution partner for
CapnoProbe, Nellcor Puritan Bennett, has recently introduced the CapnoProbe, a
non-invasive sublingual tissue CO2 system for the early detection of shock. The
Company recently acquired Vasamedics LLC, a laser Doppler flow technology
company dedicated to the diagnosis of Peripheral Arterial Disease.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Investments classified as
cash equivalents consist primarily of commercial paper and municipal bonds. The
market value of investments is based on quoted market prices and approximates
cost.

INVENTORIES

Inventories are stated at the lower of cost or market with cost determined using
the first-in, first-out method. Inventories at December 31, 2002 included
$36,255 of finished goods, $11,122 of work in process, and $212,329 of raw
materials.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over three to five years. Leasehold improvements are
amortized over the shorter of the term of the lease or the estimated life of the
asset. Equipment under capital leases is depreciated over the lease term.

                                       26

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

RESEARCH AND DEVELOPMENT SUPPLIES

In the fourth quarter of 2001, the Company wrote-off certain inventories of
$554,549, net of reserves that was deemed to have no future use. The remaining
inventory at that time was reclassified as research and development supplies
since it has use in future research and development projects.

PATENTS


Patents are stated at cost and are amortized upon issuance of a patent on a
straight-line basis over 60 months. Capitalized patent costs consist primarily
of patent legal and filing fees. In 2002, the Company capitalized $142,640 of
such patent costs. Unamortized patent costs of $665,206 at December 31, 2002
included $580,429 in costs of patents that had not yet issued. The unamortized
costs of patents that have issued will be amortized through years 2003 through
2007 in the following annual amounts; $27,947, $27,283, $21,572, $6,948 and
$1027 for a total of $87,777. Accumulated amortization was $314,745 at December
31, 2002.


IMPAIRMENT OF LONG-LIVED ASSETS

Management reviews the Company's long-lived assets for impairment when events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If impairment indicators are present and the estimated future
undiscounted cash flows are less than the carrying value of the assets, the
asset's value will be adjusted appropriately.

INCOME TAXES

The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between the financial
reporting and tax bases of assets and liabilities.

STOCK-BASED COMPENSATION

The Company follows Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees (APB No. 25), and related interpretations in
accounting for its stock options. Under APB No. 25, when the exercise price of
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

                                       27

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The following table illustrates the effect on net loss and net loss per share if
the Company had applied the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, to its stock-based employee
compensation.

<TABLE>
<CAPTION>
                                                                       2002              2001
                                                                  --------------------------------
<S>                                                               <C>               <C>
Net loss as reported                                              $   (1,852,506)   $   (3,400,022)
Add: stock-based compensation cost included in the
  determination of net loss as reported                                  254,981           104,207
Less: stock-based compensation that would have been included
  in the determination of net loss if the fair value method
  had been applied                                                      (202,692)         (212,877)
                                                                  --------------------------------
Pro forma net loss                                                $   (1,800,217)   $   (3,508,692)
                                                                  ================================

Net basic and diluted loss per share:
  As reported                                                     $        (0.67)   $        (2.24)
  Pro forma                                                       $        (0.66)   $        (2.31)
</TABLE>

The weighted average fair value of options granted and the assumptions used in
the Black-Scholes option-pricing model are as follows:

                                      2002       2001
                                    ------------------
Fair value of options granted       $  2.62    $  1.20

Assumptions used:
  Expected life (years)                 6.0        6.0
  Risk-free rate of return              3.3%       4.5%
  Volatility                             98%        70%
  Dividend yield                          0%         0%

                                       28

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of SFAS No. 123. This
statement provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
This statement also amends the disclosure requirements of SFAS No. 123 and APB
Opinion No. 28, Interim Financial Reporting, to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has implemented the annual reporting requirements for SFAS
No. 148 at December 31, 2002 (see above) and will implement disclosure
requirements for condensed financial statements for interim periods after
January 1, 2003. The Company has determined at this time to continue to account
for all stock-based employee compensation plans under APB Opinion No. 25.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from the estimates.

REVENUE RECOGNITION

Development fee revenues are recognized in accordance with the guidance provided
in Staff Accounting Bulletin No. 101. The initial milestone payment of $750,000
received from Nellcor in September 2001 (see Note 4) was recognized over the
developmental period and other payments are being recognized as the applicable
milestone is achieved. The Company did receive additional milestone payments of
$400,000 in November 2002 and $500,000 in December 2001 that were recognized as
revenue upon receipt since the milestones had been achieved.

Revenue from sales is recorded upon delivery to the customer. Product shipments
are supported by purchase orders received from customers. The sales prices are
fixed and final and collectibility from the customer is reasonably assured.

                                       29

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

NET LOSS PER SHARE

The net loss per share has been computed in accordance with the provisions of
the Financial Accounting Standards Board's Statement No. 128, Earnings Per
Share. All potential common shares from stock options and convertible promissory
notes have been excluded from the computation of diluted net loss per share for
the applicable periods presented because the effect would have been
anti-dilutive.

REVERSE STOCK SPLIT

In September 2002, the Company effected a one for six reverse stock split of its
common stock. All shares and per share amounts have been adjusted to give effect
to the reverse split.

3. ACQUISITION OF VASAMEDICS LLC


In October 2002, the Company entered into an agreement with Vasamedics LLC
whereby the Company purchased substantially all the assets and assumed certain
specified balance sheet liabilities and contractual obligations of Vasamedics
LLC. The total purchase price was $158,269 and consisted of paying off certain
debt of Vasamedics. The purchase price was allocated primarily to accounts
receivable, inventories, and fixed assets. Vasamedics was engaged in the
business of medical instrumentation for patient monitoring of laser Doppler
blood flow and related measurements. The operating results of Vasamedics are
included in the Company's financial statements from the date of acquisition.



The Company also provided earn-out provisions to two of the former owners of
Vasamedics through the use of cash payments and options that vest contingent on
achieving certain future sales milestones over the first three years following
the acquisition. The maximum cash payments that can be earned is $220,000 and
the maximum number of options is 75,000. The amount of cash payments and the
fair value of the options will be recognized as additional purchase price for
the acquisition of Vasamedics when, and if, the criteria for vesting are met.


4. EXCLUSIVE LICENSE AGREEMENT

In September 2001, the Company entered into a Development and License Agreement
and an Exclusive Supply Agreement with Nellcor Puritan Bennett, Inc. (Nellcor).
Under the terms of the Development and License Agreement, the Company granted
Nellcor exclusive manufacturing and distribution rights to the Company's
CapnoProbe product.

                                       30

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)

4. EXCLUSIVE LICENSE AGREEMENT (continued)

Nellcor agreed to pay the Company milestone payments totaling $2,000,000 upon
completion of various product development, manufacturing, and commercialization
milestones. A payment of $750,000 was received in September 2001, a payment of
$500,000 was received in December 2001, and a payment of $400,000 was received
in November 2002. The final milestone payment of $350,000 was received in
February 2003. Nellcor also agreed to pay the Company percentage royalties based
on future product sales. The Company also entered into a Supply Agreement with
Nellcor under which the Company will manufacture the CapnoProbe for Nellcor for
a transition period, of up to one year, or a certain quantity of units has been
produced, while Nellcor establishes its own manufacturing operations.

5. INVESTMENT AGREEMENT


In March 2000, the Company issued convertible promissory notes in the aggregate
principal amount of $1,400,000, pursuant to an Investment Agreement with Circle
F Ventures, LLC, or Circle F, and Special Situations Fund III, L.P. In December
2001, the $700,000 note held by Special Situations Funds III converted into
units at a conversion price equal to $25,000 per unit, each unit consisting of
8,333 shares of common stock and a five-year warrant to purchase 2,083 shares of
common stock at an exercise price of $3.00 per share for a total of 233,333
shares of common stock and a warrant to purchase 58,333 shares of common stock.
In December 2001, the $700,000 principal amount of notes held by Circle F
converted into units at a conversion price equal to $12,500 per unit, each unit
consisting of 8,333 shares of common stock and a five-year warrant to purchase
2,083 shares of common stock at an exercise price of $1.50 per share for a total
of 466,667 shares of common stock and warrants to purchase 116,666 shares of
common stock.


The Company recognized $1,400,000 of interest expense in 2000 upon receipt of
the $1,400,000 for the convertible promissory notes with the offset credited to
additional paid-in capital. The interest expense, which represents the intrinsic
value of the beneficial conversion feature embedded in the convertible
securities, was recognized at the date of issuance as a result of the ability of
the holder of the notes to convert immediately.

                                       31

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)

6. SECURITIES PURCHASE AGREEMENT


In August 2000, the Company entered into a Securities Purchase Agreement
pursuant to which the Company agreed to issue, and Circle F agreed to purchase
upon the Company's request, up to 4,333,334 shares of the Company's Series A
preferred stock for an aggregate purchase price of $1,500,000. The Company sold
1,000,000 shares of the Series A preferred stock to Circle F at $0.50 per share
for a total of $500,000 in August 2000, 1,333,334 shares of the Series A
preferred stock to Circle F at $0.375 per share for a total of $500,000 in
October 2000, and 2,000,000 shares of the Series A preferred stock to Circle F
at $0.25 per share for a total of $500,000 in December 2000. Each share of the
Series A preferred stock has a par value of $0.01, can be converted into
one-sixth of a share of common stock, has voting rights on an as converted basis
to common stock, and has no dividend rights.



The terms of the Securities Purchase Agreement also provided for changing the
exercise price of all options held by current employees and current directors
based on the average price per share paid by Circle F for the Series A preferred
stock. Accordingly, the exercise price was reduced to $2.08 per share. This
repricing provision has resulted in the options being subject to variable
accounting (see Note 12).


7. BRIDGE LOAN AGREEMENTS


In March and April 2001, the Company entered into Bridge Loan Agreements with
Circle F under which Circle F loaned the Company $335,000 in the form of a
series of one year convertible promissory notes. The notes became convertible on
April 30, 2001, at the option of Circle F, into shares of common stock at $1.50
per share.



In May 2001, the Company entered into a Bridge Loan Agreement with Circle F
under which Circle F, in their discretion, agreed to advance the Company up to
$1,500,000 to fund Company operations. In October 2001, the Bridge Loan
Agreement was mutually terminated, with Circle F having advanced $1,154,000 to
the Company. The advances were evidenced by a convertible promissory note, and
the note was payable in installments, with each installment becoming due and
payable one year after the date of an advance and with the amount of each such
installment being equal to the applicable advance. The advance under the Bridge
Loan Agreement were convertible, at the option of Circle F, into shares of
common stock at $1.50


                                       32

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)

7. BRIDGE LOAN AGREEMENTS (continued)


per share anytime after July 26, 2001. The Company recognized $709,080 of
interest expense in 2001 relating to the Bridge Loan Agreements with the offset
credited to additional paid-in capital. The interest expense, which represents
the intrinsic value of the beneficial conversion feature embedded in the
convertible securities, was recognized in 2001 as a result of the ability of the
holder of the notes to convert anytime after the applicable dates noted above.


During 2002, the convertible notes totaling $1,489,000 described above were
converted into 992,667 shares of the Company's common stock.

8. ADVANCES FROM SHAREHOLDER


The Company has been dependent upon advances from Circle F and its affiliate,
Circle F Ventures II, LLC, for continued funding of its operations. As of
December 31, 2002, the advances received by the Company totaled $2,224,000.
These advances bear no interest and contain no conversion features.


9. COMMON STOCK

At December 31, 2002, the Company has 875,493 shares of common stock reserved
for future issuance, including 698,509 for outstanding options and shares
available for grant, and 176,984 for outstanding warrants.

SHAREHOLDER RIGHTS PLAN


The Company's Board of Directors has adopted a Shareholder Rights Plan that
provides for six preferred share purchase rights (the Right) for each
outstanding share of common stock. Under certain circumstances, a Right may be
exercised to purchase 1/1000 of a share of series A junior preferred stock for
$90. The Rights become exercisable if a person or group acquires 15% or more of
the Company's outstanding common stock, subject to certain exceptions. If a
person or group (other than Circle F) acquires 15% or more of the Company's
outstanding common stock, subject to certain exceptions, each Right will entitle
its holder to buy common stock of the Company having a market value of twice the
exercise price of the Right.


                                       33

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)

9. COMMON STOCK (continued)


The Rights expire in December 2006 and may be redeemed by the Company for $0.001
per Right at any time before, or, in certain circumstances, within ten days
(subject to extension) following the announcement that a person or group (other
than Circle F) has acquired 15% or more of the Company's outstanding common
stock, subject to certain exceptions. The foregoing triggering percentage is 24%
for Special Situations Fund III, L.P. and its affiliates. Until a Right is
exercised, the holder of a Right, as such, has no rights as a shareholder of the
Company.


In connection with the adoption of the Shareholder Rights Plan, the Company
authorized 250,000 shares of series A junior preferred stock (the Preferred
Stock). Subject to the rights of holders of any Senior Securities, if any,
holders of the Preferred Stock are entitled to quarterly dividends when, as, and
if declared by the Board of Directors, in the amount of 1,000 times the
aggregate per share amount of dividends paid to common stock shareholders. Each
preferred stock share is entitled to 1,000 votes on all matters submitted to a
vote of the shareholders of the Company. The Preferred Stock has liquidation
preference over the Company's common stock. The liquidation rate on the
Preferred Stock is the greater of (a) $1,000 per share plus accrued dividends,
whether or not earned or declared, or (b) an amount equal to 1,000 times the
amount distributed to the common stock shareholders.

10. LEASES

OPERATING LEASES

The Company leases its office and research and development facility under an
operating lease that runs through March 31, 2005. Operating expenses, including
maintenance, utilities, real estate taxes, and insurance, are paid by the
Company. The Company also leases certain office equipment under operating
leases.

Total rent expense under operating leases was $121,000 and $244,000 for the
years ended December 31, 2002 and 2001, respectively.

                                       34

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)

10. LEASES (continued)

Future minimum lease payments under noncancelable operating leases with initial
or remaining terms of one year or more as of December 31, 2002 are as follows:

   Year ending December 31:
     2003                              $  107,574
     2004                                 107,574
     2005                                  26,894
                                       ----------
                                       $  242,042
                                       ==========

In connection with the operating lease agreements, the Company issued warrants
to the leasing company to purchase 2,037 shares of common stock at $54.00 per
share and 1,984 shares of common stock at $18.90 per share. The 2,037 shares of
common stock at $54.00 expired in 2002 and the remaining 1,984 warrants expire
in 2005.

CAPITAL LEASES

In June 1997, the Company entered into an equipment lease agreement. Under the
lease agreement, the Company was allowed to lease up to $2,000,000 of equipment
between June 15, 1997 and June 30, 1999. Assets leased under the agreement at
December 31, 2002 were $1,157,989. The remaining balance owed under the lease
agreement was paid in 2001.

11. INCOME TAXES


At December 31, 2002, the Company has cumulative net operating loss
carryforwards for tax purposes of approximately $71,925,000 plus research and
development tax credit carryforwards of approximately $1,740,000. Both of these
carryforwards are available to offset future taxable income through 2022 and
begin expiring in 2003.


As a result of the sales of preferred stock and additional shares of common
stock, the Company has experienced a change in ownership under the net operating
loss limitation rules. The use of losses, incurred through the change in
ownership date, to offset future taxable income will be limited during the
carryforward period. The credits will also be subject to limitations under these
same rules.

                                       35

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)

11. INCOME TAXES (continued)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31, 2002 are as
follows:

                                             2002
                                        --------------
   Deferred tax assets:
     Net operating loss carryforwards   $   26,612,000
     Tax credit carryforwards                1,740,000
     Book over tax depreciation                108,000
     Other                                      81,000
                                        --------------
   Total deferred tax assets                28,541,000
   Valuation allowance                     (28,541,000)
                                        --------------
                                        $            -
                                        ==============


The Company has fully reserved against the total deferred tax assets of
$28,541,000 due to the Company's experience of tax losses since inception and
the uncertainty of realization of these assets in the future.



12. STOCK OPTIONS AND WARRANTS

The Company has two stock option plans that include both incentive and
non-statutory stock options to be granted to directors, officers, employees, and
consultants of the Company. Option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                           OPTIONS         WEIGHTED
                                           SHARES        OUTSTANDING        AVERAGE
                                          AVAILABLE     ------------    EXERCISE PRICE
                                          FOR GRANT     TOTAL SHARES       PER SHARE
                                        ----------------------------------------------
   <S>                                      <C>              <C>          <C>
   Balance at December 31, 2000               15,581         300,001      $     4.02
   Additional shares reserved                383,333               -               -
   Granted                                  (395,828)        395,828            2.25
   Canceled                                   20,345         (20,344)           2.10
   Exercised                                       -            (407)           2.52
                                        ----------------------------
   Balance at December 31, 2001               23,431         675,078            3.06
   Additional shares reserved                170,000               -               -
   Granted                                  (136,000)        136,000            3.32
   Canceled                                      421            (421)          42.53
                                        ----------------------------
   Balance at December 31, 2002               57,852         810,657      $     3.07
                                        ============================
</TABLE>

                                       36

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)


12. STOCK OPTIONS AND WARRANTS (continued)


The weighted average fair value of options granted was $2.62 and $1.20 for the
years ended December 31, 2002 and 2001, respectively.


In accordance with the terms of the Securities Purchase Agreement (see Note 6),
all options held by current employees and current directors were amended so that
the exercise price was equal to the average price per share paid by Circle F for
the Series A preferred stock. Accordingly, the exercise price has been reduced
to $2.08 per share. This repricing has resulted in the plan being subject to
variable accounting. The Company recognized $254,981 and $104,207 of
compensation expense for the years ended December 31, 2002 and December 31,
2001, respectively.


The exercise price of options outstanding at December 31, 2002 ranged from $2.08
to $54.00 per share, as summarized in the following table:

<TABLE>
<CAPTION>
                             OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
                 -------------------------------------------   ------------------------
                              WEIGHTED          WEIGHTED                    WEIGHTED
                               AVERAGE           AVERAGE                     AVERAGE
   RANGE OF                EXERCISE PRICE       REMAINING                EXERCISE PRICE
EXERCISE PRICE    NUMBER      PER SHARE     CONTRACTUAL LIFE    NUMBER      PER SHARE
---------------------------------------------------------------------------------------
  <S>            <C>         <C>               <C>             <C>         <C>
  $     2.08     231,023     $     2.08        7.9 years       174,391     $     2.08
        2.25     395,833           2.25        8.5 years        69,509           2.25
        3.32     136,000           3.32        9.8 years             -           3.37
        5.40       1,018           5.40        2.5 years           296           5.40
        7.50       2,499           7.50        6.2 years         2,499           7.50
       10.13      33,380          10.13        5.8 years           167          10.13
       16.20       6,480          16.20        2.6 years         6,480          16.20
       27.00       1,333          27.00        4.3 years         1,333          27.00
       54.00       3,091          54.00        0.9 years         3,091          54.00
                 -------                                       -------
                 810,657     $     3.07        8.3 years       257,766     $     3.29
                 =======                                       =======
</TABLE>

The number of options exercisable at December 31, 2002 and 2001 was 257,766 and
141,145, respectively, at a weighted average exercise price per share of $3.29
and $4.38, respectively.

                                       37

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)


12. STOCK OPTIONS AND WARRANTS (continued)



The Company granted 106,800 options to a former owner of Vasamedics (see Note
3). A portion of the options, 46,800, were granted to him commensurate with his
level of responsibility subsequent to the acquisition. The remaining 60,000
options were granted as an earn-out provision and vesting is contingent on the
achievement of certain sales milestones over the first 36 months following the
acquisition. The fair value of the 60,000 options will be computed and
recognized as additional purchase price for the acquisition of Vasamedics when,
and if, the criteria for vesting are met.



The Company also granted 26,700 options to another former owner of Vasamedics
who became a consultant to the Company. A portion of the options, 11,700, vest
over four years and was stock-based compensation paid to a non-employee. The
fair value of the 11,700 options was recorded as unearned compensation and is
being amortized over the vesting period. The remaining 15,000 options were
granted as an earn-out provision and vesting is contingent on the achievement of
certain sales milestones over the first 36 months following the acquisition. The
fair value of the 15,000 options will be computed and recognized as additional
purchase price for the acquisition of Vasamedics when, and if, the criteria for
vesting are met.



The Company also has warrants outstanding that were issued to Special Situations
Fund III and Circle F as disclosed in Note 5 and to a leasing company as
disclosed in Note 10. Warrant activity is summarized as follows:


                                                    WEIGHTED
                                  WARRANTS           AVERAGE
                                 OUTSTANDING     EXERCISE PRICE
                                TOTAL SHARES        PER SHARE
                               --------------------------------
Balance at December 31, 2000            4,021    $        36.68
Issued upon debt conversion           174,999              2.00
                               --------------
Balance December 31, 2001             179,020              2.78
Expired                                (2,037)            54.00
                               --------------
Balance December 31, 2002             176,983    $         2.19


The exercise price of warrants outstanding at December 31, 2002 ranged from
$1.50 to $18.90 per share, as summarized in the following table:

           EXERCISE                            REMAINING
            PRICE             NUMBER        CONTRACTUAL LIFE
         ------------        -------        ----------------
            $   1.50         116,666            4.0 years
                3.00          58,333            4.0 years
               18.90           1,984            2.5 years
                             -------
                             176,983


                                       38

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)

13. TECHNOLOGY AGREEMENTS


In July 1998, the Company entered into a patent license agreement with the
Institute of Critical Care Medicine (ICCM) which provides the Company with the
exclusive, worldwide right under ICCM's pending and issued patents. In
consideration for the technology, the Company paid ICCM minimum annual royalties
of $300,000 through 2001 and is obligated to pay ICCM minimum annual royalties
of $400,000 from 2002 through 2005 in order to maintain exclusivity. The Company
may elect, on one year's written notice, not to make the annual minimum payment
but ICCM would then have the right to terminate the license agreement. The
Company is obligated to pay ICCM a customary royalty equal to a percentage of
sales, which varies depending on the selling price to the customer. The Company
was also obligated to meet certain product development milestones under the
license agreement. All milestones were completed prior to executing the License
Agreement with Nellcor Puritan Bennett in September 2001. The royalty payments
are included in research and development expenses.


14. EMPLOYEE BENEFIT PLANS

The Company has a 401(k) savings plan under which employees are eligible to
participate after six months of service and attaining the age of 21. Employees
may contribute up to the maximum amount which will not violate provisions of the
plan or cause the plan to exceed the maximum amount allowable as a deduction to
the employer. The Company, at its discretion, may make matching contributions
equal to a percentage of the employee's contribution. The Company did not
contribute to the plan in 2002 or 2001.

15. GOING CONCERN

Recurring losses, including $1,852,506 for 2002, have resulted in an accumulated
deficit of $76,706,032. The Company's ability to continue as a going concern and
the realization of its assets and the orderly satisfaction of its liabilities
are dependent on obtaining additional funds from outside sources. Although the
Company is currently in negotiations that may raise funds that will satisfy its
cash requirements for at least the next 12 months, there can be no assurance
that the Company will be successful.

                                       39

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)

16. QUARTERLY FINANCIAL DATA (Unaudited)

Quarterly financial data for 2002 and 2001 is as follows:

<TABLE>
<CAPTION>
                                                                   QUARTER
                                           FIRST            SECOND           THIRD            FOURTH
                                       ----------------------------------------------------------------
   <S>                                 <C>              <C>              <C>              <C>
   YEAR ENDED DECEMBER 31, 2002
   Revenues                            $     284,750    $     296,510    $      18,651    $     974,885
   Gross profit                              284,750          296,510           18,651          552,851
   Net loss                                 (713,771)        (239,366)        (678,757)        (220,612)
   Net loss per share                  $       (0.32)   $       (0.10)   $       (0.21)   $       (0.07)

   YEAR ENDED DECEMBER 31, 2001
   Revenues                            $           -    $           -    $           -    $     687,500
   Gross profit                                    -                -                -          687,500
   Net loss/(1)/                            (721,093)        (820,249)      (1,077,312)        (781,368)
   Net loss per share                  $       (0.48)   $       (0.54)   $       (0.72)   $       (0.48)
</TABLE>

   /(1)/ The fourth quarter of 2001 net loss includes write-off of inventories
   of $554,549, net of reserves.

ITEM 8.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE.

None.

                                       40

<PAGE>

                                    PART III

ITEM 9.           DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE
                  WITH SECTION 16(a) OF THE EXCHANGE ACT.

         (a)      Directors, Executive Officers, Promoters and Control Persons

Our executive officers and directors, their ages and the offices held, as of
March 15, 2003, are as follows:

<TABLE>
<CAPTION>
                NAME                       AGE                            TITLE
-------------------------------------     -----    ------------------------------------------------------
<S>                                        <C>     <C>
Paulita M. LaPlante                        45      President, Chief Executive Officer and Director

Wesley G. Peterson                         55      Chief Financial Officer, Vice President of Finance and
                                                   Administration and Secretary

Victor Kimball                             39      Vice President, Strategic Planning and Product
                                                   Development

Richard B. Egen(1)                         64      Director

Charles D. Snead, Jr.(1)                   70      Director
</TABLE>

----------
         (1)      Member of the Audit Committee

Paulita M. LaPlante has been the President and a Director of Optical Sensors
since September 1998 and Chief Executive Officer of Optical Sensors since
December 1998. From June 1994 to September 1998, Ms. LaPlante served as Optical
Sensors' Vice President of Worldwide Sales, Marketing and Business Development
and was Director of Marketing and Business Development from April 1992 to June
1994. She also served as Optical Sensors' interim Vice President of Research and
Development from January 1994 to September 1994. Ms. LaPlante served on the
board of VidaMed, Inc. from November 1999 to August 2002.

Wesley G. Peterson has been Optical Sensors' Chief Financial Officer since
January 1992, Vice President of Finance and Administration since June 1994 and
Secretary since July 1992. He was also Director of Finance and Administration
from January 1992 to June 1994.

Victor Kimball has been Optical Sensors' Vice President, Strategic Planning and
Product Development since December 1998. From June 1997 to October 1998, Mr.
Kimball was Director of Engineering and Business Development and from January
1995 to June 1997, he was Director of Engineering. From June 1992 to January
1995 he was Engineering Manager.

Richard B. Egen has been a Director of Optical Sensors since June 1997. Mr. Egen
currently serves as the Chairman of the Board of Directors of Aksys, Ltd. From
January 1997 to July 2001, Mr. Egen served as President and Chief Executive
Officer of NephRx Corporation, an early stage biotechnology company.

                                       41

<PAGE>

From January 1996 to December 1996, he served as a consultant to Baxter
International, Inc. ("Baxter") and Nestle, S.A. ("Nestle") for clinical
nutrition and start up medical companies. From January 1989 to December 1995, he
served as President and Chief Executive Officer of Clintec International, Inc.,
a joint venture between Baxter and Nestle that develops, manufactures, markets
and distributes clinical nutrition solutions and formulations. Prior to joining
Clintec International, Inc., Mr. Egen served in several positions at Baxter,
including Senior Vice President and a member of Baxter's Senior Management
Committee.


Charles D. Snead, Jr. has been a Director of Optical Sensors since June 2000.
Mr. Snead is an attorney and has served in various legal, executive, and board
of director positions in several New York and Nasdaq stock exchange listed
companies over a period of 30 years. Mr. Snead has been self employed as a
consultant and attorney during the previous five years and includes Circle F
Ventures, LLC and Hayden R. Fleming and their affiliates and related companies
as one of his clients. From June 28, 1996 to April 15, 1999, Mr. Snead served as
President, Chief Executive Officer, Director, Treasurer and Chief Financial
Officer of FBR Capital Corporation, during its transition from a fragrance
manufacturer to a time and attendance systems company.


         (b)      Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
directors and executive officers and all persons who beneficially own more than
10% of the outstanding shares of our common stock to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of our common stock. Executive officers, directors and greater than
10% beneficial owners are also required to furnish Optical Sensors with copies
of all Section 16(a) forms they file. To our knowledge, based upon a review of
the copies of such reports furnished to us and written representations that no
other reports were required, during the year ended December 31, 2002, none of
our directors or officers or beneficial owners of greater than 10% of our common
stock failed to file on a timely basis the forms required by Section 16 of the
Exchange Act.

                                       42

<PAGE>

ITEM 10.          EXECUTIVE COMPENSATION.

The following table provides summary information concerning cash and non-cash
compensation paid to or earned by our Chief Executive Officer and those
executive officers who received or earned cash and non-cash salary and bonus of
more than $100,000 for the fiscal year ended December 31, 2002.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                              LONG-TERM
                                                             ANNUAL COMPENSATION             COMPENSATION
                                                        ----------------------------         ------------
                                                                                              SECURITIES
                                                                                              UNDERLYING
NAME AND PRINCIPAL POSITION                     YEAR    SALARY($)         BONUS($)           OPTIONS(#)(1)
------------------------------------------      ----    ---------       ------------         -------------
<S>                                             <C>     <C>             <C>                    <C>
Paulita M. LaPlante                             2002    $ 180,000       $          0                 0
President and                                   2001      180,000                  0           121,885
Chief Executive Officer                         2000      180,000                  0            63,665(2)(5)

Victor Kimball                                  2002    $ 133,000       $          0                 0
Vice President, Strategic Planning and          2001      127,200                  0            48,754
Product Development                             2000      123,599                  0            28,526(3)(5)

Wesley G. Peterson                              2002    $ 110,000       $          0                 0
Chief Financial Officer, Vice President of      2001      110,000                  0            48,754
Finance and Administration and Secretary        2000      110,000                  0            28,026(4)(5)
</TABLE>

----------

(1)      On April 16, 2002, our Board of Directors approved a one-for-six
         reverse split of our outstanding common stock. We submitted the reverse
         stock split to our shareholders for approval at a special meeting of
         shareholders on August 19, 2002. The reverse split became effective
         September 13, 2002. All per share numbers in the following table have
         been adjusted to reflect the reverse split.


(2)      Of these options, an aggregate of 7,103 shares represented options
         originally granted at an exercise price of $3.00 on August 11, 2000
         that were repriced on August 18, 2000 to an exercise price of $2.08.
         The remaining 62,962 shares represented options originally granted
         prior to 2000 that were also repriced on August 18, 2000 to an exercise
         price of $2.08, of which 14,814 shares were originally granted at an
         exercise price of $5.40 and 48,148 were originally granted at an
         exercise price of $10.13.



(3)      Of these options, an aggregate of 16,489 shares represented options
         originally granted at an exercise price of $3.00 on August 11, 2000
         were repriced on August 18, 2000 to an exercise price of $2.08. The
         remaining 12,037 shares represented options originally granted prior to
         2000 that were also repriced on August 18, 2000 to an exercise price of
         $2.08, of which 722 shares were originally granted at an exercise price
         of $3.00, 814 shares were originally granted at an exercise price of
         $5.40 and the remaining shares were granted at an exercise price of
         $10.13.



(4)      Of these options, an aggregate of 12,704 shares represented options
         originally granted at an exercise price of $3.00 on August 11, 2000
         were repriced on August 18, 2000 to an exercise price of $2.08. The
         remaining 15,322 shares represented options originally granted prior to
         2000 that were also repriced on August 18, 2000 to an exercise price of
         $2.08, of which 6,481 shares were originally granted at an exercise
         price of $5.40 and 8,841 were originally granted at an exercise price
         of $10.13.


                                       43

<PAGE>


(5)      On August 18, 2000, our Board of Directors approved an amendment to the
         exercise price of all stock options held by all current employees,
         including executive officers, and directors. The exercise price of all
         amended stock options was reduced to the weighted average per share
         price paid by Circle F for Series A Preferred Stock pursuant to the
         Securities Purchase Agreement, dated August 11, 2000, between us and
         Circle F, which was $2.08. Our Board of Directors believed that
         repricing options was critical to retaining our employees and
         directors, particularly in light of the fact that the we were required
         to sell Series A Preferred Stock at prices ranging from $.25 per share
         to $.50 per share under the Securities Purchase Agreement in order to
         continue operations, which is equivalent to $1.50 to $3.00 per share of
         common stock post reverse stock split.


OPTION GRANTS AND EXERCISES

Our executive officers named above did not receive or exercise any option grants
during the year ended December 31, 2002.

                         AGGREGATED OPTION EXERCISES IN
               LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

The following table summarizes the potential realizable value of the options
held by our executive officers named above at December 31, 2002. Our executive
officers did not exercise any options during the year ended December 31, 2002.

<TABLE>
<CAPTION>

                                             NUMBER OF SECURITIES                 VALUE OF UNEXERCISED
                                            UNDERLYING UNEXERCISED                IN-THE-MONEY OPTIONS
                                         OPTIONS AT DECEMBER 31, 2002           AT DECEMBER 31, 2002(1)
                                       --------------------------------     --------------------------------
NAME                                   EXERCISABLE        UNEXERCISABLE     EXERCISABLE        UNEXERCISABLE
-----------------------------------    -----------        -------------     -----------        -------------
<S>                                         <C>                 <C>         <C>                <C>
Paulita M. LaPlante                         87,901              104,051     $   165,340        $     182,704
Victor Kimball                              28,335               48,445          53,010               86,206
Wesley G. Peterson                          30,229               46,552          56,653               82,556
</TABLE>

----------

(1)      Value based on the difference between the fair market value of the
         common stock on December 30, 2002 of $4.00 and the exercise price of
         the options. Options are in-the-money if the market price of the shares
         exceeds the option exercise price.

DIRECTOR COMPENSATION

Our directors receive no cash compensation for their services as members of the
Board of Directors, although their out-of-pocket expenses incurred on our behalf
are reimbursed. We do, however, periodically compensate our directors through
the granting of stock options.

On April 15, 1999, each director who was not an employee was granted an option
to purchase 3,333 shares of common stock at an exercise price of $7.50 per
share, the fair market value of our common stock on that date. These options
become exercisable, on a cumulative basis, with respect to 25% of the shares
covered by the option on each of the first four anniversary dates of the grant,
and expire on April 14, 2009.

On July 26, 2001, we granted Richard Egen and Charles Snead each an option to
purchase 11,434 shares of common stock at an exercise price of $2.25 per share.
These options become exercisable, on a cumulative basis, with respect to 25% of
the shares covered by the option, on each of the first four

                                       44

<PAGE>

anniversary dates of the grant, and expire July 25, 2011. Additionally, we made
two separate milestone grants. Under the first milestone grant, we granted
Richard Egen and Charles Snead each a non-statutory stock option under our
option plan to purchase 8,357 shares of common stock at an exercise price of
$2.25 per share. The vesting timeframe for these options was, in part,
contingent upon our executing an agreement with a major medical company for the
distribution of our CapnoProbe product. This milestone was satisfied on
September 28, 2001 when we entered into an exclusive license agreement with
Nellcor Puritan Bennett under which Nellcor will be the exclusive worldwide
manufacturer and distributor of our CapnoProbe(TM) product. As a result, these
options become exercisable, on a cumulative basis, with respect to 25% of the
shares covered by such option on each of the first four anniversary dates of the
grant, and expire July 25, 2011. Under the second milestone grant, we granted
Richard Egen and Charles Snead each a non-statutory stock option under the plan
to purchase 8,357 shares of common stock at an exercise price of $2.25 per
share. These options become exercisable, on a cumulative basis, with respect to
(a) 25% of the shares covered by such option on July 26, 2002 or upon completion
by Optical Sensors of an equity financing resulting in gross proceeds to Optical
Sensors of at least $2 million, whichever is later; (b) 25% of the shares
covered by such option on July 26, 2003 or upon completion by Optical Sensors of
an equity financing resulting in gross proceeds to Optical Sensors of at least
$2 million, whichever is later; (c) 25% of the shares covered by such option on
July 26, 2004 or upon completion by Optical Sensors of an equity financing
resulting in gross proceeds to Optical Sensors of at least $2 million, whichever
is later; and (d) all remaining shares covered by such option, to the extent not
previously vested, on July 26, 2005, whether or not Optical Sensors has
completed an equity financing resulting in gross proceeds to Optical Sensors of
at least $2 million, and expire July 25, 2011.

We did not make any option grants to non-employee directors during the fiscal
year ended December 31, 2002.

CHANGE IN CONTROL ARRANGEMENTS

In August 1999, our Board of Directors approved three new severance pay plans
for our employees, including a severance pay plan for our executive officers.
All of our executive officers are covered by the severance pay plan. The
severance pay plan, as amended, provides for the payment of certain benefits to
our executives who experience a "Qualifying Termination of Employment."

A "Qualifying Termination of Employment" occurs if and only if:

     .    We terminate the executive's employment, before or after a change in
          control, for any reason except "cause," death or disability, or

     .    The executive terminates his or her employment either (1) prior to a
          change in control if his or her termination was a condition of the
          change in control or was requested or insisted upon by an unrelated
          person involved with the change in control or (2) during the 12 months
          after the change in control due to any of the following reasons:

          .    A change in the executive's title, status, position, duties,
               authority or responsibilities as an employee in effect
               immediately prior to the change in control which in the
               executive's reasonable judgment is material and adverse, other
               than a change caused by an insubstantial or inadvertent action
               that Optical Sensors promptly remedies after becoming aware of
               the change;

                                       45

<PAGE>

          .    A reduction in the executive's base pay or an adverse change in
               the form or timing of the payment of the base pay, as in effect
               immediately prior to the change in control or as thereafter
               increased;

          .    Certain adverse changes to specified employee benefit plans;

          .    Relocation of the executive's place of work more than 30 miles
               from his or her work location immediately prior to the change in
               control;

          .    The failure of the Optical Sensors to obtain the assent of the
               severance pay plan by an acquiror at least three days before a
               change in control occurs; or

          .    Termination of employment for any reason other than death during
               the twelfth month following the month during which the change in
               control occurs.

If an executive has a "Qualifying Termination of Employment," he or she will
continue to receive his or her regular pay and continue to participate in all
employee benefit plans until the date of termination specified in the notice of
termination. In addition, the executive will receive the following:

     .    A lump sum cash payment equal to 12 times the executive's monthly base
          pay payable within 10 days after the date of termination;

     .    A "gross up" payment for any excise tax liability; and

     .    Indemnification and expense advances for damages, costs and expenses
          incurred in connection with all matters relating to the executive's
          service with or for Optical Sensors.

The executive has no duty or obligation to seek or accept other employment in
order to become or continue to be eligible for benefits under the severance pay
plan.

Before a change in control, our Board of Directors may amend the severance pay
plan at any time and in any manner but the effective date of any amendment that
adversely affects a participant must be at least one year after the amendment is
approved by our Board of Directors. If a change in control occurs before an
amendment becomes effective, the amendment automatically becomes null and void.
On and after a change in control, the severance pay plan may be amended only if
the participant affected by the amendment consents to the amendment in writing.

Our Board of Directors may terminate the severance pay plan at any time subject
to the following limitations:

          .    Before a change in control, the effective date of the termination
               must be at least one year after the date on which the termination
               is approved by the board of directors; and

          .    The severance pay plan cannot be terminated, and no termination
               will become effective, during the 12 month period after a change
               in control.

Under our 1993 amended and restated stock option plan, upon the occurrence of a
"change in control," all outstanding options granted under the plan will become
and remain exercisable in full during their remaining terms regardless of
whether the plan participants remain our employees. The acceleration of the
exercisability of options under the plan may be limited, however, if the
acceleration would be subject

                                       46

<PAGE>

to an excise tax imposed upon "excess parachute payments." In addition, the
compensation committee of our Board of Directors, with the consent of any
affected participant, may determine that some or all of the participants holding
outstanding options will receive cash in an amount equal to the excess of the
fair market value of such shares immediately before the effective date of the
change in control over the exercise price per share of the options.

Under the August 10, 2001 Investment Agreement between Optical Sensors and
Circle F Ventures, our Board of Directors approved and Circle F Ventures agreed
that upon a change in control, our employees, in the aggregate, will be paid a
bonus equal to (A) One Hundred Percent (100%) of the proceeds to Optical Sensors
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 Optical Sensors or its shareholders from
the change in control transaction between Sixteen Million Dollars ($16,000,000)
and Twenty Million Dollars ($20,000,000).

                                       47

<PAGE>

Item 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT.

The following table sets forth information known to us with respect to the
beneficial ownership of each class of our capital stock as of March 25, 2003 for
(1) each person known by us to beneficially own more than 5% of any class of our
voting securities, (2) each of the executive officers named in the Summary
Compensation Table under the heading "Executive Compensation," (3) each of our
directors and (4) all of our executive officers and directors as a group. Except
as otherwise indicated, we believe that each of the beneficial owners of our
capital stock listed below, based on information provided by these owners, has
sole investment and voting power with respect to its shares, subject to
community property laws where applicable.

<TABLE>
<CAPTION>
                                          SHARES OF SERIES A CONVERTIBLE
                                                PREFERRED STOCK(1)                SHARES OF COMMON STOCK(1)
NAME                                      AMOUNT         PERCENT OF CLASS       AMOUNT    PERCENT OF CLASS(2)
--------------------------------------   ---------       ----------------      --------   -------------------
<S>                                      <C>                  <C>              <C>                 <C>
Circle F. Ventures, LLC and
 Hayden R. Fleming (3) ...............   4,333,334            100.0%           2,336,780           58.00%

Special Situations Funds (4) .........           0              0.0%             265,666            8.18%

Richard B. Egen (5) ..................           0              0.0%              15,997                *

Paulita M. LaPlante (6) ..............           0              0.0%              88,248            2.69%

Victor Kimball (7) ...................           0              0.0%              29,461                *

Wesley G. Peterson (8) ...............           0              0.0%              33,524            1.04%

Charles D. Snead, Jr. (9) ............           0              0.0%              13,180                *

All directors and executive officers
 as a group (five persons)(10) .......           0              0.0%             180,410            5.36%
</TABLE>

----------

*        Less than 1% of the outstanding shares.

(1)      Except as otherwise indicated in the footnotes to this table, the
         persons named in the table have sole voting and investment power with
         respect to all shares of common stock and preferred stock. Shares of
         common stock subject to options or warrants currently exercisable or
         exercisable within 60 days are deemed outstanding for computing the
         percentage of the person or group holding such options but are not
         deemed outstanding for computing the percentage of any other person or
         group. The Series A convertible preferred is convertible into one-sixth
         share of common stock for each share of Series A convertible preferred
         within 60 days and is therefore counted in the shares of common stock
         beneficially owned as well as in its own column.

(2)      Based on 3,190,047 shares of common stock outstanding as of March 25,
         2003.

(3)      Based on Schedule 13D/A filed February 8, 2002. Includes 23,412 shares
         held by an individual retirement account for the benefit of Mr.
         Fleming's spouse, 3,333 shares held by an individual retirement account
         for the benefit of Mr. Fleming and 245,147 shares are owned by a trust
         for the benefit of Mr. Fleming and his wife. Of the shares owned by the
         trust, 33,333 shares are issuable upon the exercise of a warrant. Also
         includes 83,333 shares are issuable upon the exercise of a warrant and
         722,222 shares issuable upon the conversion of 4,333,334 shares of
         Series A convertible preferred stock held by Circle F. Mr. Fleming is
         the managing

                                       48

<PAGE>

         member of Circle F. The address of Circle F and Mr. Fleming is 17797
         North Perimeter Drive, Scottsdale, Arizona 85255. See "Certain
         Relationships and Related Transactions."

(4)      Based on a Schedule 13G/A filed February 12, 2002 and information
         provided by Special Situations Fund III, L.P. Includes warrant to
         purchase 58,333 shares of common stock. MGP Advisors Limited
         Partnership ("MGP") is the general partner and investment advisor of
         Special Situations Fund III, L.P., a limited partnership ("SSF III"),
         and AWM Investment Company, Inc. ("AWM") is the general partner of MGP
         and the general partner and investment advisor of the Cayman Fund.
         Austin W. Marxe and David Greenhouse are officers, directors and
         members of AWM and MGP, respectively, and may be deemed to be the
         beneficial owner of the shares held by SSF III and Cayman Fund. SSF
         III, MGP, Cayman Fund and AWM have sole voting and investment power
         with respect to the shares beneficially owned by such fund and advisor.
         Messrs. Marxe and Greenhouse have shared voting and investment power
         with respect to the shares beneficially owned by each of them. The
         address of SSF III, MGP, AWM and Messrs. Marxe and Greenhouse is 153
         East 53 Street, New York, New York 10022. The address of Cayman Fund is
         c/o CIBC Bank and Trust Company (Cayman) Limited, CIBC Bank Building,
         P.O. Box 694, Grand Cayman, Cayman Islands, British West Indies. See
         "Certain Relationships and Related Transactions."

(5)      Includes 15,997 shares issuable upon exercise of outstanding stock
         options held by Mr. Egen.

(6)      Includes 87,901 shares issuable upon exercise of outstanding stock
         options held by Ms. LaPlante.

(7)      Includes 28,335 shares issuable upon exercise of outstanding stock
         options held by Mr. Kimball.

(8)      Includes 30,229 shares issuable upon exercise of outstanding stock
         options held by Mr. Peterson, half of which are subject to a marital
         lien.

(9)      Includes 12,947 shares issuable upon exercise of outstanding stock
         options held by Mr. Snead.

(10)     Includes shares beneficially owned by affiliates of our officers and
         directors, but does not include any shares beneficially owned by Circle
         F Ventures, LLC or Hayden R. Fleming. Also includes 175,409 shares
         issuable upon exercise of outstanding stock options held by officers
         and directors.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table summarizes outstanding options under our 1989 Omnibus Stock
Option Plan, as amended, and our Amended and Restated 1993 Stock Option Plan as
of December 31, 2002. Options granted in the future under the plan are within
the discretion of the Company's Compensation Committee and therefore cannot be
ascertained at this time.

<TABLE>
<CAPTION>
                                              (a)                       (b)                        (c)
                                                                                           NUMBER OF SECURITIES
                                                                                          REMAINING AVAILABLE FOR
                                    NUMBER OF SECURITIES TO       WEIGHTED-AVERAGE         FUTURE ISSUANCE UNDER
                                    BE ISSUED UPON EXERCISE       EXERCISE PRICE OF         EQUITY COMPENSATION
                                    OF OUTSTANDING OPTIONS,     OUTSTANDING OPTIONS,    PLANS (EXCLUDING SECURITIES
         PLAN CATEGORY                WARRANTS AND RIGHTS        WARRANTS AND RIGHTS      REFLECTED IN COLUMN (a))
         -------------              -----------------------     --------------------    ---------------------------
<S>                                         <C>                         <C>                        <C>
Equity compensation plans
 approved by security holders               810,657                     $ 3.07                     57,852

Equity compensation plans not
 approved by security holders                     0                        N/A                          0
                                            -------                     ------                     ------
                           Total            810,657                     $ 3.07                     57,852
</TABLE>

Our only equity compensation plans are the 1989 Omnibus Stock Option Plan, as
amended, and the Amended and Restated 1993 Stock Plan. We do not have any other
equity compensation plans.

                                       49

<PAGE>

ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.


On March 10, 2000, we issued convertible promissory notes in the aggregate
principal amount of $1,400,000, pursuant to an Investment Agreement with Circle
F and Special Situations Fund III, L.P. On December 21, 2001, the $700,000 note
held by Special Situations Fund III converted into units at a conversion price
equal to $25,000 per unit, each unit consisting of 8,333 shares of common stock
and a five-year warrant to purchase 2,083 shares of common stock at an exercise
price of $3.00 per share, for a total of 233,333 shares of common stock and a
warrant to purchase 58,333 shares of common stock. On December 21, 2001, the
$700,000 principal amount of notes held by Circle F converted into units at a
conversion price equal to $12,500 per unit, each unit consisting of 8,333 shares
of common stock and a five-year warrant to purchase 2,083 shares of common stock
at an exercise price of $3.00 per share for a total of 466,666 shares of common
stock and warrants to purchase 116,666 shares of common stock.



On August 11, 2000, we entered into a Securities Purchase Agreement pursuant to
which we agreed to issue, and Circle F agreed to purchase upon our request, up
to 4,333,334 shares of our Series A preferred stock for an aggregate purchase
price of $1,500,000. At that time we agreed to sell, and Circle F agreed to
purchase, 1,000,000, 1,333,334 and 2,000,000 shares of our Series A preferred
stock at $0.50, $0.375 and $0.25, respectively. We sold 1,000,000 shares of the
Series A preferred stock to Circle F at $.50 per share for a total of $500,000
on August 11, 2000, 1,333,334 shares of the Series A preferred stock to Circle F
at $.375 per share for a total of $500,000 on October 3, 2000 and 2,000,000
shares of the Series A preferred stock to Circle F at $.25 per share for a total
of $500,000 on December 28, 2000. As a result of the one-for-six reverse split
of our common stock on September 13, 2002, each share of Series A preferred
stock is now convertible into one-sixth of a share of our common stock, or a
total of 722,222 shares of common stock. The adjusted closing price of our
common stock on August 11, 2000, October 3, 2000 and December 28, 2000 was
$3.56, $3.75 and $1.59, respectively, or $0.59, $0.63 and $0.27, prior to giving
effect for the reverse stock split. The terms of the Securities Purchase
Agreement provide for all options held by our current employees and directors to
be reduced to the weighted average, common stock equivalent price of at which
Circle F purchased Series A convertible preferred stock equaling $2.08, as
adjusted for the reverse stock split. Prior to the amendment, these options had
exercise prices ranging from $54.00 to $5.40. Such reduction resulted in the
option plan being subject to variable accounting rules.



Between March 8, 2001 and October 4, 2001, we entered into a series of Bridge
Loan Agreements with Circle F under which Circle F advanced us $1,489,000 to
fund our operations. These advances were evidenced by convertible promissory
notes, and each advance was due and payable one year after the date of the
advance. On June 12, 2002, Circle F converted these notes into 992,667 shares of
common stock at a conversion price of $1.50 per share.



Since March 6, 2002, Circle F Ventures has advanced $2,224,000 to us, all which
was advanced prior to December 31, 2002. These advances are unsecured and
recorded as short-term liabilities. We expect Circle F and its affiliate to
convert the $2,224,000 in advances into our capital stock, but, there are no
assurances that this will occur. If Circle F and/or its affiliate were to demand
payment of these advances, we would be unable to repay the debt and would be
forced to cease operations.


Charles D. Snead, Jr., one of our directors, is a consultant and attorney for
Circle F Ventures, LLC and Hayden R. Fleming and their affiliates and related
companies.

                                       50

<PAGE>

                                     PART IV

ITEM 13.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
                  8-K.

                  (a)      Exhibits

                  The exhibits to this report are listed in the Exhibit Index on
                  pages 51 to 56 below. A copy of the exhibits referred to above
                  will be furnished at a reasonable cost to any stockholder of
                  Optical Sensors, upon receipt from any such person of a
                  written request for any such exhibit. Such request should be
                  sent to: Optical Sensors Incorporated, 7615 Golden Triangle
                  Drive, Suite C, Technology Park VI, Minneapolis, Minnesota
                  55344; Attn: Stockholder Information.

                  The following is a list of each management contract or
                  compensatory plan or arrangement required to be filed as an
                  exhibit to this report on Form 10-KSB pursuant to Item 13(a):

                  A.  1989 Omnibus Stock Option Plan, as amended.

                  B.  Amended and Restated 1993 Stock Option Plan.

                  C.  Form of Non-Statutory Stock Option Agreement for
                      Nonemployees pursuant to 1993 Stock Option Plan.

                  D.  Form of Non-Statutory Stock Option Agreement for
                      Nonemployee Directors pursuant to 1993 Stock Option Plan.

                  E.  Form of Incentive Stock Option Agreement for Employees
                      pursuant to 1993 Stock Option Plan.

                  F.  Executive Severance Pay Plan, as amended.

         (b)      Reports on Form 8-K

                  None.

ITEM 14.          CONTROLS AND PROCEDURES

         (a)      Evaluation of disclosure controls and procedures. Our chief
         executive officer and chief financial officer, after evaluating the
         effectiveness of the Company's "disclosure controls and procedures" (as
         defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and
         15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before
         the filing date of this annual report on Form 10-KSB, have concluded
         that, as of the Evaluation Date, our disclosure controls and procedures
         were adequate and designed to ensure that material information relating
         to us and our consolidated subsidiaries would be made known to them by
         others within those entities.

         (b)      Changes in internal controls. There were no significant
         changes in our internal controls or, to our knowledge, in other factors
         that could significantly affect our disclosure controls and procedures
         subsequent to the Evaluation Date.

                                       51

<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                       OPTICAL SENSORS INCORPORATED


Dated:  June 26, 2003


                                       By: /s/ Paulita M. LaPlante
                                           -------------------------------------
                                           Paulita M. LaPlante
                                           President and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below on March 25, 2003 by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.


<TABLE>
<CAPTION>
NAME                                    TITLE
---------------------------------       -----------------------------------------------------
<S>                                     <C>
/s/ Paulita M. LaPlante                 President, Chief Executive Officer and Director
---------------------------------       (principal executive officer)
Paulita M. LaPlante

/s/ Wesley G. Peterson                  Chief Financial Officer, Vice President of Finance and
---------------------------------       Administration and Secretary (principal financial and
Wesley G. Peterson                      accounting officer)

/s/ Richard B. Egen                     Director
---------------------------------
Richard B. Egen

/s/ Charles D. Snead, Jr.               Director
---------------------------------
Charles D. Snead, Jr.
</TABLE>

                                       52

<PAGE>

                                 CERTIFICATIONS
                    CERTIFICATION BY CHIEF EXECUTIVE OFFICER

         I, Paulita M. LaPlante, certify that:

         1.       I have reviewed this annual report on Form 10-KSB/A of Optical
Sensors Incorporated;

         2.       Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3.       Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;

         4.       The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

         a)       designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this annual report is being prepared;

         b)       evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report ("Evaluation Date"); and

         c)       presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

         5.       The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):

         a)       all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

         b)       any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

         6.       The registrant's other certifying officers and I have
indicated in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.


Date:    June 26, 2003


                                        By:    /s/ Paulita M. LaPlante
                                               ---------------------------------
                                        Title: President and Chief Executive
                                               Officer

                                       53

<PAGE>

                    CERTIFICATION BY CHIEF FINANCIAL OFFICER

I, Wesley G. Peterson, certify that:

         1.       I have reviewed this annual report on Form 10-KSB/A of Optical
Sensors Incorporated;

         2.       Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3.       Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;

         4.       The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

         a)       designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this annual report is being prepared;

         b)       evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this annual report ("Evaluation Date"); and

         c)       presented in this annual report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

         5.       The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):

         a)       all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

         b)       any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

         6.       The registrant's other certifying officers and I have
indicated in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.


Date:    June 26, 2003


                                        By:    /s/ Wesley G. Peterson
                                               ---------------------------------
                                        Title: Chief Financial Officer,
                                               Vice President of Finance and
                                               Administration and Secretary

                                       54

<PAGE>

                          OPTICAL SENSORS INCORPORATED
                 EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB/A
                      FOR THE YEAR ENDED DECEMBER 31, 2002

<TABLE>
<CAPTION>
Item No.                            Item                         Method of Filing
--------                            ----                         ----------------
<S>          <C>                                                 <C>
3.1          Restated Certificate of Incorporation of the        Incorporated by reference to Exhibit 3.3 contained in the
             Company.                                            Company's Registration Statement on Form S-1 (File No.
                                                                 33-99904).

3.2          Amendment to Restated Certificate of Incorporation  Incorporated by reference to Exhibit 3(i) contained in
             of the Company                                      the Company's Registration Statement on Form 8-A12G/A
                                                                 dated September 16, 2002 (File No. 0-27600).

3.4          Certificate of Designation, Preferences and Rights  Incorporated by reference to Exhibit 3.2 contained in the
             of Series A Junior Preferred Stock.                 Company's Annual Report on Form 10-K for the year ended
                                                                 December 31, 1998 (File No. 0-27600).

3.5          Certificate of Designation of Rights and            Incorporated by reference to Exhibit 4.1 contained in the
             Preferences of Series A Preferred Stock.            Company's Quarterly Report on Form 10-Q for the quarter
                                                                 ended June 30, 2000 (File No. 0-27600).

3.6          Bylaws of the Company, as amended.                  Incorporated by reference to Exhibit 3.3 contained in the
                                                                 Company's Annual Report on Form 10-K for the year ended
                                                                 December 31, 1998 (File No. 0-27600).

4.1          Specimen Common Stock Certificate                   Incorporated by reference to Exhibit 4.1 contained in the
                                                                 Company's Registration Statement on Form S-1 (File No.
                                                                 33-99904).

4.2          Warrant dated November 6, 1992 issued to Comdisco,  Incorporated by reference to Exhibit 4.8 contained in the
             Inc.                                                Company's Registration Statement on Form S-1 (File No.
                                                                 33-99904).

4.3          Warrant Dated August 31, 1995 issued to Comdisco,   Incorporated by reference to Exhibit 4.9 contained in the
             Inc.                                                Company's Registration Statement on Form S-1 (File No.
                                                                 33-99904).

4.4          Rights Agreement dated as of December 3, 1996       Incorporated by reference to Exhibit 4.1 contained in the
             between the Company and Norwest Bank Minnesota,     Company's Current Report on Form 8-K dated December 3,
             N.A.                                                1996 (File No. 0-27600).
</TABLE>

                                       55

<PAGE>

<TABLE>
<S>          <C>                                                 <C>
4.5          Amendment No. 1 to Rights Agreement dated as of     Incorporated by reference to Exhibit 10.1 contained in
             March 10, 2000 between the Company and Norwest      the Company's Current Report on Form 8-K dated March 10,
             Bank Minnesota, N.A.                                2000 (File No. 0-27600).

4.6          Amendment No. 2 to Rights Agreement dated as of     Incorporated by reference to Exhibit 10.1 contained in
             August 8, 2000 between the Company and Wells Fargo  the Company's Quarterly Report on Form 10-Q for the
             Bank, N.A.                                          quarter ended June 30, 2000 (File No. 0-27600).

4.7          Amendment No. 3 to Rights Agreement dated as of     Incorporated by reference to Exhibit 10.8 to the
             April 19, 2001 between the Company and Wells Fargo  Company's Quarterly Report on Form 10-Q for the quarter
             Bank, N.A.                                          ended March 31, 2001 (File No. 0-27600).

4.8          Amendment No. 4 to Rights Agreement, dated as of    Incorporated by reference to Exhibit 4.5 contained in the
             September 13, 2002, between the Company and Wells   Company's Registration Statement on Form 8-A12G/A dated
             Fargo Bank Minnesota N.A., the successor of         September 16, 2002 (File No. 0-27600).
             Norwest Bank Minnesota, N.A.

10.1         Lease dated October 7, 1991 between Registrant and  Incorporated by reference to Exhibit 10.1 contained in
             First Industrial L.P. (successor to MIG Kappa III   the Company's Registration Statement on Form S-1 (File
             Companies)                                          No. 33-99904).

10.2         Registration Rights Agreement, dated April 28,      Incorporated by reference to Exhibit 10.9 contained in
             1992, as amended                                    the Company's Registration Statement on Form S-1 (File
                                                                 No. 33-99904).

10.3         1989 Omnibus Stock Option Plan, as amended          Incorporated by reference to Exhibit 10.11 contained in
                                                                 the Company's Registration Statement on Form S-1 (File
                                                                 No. 33-99904).

10.4         Amended and Restated 1993 Stock Option Plan (as of  Incorporated by reference to Exhibit 10.1 to the
             July 26, 2001)                                      Company's Quarterly Report on Form 10-QSB for the quarter
                                                                 ended September 30, 2001 (File No. 0-27600).

10.5         Form of Non-Statutory Stock Option Agreement for    Incorporated by reference to Exhibit 10.21 contained in
             Nonemployees pursuant to 1993 Stock Option Plan     the Company's Registration Statement on Form S-1 (File
                                                                 No. 33-99904).
</TABLE>

                                       56

<PAGE>

<TABLE>
<S>          <C>                                                 <C>
10.6         Form of Non-Statutory Stock Option Agreement for    Incorporated by reference to Exhibit 10.18 contained in
             Nonemployee Directors pursuant to 1993 Stock        the Company's Registration Statement on Form S-1 (File
             Option Plan                                         No. 33-99904).

10.7         Form of Incentive Stock Option Agreement for        Incorporated by reference to Exhibit 10.19 contained in
             Employees pursuant to 1993 Stock Option Plan        the Company's Registration Statement on Form S-1 (File
                                                                 No. 33-99904).

10.8         First Amendment to Lease Agreement dated April 26,  Incorporated by reference to Exhibit 10.21 contained in
             1996 between First Industrial Financing             the Company's Annual Report on Form 10-K for the year
             Partnership, L.P. and the Company.                  ended December 31, 1996 (File No. 0-27600).

10.9         Second Amendment to Lease Agreement, dated April    Incorporated by reference to Exhibit 10.21 contained in
             14, 1997, between First Industrial Financing        the Company's Annual Report on Form 10-K for the year
             Partnership, L.P. and the Company.                  ended December 31, 1997 (File No. 0-27600).

10.10        Stock Purchase Agreement dated as of January 7,     Incorporated by reference to Exhibit 10.2 contained in
             1998 between the Company and Group CH Werfen, S.A.  the Company's Current Report on Form 8-K, dated January
                                                                 7, 1998 (File No. 0-27600).

10.11        Patent License Agreement dated July 20, 1998        Incorporated by reference to Exhibit 10.1 contained in
             between the Company and the Institute of Critical   the Company's Quarterly Report on Form 10-Q for the
             Care Medicine (1)                                   quarter ended September 30, 1998 (File No. 0-27600).

10.12        Executive Severance Pay Plan                        Incorporated by reference to Exhibit 10.1 to the
                                                                 Company's Quarterly Report on Form 10-Q for the quarter
                                                                 ended September 30, 1999 (File No. 0-27600).

10.13        Third Amendment to Lease Agreement dated September  Incorporated by reference to Exhibit 10.25 contained in
             3, 1999 between First Industrial Financing          the Company's Annual Report on Form 10-K for the year
             Partnership, L.P. and the Company                   ended December 31, 1999 (File No. 0-27600).

10.14        Investment Agreement, dated, March 10, 2000, among  Incorporated by reference to Exhibit 10.16 contained in
             the Company, Circle F Ventures, LLC and Special     the Company's Annual Report on Form 10-K for the year
             Situations Fund III, L.P.                           ended December 31, 2000 (File No. 0-27600).

10.15        Form of Convertible Promissory Note issued under    Incorporated by reference to Exhibit 10.17 contained in
             Investment Agreement, dated March 10, 2000          the Company's Annual Report on Form 10-K for the year
                                                                 ended December 31, 2000 (File No. 0-27600).
</TABLE>

                                       57

<PAGE>

<TABLE>
<S>          <C>                                                 <C>
10.16        Fourth Amendment to Lease Agreement dated June 1,   Incorporated by reference to Exhibit 10.18 contained in
             2000 between First Industrial L.P. and the Company  the Company's Annual Report on Form 10-K for the year
                                                                 ended December 31, 2000 (File No. 0-27600).

10.17        Securities Purchase Agreement, dated August 11,     Incorporated by reference to Exhibit 10.2 to the
             2000, between the Company and Circle F Ventures,    Company's Quarterly Report on Form 10-Q for the quarter
             LLC (1)                                             ended June 30, 2000 (File No. 0-27600).

10.18        Amendment No. 1, dated August 15, 2000 to           Incorporated by reference to Exhibit 10.20 contained in
             Executive Severance Pay Plan                        the Company's Annual Report on Form 10-K for the year
                                                                 ended December 31, 2000 (File No. 0-27600).

10.19        Bridge Loan Agreement, dated March 8, 2001,         Incorporated by reference to Exhibit 10.21 contained in
             between the Company and Circle F Ventures, LLC      the Company's Annual Report on Form 10-K for the year
                                                                 ended December 31, 2000 (File No. 0-27600).

10.20        Convertible Promissory Note issued under Bridge     Incorporated by reference to Exhibit 10.22 contained in
             Loan Agreement, dated March 8, 2001                 the Company's Annual Report on Form 10-K for the year
                                                                 ended December 31, 2000 (File No. 0-27600).

10.21        Letter Agreement, dated March 10, 2001, between     Incorporated by reference to Exhibit 10.23 contained in
             the Company and Special Situations Fund III, L.P.   the Company's Annual Report on Form 10-K for the year
                                                                 ended December 31, 2000 (File No. 0-27600).

10.22        Bridge Loan Agreement, dated April 5, 2001,         Incorporated by reference to Exhibit 10.1 to the
             between the Company and Circle F Ventures, LLC      Company's Quarterly Report on Form 10-QSB for the quarter
                                                                 ended March 31, 2001 (File No. 0-27600).

10.23        Form of Convertible Promissory Note issued under    Incorporated by reference to Exhibit 10.2 to the
             Bridge Loan Agreement, dated April 5, 2001          Company's Quarterly Report on Form 10-QSB for the quarter
                                                                 ended March 31, 2001 (File No. 0-27600).

10.24        Bridge Loan Agreement, dated April 19, 2001,        Incorporated by reference to Exhibit 10.3 to the
             between the Company and Circle F Ventures, LLC      Company's Quarterly Report on Form 10-QSB for the quarter
                                                                 ended March 31, 2001 (File No. 0-27600).
</TABLE>

                                       58

<PAGE>

<TABLE>
<S>          <C>                                                 <C>
10.25        Form of Convertible Promissory Note issued under    Incorporated by reference to Exhibit 10.4 to the
             Bridge Loan Agreement, dated April 19, 2001         Company's Quarterly Report on Form 10-QSB for the quarter
                                                                 ended March 31, 2001 (File No. 0-27600).

10.26        Bridge Loan Agreement, dated May 3, 2001, between   Incorporated by reference to Exhibit 10.5 to the
             the Company and Circle F Ventures, LLC              Company's Quarterly Report on Form 10-QSB for the quarter
                                                                 ended March 31, 2001 (File No. 0-27600).

10.27        Form of Convertible Promissory Note issued under    Incorporated by reference to Exhibit 10.6 to the
             Bridge Loan Agreement, dated May 3, 2001            Company's Quarterly Report on Form 10-QSB for the quarter
                                                                 ended March 31, 2001 (File No. 0-27600).

10.28        Amendment No. 2, dated April 19, 2001 to Executive  Incorporated by reference to Exhibit 10.7 to the
             Severance Pay Plan                                  Company's Quarterly Report on Form 10-QSB for the quarter
                                                                 ended March 31, 2001 (File No. 0-27600).

10.29        Bridge Loan Agreement, effective May 1, 2001,       Incorporated by reference to Exhibit 10.1 to the
             between the Company and Circle F Ventures, LLC      Company's Quarterly Report on Form 10-QSB for the quarter
                                                                 ended June 30, 2001 (File No. 0-27600).

10.30        Form of Convertible Promissory Note issued under    Incorporated by reference to Exhibit 10.2 to the
             Bridge Loan Agreement, dated July 26, 2001          Company's Quarterly Report on Form 10-QSB for the quarter
                                                                 ended June 30, 2001 (File No. 0-27600).

10.31        Development and License Agreement, dated September  Incorporated by reference to Exhibit 10.2 to the
             28, 2001, between the Company and Nellcor Puritan   Company's Quarterly Report on Form 10-QSB/A for the
             Bennett, Inc. (1)                                   quarter ended September 30, 2001 (File No. 0-27600).

10.32        Mutual Termination Agreement, effective October 5,  Incorporated by reference to Exhibit 10.3 to the
             2001, between the Company and Circle F Ventures,    Company's Quarterly Report on Form 10-QSB for the quarter
             LLC                                                 ended September 30, 2001 (File No. 0-27600).

10.33        Fifth Amendment to Lease Agreement dated March 28,  Incorporated by reference to Exhibit 10.33 contained in
             2001 between First Industrial L.P. and the Company  the Company's Annual Report on Form 10-KSB for the year
                                                                 ended December 31, 2001 (File No. 0-27600).
</TABLE>

                                       59

<PAGE>

<TABLE>
<S>          <C>                                                 <C>
10.34        Sixth Amendment to Lease Agreement effective        Incorporated by reference to Exhibit 10.34 contained in
             January 7, 2002 between First Industrial L.P. and   the Company's Annual Report on Form 10-KSB for the year
             the Company                                         ended December 31, 2001 (File No. 0-27600).

23.1         Consent of Independent Auditors                     Filed herewith.

99.1         Certification of Chief Executive Officer and Chief  Filed herewith.
             Financial Officer pursuant to 18 U.S.C. Section
             1350, as adopted pursuant to Section 906 of the
             Sarbanes-Oxley Act of 2002.
</TABLE>

----------

(1) Confidential treatment has been granted by the Commission with respect to
designated portions contained within document. Such portions have been omitted
and filed separately with the Commission pursuant to Rule 24b-2 of the
Securities and Exchange Act of 1934, as amended.

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