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

                           __________________________
                                   FORM 10-KSB

(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 [X] NO [ ]

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

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                                     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 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.

                                        1

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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.

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 $226,000 and
consisted of paying off the debt and liabilities of Vasamedics. 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 with its proprietary metabolic means of
assessing perfusion. Additionally, the acquisition provides direct sales contact
with customers in areas of future market interest to the Company.

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 BPM/2/ technology allows monitoring of
microvascular blood flow in tissue at risk of ischemic injury. This product
provides information via laser and fiber optics technology.

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SALES AND MARKETING

We do not maintain any sales or marketing personnel for CapnoProbe. The right to
military battlefield sales of CapnoProbe are assigned to us and sales for field
forward personnel triage are contemplated.

We sell the Vasamedics product through a group of 5 independent U.S.
distributors and two direct sales people. We also have distribution of the
Vasamedics product in Mexico 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.

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 comply
with certain 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

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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 31 U.S. patents covering our technology, eight of
which are specifically related to the CapnoProbe and four of which cover
Vasamedics products. We have filed a number of patent 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.

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.

                                        4

<PAGE>

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 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

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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.

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

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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.

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 a certain
quantity has been produced, while Nellcor establishes its own manufacturing
operations.

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 $226,000 and
consisted of paying off the debt and liabilities of Vasamedics. 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 with our proprietary metabolic means of assessing
perfusion. 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.

                                        9

<PAGE>

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.

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.

                                       10

<PAGE>

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. Nellcor is obligated to pay us a
customary royalty equal to a varying percentage of Nellcor's CapnoProbe sales,
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
between us and ICCM and subsequent agreements among us, ICCM and Nellcor. We are
required under the license agreement to pay ICCM an annual minimum royalty of
$400,000 through 2005. Until minimum royalty payments to ICCM are exceeded by
royalties received from Nellcor, payments by us to ICCM for minimum royalty
payments will be recorded as research and development expense. We expect to
begin receiving royalty payments from Nellcor in the second quarter of 2003.

Net sales for 2002 were $518,882, all of which was in the fourth quarter of
2002. These sales were a combination of CapnoProbe product sold to Nellcor under
a short term supply agreement and Vasamedics product. We had no sales in 2001.

Cost of goods sold for 2002 was $422,034. There were no cost of goods sold in
2001.

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 inventory. 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 and
transferred $262,086 to cost of sales for efforts related to CapnoProbe product
that we produced for Nellcor. 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

                                       11

<PAGE>

$107,819 and $35,850, respectively, in the 2002 and 2001. 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.

<TABLE>
<CAPTION>
                                                               2002         2001
                                                           -----------   -----------
     <S>                                                   <C>           <C>
     Write-off inventory                                   $         -   $   554,549

     Nellcor reimbursement                                    (230,762)      (28,335)

     Capitalization  of labor and  overhead for build of
      in-house produced equipment                              (84,904)            -

     Cost  allocated  to cost of goods sold - CapnoProbe
     and Vasamedics production                                (262,086)            -

     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             1,734,795     1,628,401
                                                           -----------   -----------
                                                           $ 1,883,364   $ 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.

                                       12

<PAGE>

<TABLE>
<CAPTION>
                                                               2002         2001
                                                           -----------   -----------
     <S>                                                   <C>           <C>
     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
                                                           ===========   ===========
</TABLE>

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

                                       13

<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
and debt securities. 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
Ventures, LLC 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 Ventures and certain of
its affiliates 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 Ventures beneficially owns
approximately 58% of our outstanding

                                       14

<PAGE>

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 common
stock in the future. Charles Snead, one of our directors is a consultant and
attorney for Circle F Ventures, Hayden R. Fleming and their affiliates and
related companies.

In August 2000, we entered into a Securities Purchase Agreement pursuant to
which we agreed to issue, and Circle F Ventures 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. We sold 1,000,000 shares of the Series A preferred
stock to Circle F Ventures 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 Ventures
and its affiliates 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 Ventures 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. 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 price at which Circle F Ventures purchased Series A convertible
preferred stock. 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 Ventures under which Circle F Ventures and its
affiliates 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,
of which all was advanced prior to December 31, 2002.

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 Ventures, 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 $2,235,993 for operations and $182,895
for capital expenditures in 2002.

We are currently dependent on development fees from Nellcor and loans and equity
infusions from current shareholders or other investors to continue our
operations. Our current cash balances are insufficient to fund our operations.
We will need to obtain additional loans, equity funding or development fees in
order to continue operations. While we believe that Circle F or its affiliates
will advance sufficient funds to us on a monthly or semi-monthly basis to enable
us to continue operations, there can be no assurance that Circle F or its
affiliates 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.

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:

                                       15

<PAGE>

..    Need for Additional Financing. Our current cash balances are 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 do not have sufficient cash to
     fund our operations and will need to raise additional funds or obtain
     technology development fees in order to continue operations. While we
     believe that Circle F or its affiliates will advance sufficient funds to us
     on a monthly or semi-monthly basis to enable us to continue operations,
     there can be no assurance that Circle F or its affiliate will do so.
     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.

                                       16

<PAGE>

ITEM 7.        FINANCIAL STATEMENTS.

<TABLE>
<CAPTION>
Description                                                                                                     Page
-----------                                                                                                     ----
<S>                                                                                                              <C>
Independent Auditors' Report .....................................................................................18

Balance Sheet as of December 31, 2002.............................................................................19

Statements of Operations for the years ended December 31, 2002 and 2001...........................................20

Statements of Shareholders' Equity (Deficit) for the years ended December 31, 2002 and 2001.......................21

Statements of Cash Flows for the years ended December 31, 2002 and 2001...........................................22

Notes to the Financial Statements for the years ended December 31, 2002 and 2001..................................23
</TABLE>

                                       17

<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

                                       18

<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.

                                       19

<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.

                                       20

<PAGE>

                          Optical Sensors Incorporated

                   Statement of Shareholders' Equity (Deficit)

                          Year Ended December 31, 2002

<TABLE>
<CAPTION>
                                                                    PREFERRED STOCK                     COMMON STOCK
                                                          ---------------------------------------------------------------------
                                                               SHARES           AMOUNT            SHARES             AMOUNT
                                                          ---------------------------------------------------------------------
<S>                                                             <C>         <C>                     <C>         <C>
Balance at December 31, 2000                                    4,333,334   $        43,333         1,496,973   $        14,970
Issuance of common stock upon exercise of options                       -                 -               407                 4
Beneficial conversion on convertible notes payable                      -                 -                 -                 -
Variable compensation on stock options                                  -                 -                 -                 -
Conversion of notes payable                                             -                 -           700,000             7,000
Net loss                                                                -                 -                 -                 -
                                                          ---------------------------------------------------------------------
Balance at December 31, 2001                                    4,333,334            43,333         2,197,380            21,974
Conversion of notes payable                                             -                 -           992,667             9,927
Variable compensation on stock options                                  -                 -                 -                 -
Fair value of options granted to consultant                             -                 -                 -                 -
Amortization of unearned compensation                                   -                 -                 -                 -
Net loss                                                                -                 -                 -                 -
                                                          ---------------------------------------------------------------------
Balance at December 31, 2002                                    4,333,334   $        43,333         3,190,047   $        31,901
                                                          =====================================================================

<CAPTION>
                                                            ADDITIONAL
                                                              PAID-IN          ACCUMULATED       UNEARNED
                                                              CAPITAL            DEFICIT       COMPENSATION          TOTAL
                                                          ---------------------------------------------------------------------
<S>                                                       <C>               <C>               <C>               <C>
Balance at December 31, 2000                              $    72,387,497   $   (71,453,504)  $             -   $       992,296
Issuance of common stock upon exercise of options                   1,043                 -                 -             1,047
Beneficial conversion on convertible notes payable                709,080                 -                 -           709,080
Variable compensation on stock options                            104,207                 -                 -           104,207
Conversion of notes payable                                     1,393,000                 -                 -         1,400,000
Net loss                                                                -        (3,400,022)                -        (3,400,022)
                                                          ---------------------------------------------------------------------
Balance at December 31, 2001                                   74,594,827       (74,853,526)                -          (193,392)
Conversion of notes payable                                     1,479,073                 -                 -         1,489,000
Variable compensation on stock options                            254,981                 -                 -           254,981
Fair value of options granted to consultant                        38,727                 -           (38,727)                -
Amortization of unearned compensation                                   -                 -             2,421             2,421
Net loss                                                                -        (1,852,506)                -        (1,852,506)
                                                          ---------------------------------------------------------------------
Balance at December 31, 2002                              $    76,367,608   $   (76,706,032)  $       (36,306)  $      (299,496)
                                                          =====================================================================
</TABLE>

See accompanying notes.

                                       21

<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                         391,120             80,156
         Deferred income                                              (562,500)           562,500
                                                               ----------------------------------
Net cash used in operating activities                               (2,235,993)        (1,204,524)

INVESTING ACTIVITIES
Purchases of property and equipment                                   (182,895)            (9,827)
Acquisition of business                                               (225,929)                 -
                                                               ----------------------------------
Net cash used in investing activities                                 (408,824)            (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.

                                       22

<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 Bennet, 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.

                                       23

<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. 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.

                                       24

<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:

<TABLE>
<CAPTION>
                                                                        2002               2001
                                                                   ----------------------------------
    <S>                                                            <C>                <C>
    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%
</TABLE>

                                       25

<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.

                                       26

<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 $225,929 and consisted of paying off the debt
and liabilities 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.

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.

                                       27

<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 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 Ventures and certain of
its affiliates 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.

                                       28

<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 Ventures 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
Ventures 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 Ventures and its affiliates
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 Ventures 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 Ventures, LLC 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 Ventures under which Circle F Ventures 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 Ventures, into shares
of common stock at $1.50 per share.

In May 2001, the Company entered into a Bridge Loan Agreement with Circle F
Ventures under which Circle F Ventures and its affiliates, 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
Ventures and its affiliates 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

                                       29

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)

7.   BRIDGE LOAN AGREEMENTS (Continued)

Circle F Ventures, into shares of common stock at $1.50 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 Ventures 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 Ventures and its affiliates) 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.

                                       30

<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 Ventures and its affiliates) 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.

                                       31

<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. These
carryforwards are available to offset future taxable income through 2022.

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.

                                       32

<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)
                                                                 --------------
                                                                 $            -
                                                                 ==============

12.  STOCK OPTIONS

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>

                                       33

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)

12.  STOCK OPTIONS (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
Ventures, LLC 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.

                                       34

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)

12.  STOCK OPTIONS (Continued)

The Company granted 106,800 options to a former owner of Vasamedics (see Note
3). The options were not deemed to be additional purchase price and were
commensurate with his level of responsibility. A portion of the options, 46,800,
vest over four years and the remaining 60,000 vest over three years depending on
the net sales of the Vasamedics products each year. The performance-based
options are subject to variable accounting and will be recognized when, and if,
the criteria are met for vesting.

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 the remaining 15,000 vest over three years depending on the
net sales of the Vasamedics products each year. The fair value of the 11,700
options granted to the consultant was recorded as unearned compensation and is
being amortized over the vesting period. The performance-based options are
subject to variable accounting and will be recognized when, and, if, the
criteria are met for vesting.

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
is also obligated to meet certain product development milestones under the
license agreement. The royalty payments are included in research and development
expenses.

                                       35

<PAGE>

                          Optical Sensors Incorporated

                    Notes to Financial Statements (continued)

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.

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.

                                       36

<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. 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

                                       37

<PAGE>

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. Since early 1996, Mr. Snead has served as a
consultant and attorney for Circle F Ventures, LLC and Hayden R. Fleming and
their affiliates and related companies.

       (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.

                                       38

<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.

<TABLE>
<CAPTION>
                                              SUMMARY COMPENSATION TABLE
                                                                                                         LONG-TERM
                                                                                                        COMPENSATION
                                                                               ANNUAL                 ---------------
                                                                            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)

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)

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)
</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 on August 11, 2000 that were repriced on August 18,
          2000. The remaining 62,962 shares represented options originally
          granted prior to 2000 that were repriced on August 18, 2000.

(3)       Of these options, an aggregate of 16,489 shares represented options
          originally granted on August 11, 2000 that were repriced on August 18,
          2000. The remaining 12,037 shares represented options originally
          granted prior to 2000 that were repriced on August 18, 2000.

(4)       Of these options, an aggregate of 12,704 shares represented options
          originally granted on August 11, 2000 that were repriced on August 18,
          2000. The remaining 15,322 shares represented options originally
          granted prior to 2000 that were repriced on August 18, 2000.

                                       39

<PAGE>

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 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

                                       40

<PAGE>

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;

               .    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;

                                       41

<PAGE>

               .    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 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.

                                       42

<PAGE>

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).

                                       43

<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

                                       44

<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>
                                                                                                     (c)
                                                                                            NUMBER OF SECURITIES
                                              (a)                        (b)               REMAINING AVAILABLE FOR
                                  NUMBER OF SECURITIES TO BE      WEIGHTED-AVERAGE      FUTURE ISSUANCE UNDER EQUITY
                                    ISSUED UPON EXERCISE OF       EXERCISE PRICE OF          COMPENSATION PLANS
                                     OUTSTANDING OPTIONS,       OUTSTANDING OPTIONS,        (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.

                                       45

<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 Ventures, LLC 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 Ventures and
certain of its affiliates 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 10, 2000, we entered into a Securities Purchase Agreement pursuant to
which we agreed to issue, and Circle F Ventures 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. We sold 1,000,000 shares of the Series A preferred
stock to Circle F Ventures 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 Ventures
and its affiliates 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 Ventures 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 terms of the
Securities Purchase Agreement provide for all options held by our current
employees and directors to be reduced to the weighted average price at which
Circle F Ventures purchased Series A convertible preferred stock. 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 Ventures under which Circle F Ventures and its
affiliates 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.

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.

                                       46

<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.

                                       47

<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:  March 25, 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.

NAME                             TITLE
------------------------------   -----------------------------------------------

/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
Wesley G. Peterson               (principal financial and  accounting officer)


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

/s/ Charles D. Snead, Jr.        Director
------------------------------
Charles D. Snead, Jr.


                                       48

<PAGE>

                                 CERTIFICATIONS

                    CERTIFICATION BY CHIEF EXECUTIVE OFFICER

          I, Paulita M. LaPlante, certify that:

          1.   I have reviewed this annual report on Form 10-KSB 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:    March 25, 2003

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

                                       49

<PAGE>

                    CERTIFICATION BY CHIEF FINANCIAL OFFICER

I, Wesley G. Peterson, certify that:

          1.   I have reviewed this annual report on Form 10-KSB 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:    March 25, 2003

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

                                       50

<PAGE>

                          OPTICAL SENSORS INCORPORATED
                  EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB
                      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
             Company.                                              contained in the Company's Registration Statement
                                                                   on Form S-1 (File No. 33-99904).

3.2          Amendment to Restated Certificate of                  Incorporated by reference to Exhibit   3(i)
             Incorporation of the Company                          contained in 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           Incorporated by reference to Exhibit   3.2
             Rights of Series A Junior Preferred Stock.            contained in the  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
             Preferences of Series A Preferred Stock.              contained in the 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              Incorporated by reference to Exhibit 4.8
             Comdisco, Inc.                                        contained in the Company's Registration Statement
                                                                   on Form S-1 (File No. 33-99904).

4.3          Warrant Dated August 31, 1995 issued to               Incorporated by reference to Exhibit 4.9
             Comdisco, Inc.                                        contained in the 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
             between the Company and Norwest Bank Minnesota,       contained in the Company's Current Report on Form
             N.A.                                                  8-K dated December 3, 1996 (File No. 0-27600).
</TABLE>

                                       51

<PAGE>

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

4.6          Amendment No. 2 to Rights Agreement dated as of       Incorporated by reference to Exhibit 10.1
             August 8, 2000 between the Company and Wells          contained in the Company's Quarterly Report on
             Fargo Bank, N.A.                                      Form  10-Q for the 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          Company's Quarterly Report on Form 10-Q for the
             Fargo Bank, N.A.                                      quarter 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
             September 13, 2002, between the Company  and          contained in the Company's Registration Statement
             Wells Fargo Bank Minnesota N.A., the successor        on Form  8-A12G/A dated September 16, 2002 (File
             of Norwest Bank Minnesota, N.A.                       No. 0-27600).

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

10.2         Registration Rights Agreement, dated April 28,        Incorporated by reference to Exhibit 10.9
             1992, as amended                                      contained in 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       Incorporated by reference to Exhibit 10.1 to the
             of 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
             Nonemployees pursuant to 1993 Stock Option Plan       contained in the Company's Registration Statement
                                                                   on Form S-1 (File No. 33-99904).
</TABLE>

                                       52

<PAGE>

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

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

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

10.9         Second Amendment to Lease Agreement, dated April      Incorporated by reference to Exhibit 10.21
             14, 1997, between First Industrial Financing          contained in the Company's Annual Report on Form
             Partnership, L.P. and the Company.                    10-K for the year 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
             1998 between the Company and Group CH Werfen,         contained in the Company's Current Report on Form
             S.A.                                                  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
             between the Company and the Institute of              contained in the Company's Quarterly Report on
             Critical Care Medicine (1)                            Form 10-Q for the 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              Incorporated by reference to Exhibit 10.25
             September 3, 1999 between First Industrial            contained in the Company's Annual Report on Form
             Financing Partnership, L.P. and the Company           10-K for the year ended December 31, 1999 (File
                                                                   No. 0-27600).

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

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

                                       53

<PAGE>

<TABLE>
<S>          <C>                                                   <C>
10.16        Fourth Amendment to Lease Agreement dated June        Incorporated by reference to Exhibit 10.18
             1, 2000 between First Industrial L.P. and the         contained in the  Company's Annual Report on Form
             Company                                               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
             LLC (1)                                               quarter 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
             Executive Severance Pay Plan                          contained in 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
             between the Company and Circle F Ventures, LLC        contained in 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
             Loan Agreement, dated March 8, 2001                   contained in 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
             the Company and Special Situations Fund III, L.P.     contained in 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>

                                       54

<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,             Incorporated by reference to Exhibit 10.5 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).

10.27        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              Incorporated by reference to Exhibit 10.7 to the
             Executive 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              Incorporated by reference to Exhibit 10.2 to the
             September 28, 2001, between the Company and           Company's Quarterly Report on Form  10-QSB/A for
             Nellcor Puritan Bennett, Inc. (1)                     the quarter ended September  30, 2001 (File No.
                                                                   0-27600).

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

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

                                       55

<PAGE>

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

23.1         Consent of Independent Auditors                       Filed herewith.

99.1         Certification of Chief Executive Officer and          Filed herewith.
             Chief 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.

                                       56