<PAGE>
 
                          OPTICAL SENSORS INCORPORATED
                              EXECUTIVE MANAGEMENT
                      CHANGE IN CONTROL SEVERANCE PAY PLAN


                                           As Adopted Effective January 18, 1999
<PAGE>
 
                          OPTICAL SENSORS INCORPORATED
                              EXECUTIVE MANAGEMENT
                      CHANGE IN CONTROL SEVERANCE PAY PLAN

                                Table of Contents
                                -----------------

                                                                            Page
                                                                            ----

ARTICLE 1. Introduction........................................................1

      1.1. Plan Name...........................................................1
      1.2. Plan Type...........................................................1
      1.3. Plan Purpose........................................................1

ARTICLE 2. Definitions, Construction and Interpretations.......................2

      2.1. Affiliate...........................................................2
      2.2. Base Pay............................................................2
      2.3. Benefit Plan........................................................2
      2.4. Board...............................................................2
      2.5. Cause...............................................................2
      2.6. Change in Control...................................................3
      2.7. Code................................................................3
      2.8. Company.............................................................3
      2.9. Date of Termination.................................................3
      2.10. Eligible Participant...............................................4
      2.11. ERISA..............................................................4
      2.12. Exchange Act.......................................................4
      2.13. Full Change in Control.............................................4
      2.14. Good Reason........................................................6
      2.15. Governing Law......................................................7
      2.16. Headings...........................................................7
      2.17. Notice of Termination..............................................7
      2.18. Number and Gender..................................................7
      2.19. Parent Corporation.................................................7
      2.20. Partial Change in Control..........................................8
      2.21. Participant........................................................8
      2.22. Plan...............................................................8
      2.23. Person.............................................................8
      2.24. Qualified Employee.................................................8
      2.25. Successor..........................................................8
      2.26. Trust..............................................................8
      2.27. Trustee............................................................8

ARTICLE 3. Participation and Eligibility for Benefits..........................9

      3.1. Commencement of Participation.......................................9


                                       i
<PAGE>
 
      3.2. Ceasing to be a Qualified Employee..................................9
      3.3. Eligibility for Benefits............................................9

ARTICLE 4. Benefits...........................................................11

      4.1. Compensation and Benefits Before Date of Termination...............11
      4.2. Cash Payment.......................................................11
      4.3. Continuation of Certain Welfare Benefits...........................11
      4.4. Gross-Up Payments..................................................12
      4.5. Indemnification....................................................12

ARTICLE 5. Administration and Enforcement of Rights...........................14

      5.1. Plan Administration................................................14
      5.2. Amendment and Termination..........................................14
      5.3. Benefit Claims.....................................................14
      5.4. Disputes...........................................................15
      5.5. Funding and Payment................................................15

ARTICLE 6. Miscellaneous......................................................17

      6.1. Successors.........................................................17
      6.2. Binding Plan.......................................................17
      6.3. Validity...........................................................17
      6.4. No Mitigation......................................................17
      6.5. No Set-off.........................................................17
      6.6. Taxes..............................................................17
      6.7. Notices............................................................18
      6.8. Effect of Plan Benefits on Other Severance Plans...................18
      6.9. Related Plans......................................................18
      6.10. No Employment or Service Contract.................................18
      6.11. Survival..........................................................18
      6.12. Effect on Other Plans.............................................18
      6.13. Prohibition of Alienation.........................................18


                                       ii
<PAGE>
 
                         OPTICAL SENSORS INCORPORATED
                             EXECUTIVE MANAGEMENT
                     CHANGE IN CONTROL SEVERANCE PAY PLAN

                                    ARTICLE
                                      1.
                                 Introduction
                                 ------------

1.1. Plan Name.  The name of the Plan is the "Optical Sensors Incorporated
     ---------                                                            
     Executive Management Change in Control Severance Pay Plan."

1.2. Plan Type.  The Plan is an unfunded plan maintained by the Company
     ---------                                                         
     primarily for the purpose of providing benefits for a select group of
     management or highly compensated employees and, as such, is intended to be
     exempt from the provisions of Parts 2, 3 and 4 of Subtitle B of Title I of
     ERISA, to the extent such provisions would otherwise be applicable, by
     operation of sections 201(2), 301(a)(3) and 401(a)(1) thereof,
     respectively.  The Plan is also intended to be unfunded for tax purposes.
     The Plan will be construed in a manner that gives effect to such intent.

1.3. Plan Purpose.  The purpose of the Plan is to provide benefits to Qualified
     ------------                                                              
     Employees whose employment is terminated in connection with a Change in
     Control.
<PAGE>
 
                                    ARTICLE
                                      2.
                 Definitions, Construction and Interpretations
                 ---------------------------------------------

The definitions and rules of construction and interpretation set forth in this
Article 2 apply in construing the Plan unless the context otherwise indicates.

2.1. Affiliate.  An "Affiliate" is:
     ---------                     

     (A)  any corporation at least a majority of whose outstanding securities
          ordinarily having the right to vote at elections of directors is owned
          directly or indirectly by the Parent Corporation; or

     (B)  any other form of business entity in which the Parent Corporation, by
          virtue of a direct or indirect ownership interest, has the right to
          elect a majority of the members of such entity's governing body.

2.2. Base Pay.  The "Base Pay" of a Participant is his or her base salary from
     --------                                                                 
     the Company at the annual rate in effect immediately prior to the Change in
     Control or at the time Notice of Termination is given, whichever is
     greater, disregarding any decrease which constitutes Good Reason for the
     Participant's termination of employment.  Base Pay includes only regular
     cash salary, wages or commissions and is determined before any reduction
     for deferrals pursuant to any nonqualified deferred compensation plan or
     arrangement, qualified cash or deferred arrangement or cafeteria plan.

2.3. Benefit Plan.  A "Benefit Plan" is any:
     ------------                           

     (A)  employee benefit plan as defined in ERISA section 3(3),

     (B)  cafeteria plan described in Code section 125,

     (C)  plan, policy or practice providing for paid vacation, other paid time
          off or short- or long-term profit sharing, bonus or incentive
          payments, or

     (D)  stock option, stock purchase, restricted stock, phantom stock, stock
          appreciation right or other equity-based compensation plan

     that is sponsored, maintained or contributed to by the Company for the
     benefit of employees (and/or their families and dependents) generally or a
     Participant (and/or a Participant's family and dependents) in particular.

2.4. Board.  The "Board" is the board of directors of the Parent Corporation
     -----                                                                  
     duly qualified and acting at the time in question.  On and after the date
     of a Change in Control, any duty of the Board in connection with the Plan
     is nondelegable and any attempt by the Board to delegate any such duty is
     ineffective.

2.5. Cause.
     ----- 

     (A)  Subject to Subsection (B), "Cause" with respect to a particular
          Participant is any of the following:

                                       2
<PAGE>
 
          (1)  the Participant's gross misconduct which is materially and
               demonstrably injurious to the Company;

          (2)  the Participant's willful and continued failure to perform
               substantially his or her duties with the Company (other than a
               failure resulting from the Participant's incapacity due to bodily
               injury or physical or mental illness) after a demand for
               substantial performance is delivered to the Participant by the
               Board which specifically identifies the manner in which the Board
               believes that the Participant has not substantially performed his
               or her duties and provides for a reasonable period of time within
               which the Participant may take corrective measures; or

          (3)  the Participant's conviction (including a plea of nolo
               contendere) of willfully engaging in illegal conduct constituting
               a felony or gross misdemeanor under federal or state law (or
               comparable illegal conduct under the laws of any foreign
               jurisdiction) which is materially and demonstrably injurious to
               the Company or which impairs the Participant's ability to perform
               substantially his or her duties with the Company.

          An act or failure to act will be considered "gross" or "willful" for
          this purpose only if done, or omitted to be done, by the Participant
          in bad faith and without reasonable belief that it was in, or not
          opposed to, the best interests of the Company.  Any act, or failure to
          act, based upon authority given pursuant to a resolution duly adopted
          by the board of directors or governing body of any Company (or a
          committee thereof) or based upon the advice of counsel for the Company
          will be conclusively presumed to be done, or omitted to be done, by
          the Participant in good faith and in the best interests of the
          Company.  A Participant's attention to matters not directly related to
          the business of the Company will not provide a basis for termination
          for Cause so long as the Board did not expressly disapprove in writing
          of his or her engagement in such activities either before or within a
          reasonable period of time after the Board knew or could reasonably
          have known that the Participant engaged in those activities.

     (B)  Notwithstanding Subsection (A), a Participant may not be terminated
          for Cause unless and until there has been delivered to such
          Participant a copy of a resolution duly adopted by the affirmative
          vote of not less than a majority of the entire membership of the Board
          at a meeting of the Board called and held for such purpose (after
          reasonable notice to such Participant and an opportunity for such
          Participant, together with his or her counsel, to be heard before the
          Board), finding that in the good faith opinion of the Board such
          Participant was guilty of the conduct set forth in clause (1), (2) or
          (3) of Subsection (A) and specifying the particulars thereof in
          detail.

2.6. Change in Control.  A "Change in Control" is a Full Change in Control or a
     -----------------                                                         
     Partial Change in Control.

2.7. Code.  The "Code" is the Internal Revenue Code of 1986, as amended.  Any
     ----                                                                    
     reference to a specific provision of the Code includes a reference to such
     provision as it may be amended from time to time and to any successor
     provision.

2.8. Company.  The "Company" is the Parent Corporation, any Successor and any
     -------                                                                 
     Affiliate.

2.9. Date of Termination.  The "Date of Termination" with respect to a
     -------------------                                              
     Participant following a Change in Control (or prior to a Change in Control
     if the Participant's termination was either a 

                                       3
<PAGE>
 
     condition of the Change in Control or was at the request or insistence of
     any Person related to the Change in Control) means:

     (A)  if the Participant's employment is to be terminated by the Participant
          for Good Reason, the date specified in the Notice of Termination which
          in no event may be a date more than 15 days after the date on which
          Notice of Termination is given unless the Company agrees in writing to
          a later date;

     (B)  if the Participant's employment is to be terminated by the Company for
          Cause, the date specified in the Notice of Termination;

     (C)  if the Participant's employment is terminated by reason of his or her
          death, the date of his or her death; or

     (D)  if the Participant's employment is to be terminated by the Company for
          any reason other than Cause or his or her death, the date specified in
          the Notice of Termination, which in no event may be a date earlier
          than 15 days after the date on which a Notice of Termination is given,
          unless the Participant expressly agrees in writing to an earlier date.

      If the Company terminates a Participant's employment for Cause and the
      Participant has not previously expressly agreed in writing to the
      termination, then within the 30-day period after the Participant's receipt
      of the Notice of Termination, the Participant may notify the Company that
      a dispute exists concerning the termination, in which event the Date of
      Termination will be the date set either by mutual written agreement of the
      parties or by the arbitrators or a court in a proceeding as provided in
      Section 5.4. During the pendency of any such dispute, the Participant will
      continue to make himself or herself available to provide services to the
      Company and the Company will continue to pay the Participant his or her
      full compensation and benefits in effect immediately prior to the date on
      which the Notice of Termination is given (without regard to any changes to
      such compensation or benefits which constitute Good Reason) and until the
      dispute is resolved in accordance with Section 5.4. The Participant will
      be entitled to retain the full amount of any such compensation and
      benefits without regard to the resolution of the dispute unless the
      arbitrators or judge decide(s) that the Participant's claim of a dispute
      was frivolous or advanced by the Participant in bad faith.

2.10. Eligible Participant.  An "Eligible Participant" is a Participant who has
      --------------------                                                     
      become eligible to receive benefits pursuant to Section 3.3.

2.11. ERISA.  "ERISA" is the Employee Retirement Income Security Act of 1974,
      -----                                                                  
      as amended.  Any reference to a specific provision of ERISA includes a
      reference to such provision as it may be amended from time to time and to
      any successor provision.

2.12. Exchange Act.  The "Exchange Act" is the Securities Exchange Act of 1934,
      ------------                                                             
      as amended.  Any reference to a specific provision of the Exchange Act or
      to any rule or regulation thereunder includes a reference to such
      provision as it may be amended from time to time and to any successor
      provision.

2.13. Full Change in Control.
      ---------------------- 

      (A)  "Full Change in Control" is the occurrence of any of the following on
           or after January 18, 1999:

                                       4
<PAGE>
 
          (1)  the sale, lease, exchange or other transfer, directly or
               indirectly, of all or substantially all of the assets of the
               Parent Corporation, in one transaction or in a series of related
               transactions, to any Person;

          (2)  the approval by the shareholders of the Parent Corporation of any
               plan or proposal for the liquidation or dissolution of the Parent
               Corporation;

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

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

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

          (6)  a change in control of a nature that is determined by outside
               legal counsel to the Parent Corporation, in a written opinion
               specifically referencing this provision of the Plan, to be
               required to be reported (assuming such event has not been
               "previously reported") pursuant to section 13 or 15(d) of the
               Exchange Act, whether or not the Parent Corporation is then
               subject to such reporting requirement, as of the effective date
               of such change in control.

     (B)  For purposes of this section:

          (1)  "continuity director" means any individual who is a member of the
               Board on January 18, 1999, while he or she is a member of the
               Board, and any individual who subsequently becomes a member of
               the Board whose election or nomination for election by the Parent
               Corporation's shareholders was approved by a vote of at least a
               majority of the directors who are continuity directors (either by
               a specific vote or by approval of the proxy statement of the
               Parent Corporation in which such individual is named as a nominee
               for director without objection to such nomination).  For example,
               if a majority of the six individuals constituting 

                                       5
<PAGE>
 
               the Board on January 18, 1999, approved a proxy statement in
               which two different individuals were nominated to replace two of
               the individuals who were members of the Board on January 18,
               1999, upon their election by the Parent Corporations
               shareholders, the two newly elected directors would join the four
               remaining directors who were members of the Board on January 18,
               1999 as continuity directors. Similarly if a majority of those
               six directors approved a proxy statement in which three different
               individuals were nominated to replace three other directors who
               were members of the Board on January 18, 1999, upon their
               election by the Parent Corporations shareholders, the three newly
               elected directors would also become, along with the three other
               directors, continuity directors. Individuals subsequently joining
               the Board could become continuity directors under the principles
               reflected in this example.

          (2)  "bona fide underwriter" means a Person engaged in business as an
               underwriter of securities that acquires securities of the Parent
               Corporation through such Person's participation in good faith in
               a firm commitment underwriting until the expiration of 40 days
               after the date of such acquisition.

2.14. Good Reason.
      ----------- 

      (A)  Subject to Subsection (B), "Good Reason" with respect to a
           Participant is any of the following:

           (1)  a change in the Participant's status, position(s), duties or
                responsibilities as an executive of the Company as in effect at
                any time during the 90-day period ending on the date of the
                Change in Control which, in the Participant's reasonable
                judgment, is adverse (other than, if applicable, any such change
                directly attributable to the fact that the Parent Corporation is
                no longer publicly owned); provided, however, that Good Reason
                does not include a change in a Participant's status,
                position(s), duties or responsibilities caused by an
                insubstantial and inadvertent action that is remedied by the
                Company promptly after receipt of notice of such change is given
                by the Participant;

          (2)   a reduction by the Company in the Participant's Base Pay, or an
                adverse change in the form or timing of the payment thereof, as
                in effect immediately prior to the Change in Control or as
                thereafter increased;
 
          (3)   the failure by the Company to cover the Participant under
                Benefit Plans that, in the aggregate, provide substantially
                similar benefits to the Participant and/or his or her family and
                dependents at a substantially similar total cost to the
                Participant (e.g., premiums, deductibles, co-pays, out of pocket
                maximums, required contributions, taxes and the like) relative
                to the benefits and total costs under the Benefit Plans in which
                the Participant (and/or his or her family or dependents) is
                participating at any time during the 90-day period immediately
                preceding the Change in Control;

          (4)   the Company's requiring a Participant to be based more than 30
                miles from where his or her office is located immediately prior
                to the Change in Control, except for required travel on the
                Company's business, and then only to the extent substantially
                consistent with the business travel obligations which the
                Participant undertook on behalf of the Company during the 90-day
                period ending on the date 

                                       6
<PAGE>
 
                of the Change in Control (without regard to travel related to or
                in anticipation of the Change in Control);

          (5)   the failure of the Parent Company to obtain from any Successor
                the assent to this Plan contemplated by Section 6.1;

          (6)   any purported termination by the Company of a Participant's
                employment which is not properly effected pursuant to a Notice
                of Termination and pursuant to any other requirements of this
                Plan, and for purposes of this Plan, no such purported
                termination will be effective; or

          (7)   any refusal by the Company to continue to allow a Participant to
                attend to matters or engage in activities not directly related
                to the business of the Company which, at any time prior to the
                Change in Control, the Participant was not expressly prohibited
                by the Company from attending to or engaging in.

     (B)  A Participant's continued employment does not constitute consent to,
          or waiver of any rights arising in connection with, any circumstance
          constituting Good Reason.  Termination by a Participant of his or her
          employment for Good Reason as defined in this section will constitute
          Good Reason for all purposes of this Plan, notwithstanding that the
          Participant may also thereby be deemed to have "retired" under any
          applicable retirement programs of the Company.

2.15. Governing Law.  To the extent that state law is not preempted by
      -------------                                                   
      provisions of ERISA or any other laws of the United States, all questions
      pertaining to the construction, validity, effect and enforcement of this
      Plan will be determined in accordance with the internal, substantive laws
      of the State of Minnesota, without regard to the conflict of laws
      principles of the State of Minnesota or of any other jurisdiction.
 
2.16. Headings.  The headings of articles and sections are included solely for
      --------                                                                
      convenience.  If there is a conflict between the headings and the text of
      the Plan, the text will control.

2.17. Notice of Termination.  A "Notice of Termination" is a written notice
      ---------------------                                                
      given on or after the date of a Change in Control (unless the termination
      before the date of the Change in Control was either a condition of the
      Change in Control or was at the request or insistence of any Person
      related to the Change in Control) which indicates the specific termination
      provision in this Plan pursuant to which the notice is given. Any
      purported termination by the Company or by a Participant for Good Reason
      on or after the date of a Change in Control (or before the date of the
      Change in Control if the termination was either a condition of the Change
      in Control or was at the request or insistence of any Person related to
      the Change in Control) must be communicated by written Notice of
      Termination to be effective; provided, that a Participant's failure to
      provide Notice of Termination will not limit any of his or her rights
      under the Plan except to the extent the Company demonstrates that it
      suffered material actual damages by reason of such failure.

2.18. Number and Gender.  Wherever appropriate, the singular number may be read
      -----------------                                                        
      as the plural, the plural number may be read as the singular and a
      reference to one gender may be read as a reference to the other.

2.19. Parent Corporation.  The "Parent Corporation" is Optical Sensors
      ------------------                                              
      Incorporated and any Successor.

                                       7
<PAGE>
 
2.20. Partial Change in Control.  A "Partial Change in Control" is the
      -------------------------                                       
      occurrence of any of the following on or after January 18, 1999:

      (A)  the sale, lease, exchange or other transfer, directly or indirectly,
           of the assets of the Parent Corporation comprising either (i) the
           SensiCath Arterial Blood Gas Monitoring Product Line or (ii) the
           CapnoProbe Product Line, but not both, in one transaction or in a
           series of related transactions, to any Person; or

      (B)  the approval by the Board of any plan or proposal for the cessation
           of commercial activity relating to or the liquidation of the Parent
           Corporation's SensiCath Arterial Blood Gas Monitoring Product Line.

      In no event shall a transaction, or series of related transactions, that
      constitutes a Full Change in Control be deemed to be a Partial Change in
      Control.

2.21. Participant.  A "Participant" is a Qualified Employee who is
      -----------                                                 
      participating in the Plan pursuant to Article 3.

2.22. Plan.  The "Plan" is that set forth in this instrument as it may be
      ----                                                               
      amended from time to time.

2.23. Person.  A "Person" includes any individual, corporation, partnership,
      ------                                                                
      group, association or other "person," as such term is used in section
      14(d) of the Exchange Act, other than the Parent Corporation, any
      Affiliate or any benefit plan sponsored by the Parent Corporation or an
      Affiliate.
 
2.24. Qualified Employee. A "Qualified Employee" is an individual who (a) at
      ------------------                                                    
      any time during the 90-day period ending on the date of a Change in
      Control, is employed by the Parent Corporation as Chief Executive Officer,
      President, Vice President, General Manager or Chief Technical Officer -
      Systems and (b) is not a party to a separate written agreement with the
      Company which by its express terms specifically provides that the
      individual is not eligible to participate in the Plan.

2.25. Successor.  A "Successor" is any Person that succeeds to, or has the
      ---------                                                           
      practical ability to control (either immediately or solely with the
      passage of time), the Parent Corporation's business directly, by merger,
      consolidation or other form of business combination, or indirectly, by
      purchase of the Parent Corporation's outstanding securities ordinarily
      having the right to vote at the election of directors, all or
      substantially all of its assets or otherwise.

2.26. Trust.  "Trust" means the trust or trusts, if any, established by the
      -----                                                                
      Company pursuant to Section 5.5.

2.27. Trustee.  "Trustee" means the one or more banks or trust companies who at
      -------                                                                  
      the relevant time has or have been appointed by the Company to act as
      Trustee of the Trust.

                                       8
<PAGE>
 
                                    ARTICLE
                                      3.
                  Participation and Eligibility for Benefits
                  ------------------------------------------

3.1. Commencement of Participation.  An individual who is hired as a Qualified
     -----------------------------                                            
     Employee prior to the date of a Change in Control will commence
     participation in the Plan on January 18, 1999.  An individual who is hired
     as a Qualified Employee on or after the date of a Change in Control is not
     eligible to participate in the Plan.

3.2. Ceasing to be a Qualified Employee.
     ---------------------------------- 

     (A)  A Participant who ceases for any reason to be a Qualified Employee
          will, except with respect to any current or future benefit to which he
          or she is then entitled, thereupon cease his or her participation in
          the Plan.

     (B)  Notwithstanding any other provision of the Plan to the contrary, a
          Participant will cease to be a Qualified Employee if, prior to the
          date of a Change in Control:  (1) an Affiliate is sold, merged,
          transferred or in any other manner or for any other reason ceases to
          be an Affiliate or all or any portion of the business or assets of an
          Affiliate are sold, transferred or otherwise disposed of and no Change
          in Control occurs in connection therewith; (2) the Participant's
          primary employment duties are with the Affiliate at the time of the
          occurrence of such event; and (3) such Participant does not, in
          conjunction therewith, transfer employment directly to the Parent
          Corporation or another affiliate as a Qualified Employee.

3.3. Eligibility for Benefits.
     ------------------------ 

     (A)  A Participant will become eligible for the benefits provided in
          Article 4 if and only if

          (1)  (i) the Company terminates his or her employment for any reason
               other than his or her death or Cause, (ii) the termination occurs
               within the period beginning on the date of a Partial Change in
               Control and ending on the last day of the sixth month that begins
               after the month in which the Partial Change in Control occurs or
               prior to a Partial Change in Control if the termination was
               either a condition of the Partial Change in Control or at the
               request or insistence of a Person related to the Partial Change
               in Control and (iii) the Participant provides service to the
               Company on a part-time basis during the sixty-day period
               following termination as may be reasonably requested by the
               Company, provided that such request does not interfere with the
               Participant's activities in seeking new employment or actual
               employment by another employer, in order to assist with the
               transition of the Participant's job responsibilities; or

          (2)  (i) (a) the Company terminates his or her employment for any
               reason other than his or her death or Cause or (b) the
               Participant terminates employment with the Company for Good
               Reason and (ii) the termination occurs within the period
               beginning on the date of a Full Change in Control and ending on
               the last day of the twelfth month that begins after the month in
               which the Full Change in Control occurs or prior to a Full Change
               in Control if the termination was either a condition of the Full
               Change in Control or at the request or insistence of a Person
               related to the Full Change in Control.

                                       9
<PAGE>
 
     (B)  If, on or after the date of a Change in Control, an Affiliate is sold,
          merged, transferred or in any other manner or for any other reason
          ceases to be an Affiliate or all or any portion of the business or
          assets of an Affiliate are sold, transferred or otherwise disposed of
          and the acquiror is not the Parent Corporation or an Affiliate (a
          "Disposition"), any individual who was a Qualified Employee
          immediately prior to the Disposition and who remains or becomes
          employed by the acquiror or an affiliate of the acquiror (as defined
          in Section 2.1 but substituting "acquiror" for "Parent Corporation")
          in connection with the Disposition will be deemed to have terminated
          employment on the effective date of the Disposition for purposes of
          Subsection (A) unless (1) the acquiror and its affiliates jointly and
          severally expressly assume and agree, in a manner that is enforceable
          by the individual, to perform the obligations of this Plan to the same
          extent that the Company would be required to perform if the
          Disposition had not occurred and (2) the Successor guarantees, in a
          manner that is enforceable by the individual, payment and performance
          by the acquiror.

                                       10
<PAGE>
 
                                    ARTICLE
                                      4.
                                   Benefits
                                   --------

4.1. Compensation and Benefits Before Date of Termination.  During the period
     ----------------------------------------------------                    
     beginning on the date a Participant or the Company, as the case may be,
     receives Notice of Termination and ending on the  Date of Termination, the
     Company will continue to pay the Participant his or her Base Pay and cause
     his or her continued participation in all Benefit Plans in accordance with
     the terms of such Benefit Plans.

4.2. Cash Payment.
     ------------ 

     (A)  The Company will make a cash payment to an Eligible Participant in an
          amount equal to one hundred percent (100%) of the Eligible
          Participant's Base Pay.

     (B)  If the Participant's employment is terminated in connection with a
          Partial Change in Control, and the Participant becomes eligible to
          receive benefits pursuant to Section 3.3(A)(1), the amount determined
          under Subsection (A) will be paid in periodic installments made on the
          same basis as the Participant's Base Pay; provided that if a Full
          Change in Control occurs before such amount is paid in full, any
          remaining unpaid balance will be paid in a single lump sum within ten
          business days following the date of the Full Change in Control.  If
          the Participant's employment is terminated in connection with a Full
          Change in Control, and the Participant becomes eligible to receive
          benefits pursuant to Section 3.3(A)(2), the amount determined under
          Subsection (A) will be paid in a single lump sum within ten days after
          the Eligible Participant's Date of Termination or, if later, within
          ten business days following the date of the Change in Control.

4.3. Continuation of Certain Welfare Benefits.
     ---------------------------------------- 

     (A)  During the period described in Subsection (B), the Company will
          maintain, or continue to reimburse or pay on behalf of the executive,
          as the case may be, medical, dental and life insurance plans which by
          their terms cover each Eligible Participant (and his or her family
          members and dependents who were eligible to be covered at any time
          during the 90-day period ending on the date of a Change in Control for
          the period after the Change in Control in which such family members
          and dependents would otherwise continue to be covered under the terms
          of the plan in effect immediately prior to the Change in Control)
          under the same terms and at the same cost to the Eligible Participant
          and his or her family members and dependents as similarly situated
          executives who continue to be employed by the Company (without regard
          to any reduction in such benefits that constitutes Good Reason).  The
          continuation period under applicable federal and state continuation
          laws will begin to run from the date on which coverage pursuant to
          this Section 4.3 ends.

     (B)  For purposes of Subsection (A), the continuation period with respect
          to any particular plan is the period beginning on an Eligible
          Participant's Date of Termination and ending on the earlier of (1) the
          last day of the twelfth month that begins after the Eligible
          Participant's Date of Termination, (2) the date after the Eligible
          Participant's Date of Termination on which the Eligible Participant
          first becomes eligible to participate as an employee in a plan of
          another employer providing benefits to the Eligible Participant and
          his or her eligible family members and dependents which plan does not
          contain any exclusion or limitation with respect to any pre-existing
          condition of the Eligible Participant or any eligible family member or
          dependent who would otherwise be covered 

                                       11
<PAGE>
 
          under the Company's plan but for this clause (2), or (3) the date of
          the Eligible Participant's death.

     (C)  To the extent an Eligible Participant incurs a tax liability
          (including federal, state and local taxes and any interest and
          penalties with respect thereto) in connection with a benefit provided
          pursuant to Subsection (A) which he or she would not have incurred had
          he or she been an active employee of the Company participating in the
          Company's Benefit Plan, the Company will make a payment to the
          Eligible Participant in an amount equal to such tax liability plus an
          additional amount sufficient to permit the Eligible Participant to
          retain a net amount after all taxes (including penalties and interest)
          equal the initial tax liability in connection with the benefit.  For
          purposes of applying the foregoing, an Eligible Participant's tax rate
          will be deemed to be the highest statutory marginal state and federal
          tax rate (on a combined basis) then in effect.  The payment pursuant
          to this subsection will be made within ten days after the Eligible
          Participant's remittal of a written request therefor accompanied by a
          statement indicating the basis for and amount of the liability.

4.4. Gross-Up Payments.  Following a Change in Control, the Company will cause
     -----------------                                                        
     its independent auditors promptly to review, at the Company's sole expense,
     the applicability of Code section 4999 to any payment or distribution of
     any type by the Company to or for the benefit of an Eligible Participant,
     whether paid or payable or distributed or distributable pursuant to the
     terms of the Plan, any Benefit Plan or otherwise (the "Total Payments").
     If the auditor determines that the Total Payments result in an excise tax
     imposed by Code section 4999 or any comparable state or local law, or any
     interest or penalties with respect to such excise tax (such excise tax,
     together with any such interest and penalties, are collectively referred to
     as the "Excise Tax"), the Company will make an additional cash payment (a
     "Gross-Up Payment") to the Eligible Participant within ten days after such
     determination equal to an amount such that after payment by the Eligible
     Participant of all taxes (including any interest or penalties imposed with
     respect to such taxes), including any Excise Tax, imposed upon the Gross-Up
     Payment, the Eligible Participant would retain an amount of the Gross-Up
     Payment equal to the Excise Tax imposed upon the Total Payments.  For
     purposes of the foregoing determination, an Eligible Participant's tax rate
     will be deemed to be the highest statutory marginal state and federal tax
     rate (on a combined basis) then in effect.  If no determination by the
     Company's auditors is made prior to the time a tax return reflecting the
     Total Payments is required to be filed by the Eligible Participant, he or
     she will be entitled to receive from the Company a Gross-Up Payment
     calculated on the basis of the Excise Tax he or she reported in such tax
     return, within ten days after the later of the date on which he or she
     files such tax return or the date on which he or she provides a copy
     thereof to the Company.  In all events, if any tax authority determines
     that a greater Excise Tax should be imposed upon the Total Payments than is
     determined by the Company's independent auditors or reflected in the
     Eligible Participants' tax return pursuant to this Section 4.4, the
     Eligible Participant is entitled to receive from the Company the full
     Gross-Up Payment calculated on the basis of the amount of Excise Tax
     determined to be payable by such tax authority within ten days after he or
     she notifies the Company of such determination.

4.5. Indemnification.  Following a Change in Control, the Company will indemnify
     ---------------                                                            
     and advance expenses to an Eligible Participant to the full extent
     permitted by law for damages, costs and expenses (including, without
     limitation, judgments, fines, penalties, settlements and reasonable fees
     and expenses of the Participant's counsel) incurred in connection with all
     matters, events and transactions relating to such Eligible Participant's
     service to or status with the Company or any 

                                       12
<PAGE>
 
     other corporation, employee benefit plan or other entity with whom the
     Eligible Participant served at the request of the Company.

                                       13
<PAGE>
 
                                    ARTICLE
                                      5.
                   Administration and Enforcement of Rights
                   ----------------------------------------

5.1. Plan Administration.  The Board has the power and authority to construe,
     -------------------                                                     
     interpret and administer the Plan.  Prior to the date of a Change in
     Control, the Board may delegate such power and authority to any committee
     or individual but such delegation will automatically cease to be effective
     on the date of a Change in Control.  Prior to (but not after) the date of a
     Change in Control, the power and authority of the Board and any individual
     or committee to whom such power and authority is in whole or in part
     delegated is discretionary as to all matters.

5.2. Amendment and Termination.
     ------------------------- 

     (A)  Prior to the date of a Change in Control, the Board may amend the Plan
          from time to time in such respects as the Board may deem advisable;
          provided, that the effective date of any amendment that adversely
          affects a Qualified Employee may not be less than one year after the
          date on which the amendment is approved by the Board and, if a Change
          in Control occurs prior to the date on which the amendment would
          otherwise be effective, the amendment automatically will be null and
          void.  On and after the date of a Change in Control, the Plan may be
          amended with respect to a Participant only if he or she consents to
          the amendment in a written instrument signed by the Participant.

     (B)  The Board may terminate the Plan at any time; provided, first, that
          prior to the date of a Change in Control, the effective date of the
          termination may not be less than one year after the date on which the
          termination is approved by the Board; and, second, that the Plan
          cannot be terminated, and no termination will become effective, within
          the period beginning on the date of a Change in Control and ending on
          the last day of the twelfth month that begins after the month in which
          the Change in Control occurs.

     (C)  Any amendment or termination of the Plan must be set forth in a
          written instrument approved by the Board and signed by at least two
          officers of the Parent Corporation.

5.3. Benefit Claims.  A person whose employment relationship with the Company
     --------------                                                          
     has terminated and who has not been awarded benefits under the Plan or who
     objects to the amount of the benefits so awarded may, within 90 days after
     his or her employment has terminated, file a written request for benefits
     with the Board.  The Board will review such request and will notify the
     claimant of its decision within 60 days after such request is filed.  If
     the Board denies the claim for benefits, the notice of the denial will
     contain

     (A)  the specific reason for the denial,

     (B)  a specific reference to the provision of the Plan on which denial is
          based,

     (C)  a description of any additional information or material necessary for
          the person to perfect his or her claim (and an explanation of why such
          information is material or necessary), and

     (D)  an explanation of the Plan's claim review procedure.

     If the Board determines that a claimant is not eligible for benefits, or if
     the claimant believes that he or she is entitled to greater or different
     benefits, the claimant may file a petition for review with the Board within
     60 days after the claimant receives the notice issued by the Board.  Within

                                       14
<PAGE>
 
     60 days after the Board receives the petition, the Board will give the
     claimant (and his or her counsel, if any) an opportunity to present his or
     her position to the Board orally or in writing, and the claimant (or his or
     her counsel) will have the right to review the pertinent documents.  Within
     60 days after the hearing (or the date of receipt of the petition if the
     claimant presents his or her position in writing) the Board will notify the
     claimant of its decision in writing, stating the decision and the specific
     provisions of the Plan on which the decision is based.

5.4. Disputes.
     -------- 

     (A)  If a Participant so elects, any dispute, controversy or claim arising
          under or in connection with this Plan will be settled exclusively by
          binding arbitration in Minneapolis, Minnesota in accordance with the
          Employee Benefit Plan Claims Arbitration Rules of the American
          Arbitration Association, incorporated by referenced herein.  Judgment
          may be entered on the arbitrator's award in any court having
          jurisdiction; provided, that a Participant may seek specific
          performance of his or her right to receive benefits until the Date of
          Termination during the pendency of any dispute or controversy arising
          under or in connection with the Plan.  If any dispute, controversy or
          claim for damages arising under or in connection with this Plan is
          settled by arbitration, the Company will pay, or if elected by the
          Participant, reimburse, all fees, costs and expenses incurred by a
          Participant related to such arbitration.

     (B)  If a Participant does not elect arbitration, he or she may pursue all
          available legal remedies.  The Company will pay, or if elected by the
          Participant, reimburse each Participant for, all fees, costs and
          expenses incurred by such Participant in connection with any actual,
          threatened or contemplated litigation relating to this Plan to which
          the Participant is or reasonably expects to become a party, whether or
          not initiated by the Participant, if the Participant is successful in
          recovering any benefit under this Plan as a result of such action.

     (C)  The Company will not assert in any dispute or controversy with any
          Participant arising under or in connection with this Plan the
          Participant's failure to exhaust administrative remedies.

5.5. Funding and Payment.
     ------------------- 

     (A)  The Company may establish a Trust with an independent corporate
          trustee.  The Trust must (1) be a grantor trust with respect to which
          the Company is treated as grantor for purposes of Code section 677,
          (2) not cause the Plan to be funded for purposes of Title I of ERISA
          and (3) provide that Trust assets will, upon the insolvency of the
          Company, be used to satisfy claims of the Company's general creditors.
          The Company may from time to time transfer to the Trust cash,
          marketable securities or other property acceptable to the Trustee.

     (B)  The Trustee will make distributions to Participants and Beneficiaries
          from the Trust in satisfaction of the Company's obligations under the
          Plan in accordance with the terms of the Trust.  The Company is
          responsible for paying any benefits that are not paid from the Trust.

     (C)  Nothing contained in the Plan or Trust is to be construed as providing
          for assets to be held for the benefit of any Participant or any other
          person or persons to whom benefits are to be paid pursuant to the
          terms of this Plan, the Participant's or other person's only interest
          under the Plan being the right to receive the benefits set forth
          herein.  The Trust 

                                       15
<PAGE>
 
          is established only for the convenience of the Company and no
          Participant has any interest in the assets of the Trust. To the extent
          the Participant or any other person acquires a right to receive
          benefits under this Plan or the Trust, such right is no greater than
          the right of any unsecured general creditor of the Company.

                                       16
<PAGE>
 
                                    ARTICLE
                                      6.
                                 Miscellaneous
                                 -------------

6.1. Successors.  The Parent Corporation will require any Successor to expressly
     ----------                                                                 
     assume and agree to perform the obligations of this Plan in the same manner
     and to the same extent that the Parent Corporation would be required to
     perform if no such succession had taken place.  Failure of the Parent
     Corporation to obtain such assumption and agreement at least three business
     days prior to the time a Person becomes a Successor (or where the Parent
     Corporation does not have at least three business days' advance notice that
     a Person may become a Successor, within one business day after having
     notice that such Person may become or has become a Successor) will
     constitute Good Reason for termination of a Participant's employment.  The
     date on which any such succession becomes effective will be deemed the Date
     of Termination and Notice of Termination will be deemed to have been given
     on such date.  A Successor has no rights, authority or power with respect
     to the Plan prior to a Change in Control.

6.2. Binding Plan.  This Plan is for the benefit of, and is enforceable by, each
     ------------                                                               
     Participant, each Participant's personal and legal representatives,
     executors, administrators, successors, heirs, distributees, devisees and
     legatees, but each Participant may not otherwise assign any of his or her
     rights or delegate any of his or her obligations under this Plan.  If a
     Participant dies after becoming entitled to, but before receiving, any
     amounts payable under this Plan, all such amounts, unless otherwise
     provided in this Plan, will be paid in accordance with the terms of this
     Plan to such Participant's devisee, legatee or other designee or, if there
     be no such designee, to such Participant's estate.

6.3. Validity.  The invalidity or unenforceability of any provision of the Plan
     --------                                                                  
     does not affect the validity or enforceability of any other provision of
     the Plan, which will remain in full force and effect.

6.4. No Mitigation.  No Eligible Participant will be required to mitigate the
     -------------                                                           
     amount of any benefits the Company becomes obligated to provide in
     connection with this Plan by seeking other employment or otherwise and the
     benefits to be provided in connection with this Plan may not be reduced,
     offset or subject to recovery by the Company by any benefits an Eligible
     Participant may receive from other sources.

6.5. No Set-off.  The Company has no right to set-off benefits owed under this
     ----------                                                               
     Plan against amounts owed or claimed to be owed by an Eligible Participant
     to the Company under this Plan or otherwise.

6.6. Taxes.  All benefits to be provided to each Eligible Participant in
     -----                                                              
     connection with this Plan will be subject to required withholding of
     federal, state and local income, excise and employment-related taxes.

6.7. Notices.  For the purposes of this Plan, notices and all other
     -------                                                       
     communications provided for in, or required under, this Plan must be in
     writing and will be deemed to have been duly given when personally
     delivered or when mailed by United States registered or certified mail,
     return receipt requested, postage prepaid and addressed to each
     Participant's or the Company's (as the case may be) respective address
     (provided that all notices to the Company must be directed to the attention
     of the chair of the Board, or if no such chair has been designated, to a
     member of the Compensation Committee of the Board).  For purposes of any
     such notice requirement, the Company will use the Participant's most
     current address on file in the Company's personnel 

                                       17
<PAGE>
 
      records. Any notice of a Participant's change of address will be effective
      only upon receipt by the Company.

6.8.  Effect of Plan Benefits on Other Severance Plans.  A Participant who
      ------------------------------------------------                    
      receives any payment under the terms of this Plan will not be eligible to
      receive benefits under any other severance pay plan sponsored or
      maintained by the Company.

6.9.  Related Plans.  To the extent that any provision of any other Benefit Plan
      -------------                                                             
      or agreement between the Company and a Participant limits, qualifies or is
      inconsistent with any provision of this Plan, then for purposes of this
      Plan, while such other Benefit Plan or agreement remains in force, the
      provision of this Plan will control and such provision of such other
      Benefit Plan or agreement will be deemed to have been superseded, and to
      be of no force or effect, as if such other agreement had been formally
      amended to the extent necessary to accomplish such purpose. Nothing in
      this Plan prevents or limits a Participant's continuing or future
      participation in any Benefit Plan provided by the Company, and nothing in
      this Plan limits or otherwise affects the rights Participants may have
      under any Benefit Plans or other agreements with the Company. Amounts
      which are vested benefits or which Participants are otherwise entitled to
      receive under any Benefit Plan or other agreement with the Company at or
      subsequent to the Date of Termination will be payable in accordance with
      such Benefit Plan or other agreement.

6.10. No Employment or Service Contract.  Nothing in this Plan is intended to
      ---------------------------------                                      
      provide any Participant with any right to continue in the employ of the
      Company for any period of specific duration or interfere with or otherwise
      restrict in any way Participants' rights or the rights of the Company,
      which rights are hereby expressly reserved, to terminate a Participant's
      employment at any time for any reason or no reason whatsoever, with or
      without cause.

6.11. Survival.  The respective obligations of, and benefits afforded to, the
      --------                                                               
      Company and the Participants which by their express terms or clear intent
      survive termination of a Participant's employment with the Company or
      termination of this Plan, as the case may be, will remain in full force
      and effect according to their terms notwithstanding the termination of a
      Participant's employment with the Company or termination of this Plan, as
      the case may be.

6.12. Effect on Other Plans.  Unless otherwise expressly provided therein,
      ---------------------                                               
      benefits paid or payable under the Plan will not be deemed to be salary or
      compensation for purposes of determining the benefits to which a
      Participant may be entitled under any other Benefit Plan sponsored,
      maintained or contributed to by the Company.

6.13. Prohibition of Alienation.  No Participant will have the right to
      -------------------------                                        
      alienate, assign, encumber, hypothecate or pledge his or her interest in
      any benefit provided under the Plan, voluntarily or involuntarily, and any
      attempt to so dispose of any interest will be void.

                                       18