<PAGE>

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

                                    FORM 10-Q


                                   (Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
     For the quarter ended June 30, 1999

                                       or

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
      For the transition period from _______________ to _______________

                         Commission File Number: 0-27600

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

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


 7615 Golden Triangle Drive, Suite A, Minneapolis, Minnesota    55344-3733
           (Address of principal executive offices)              (Zip Code)

        Registrant's telephone number, including area code (612) 944-5857


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. [X] Yes [ ] No

         As of July 23, 1999, the Registrant had 8,856,354 shares of Common
Stock outstanding.
<PAGE>

                                      Index


                          OPTICAL SENSORS INCORPORATED



Part I.    Financial Information

           Item 1.    Financial Statements (Unaudited)

              Balance Sheets - June 30, 1999 and December 31, 1998

              Statements of Operations - Three and Six Month Periods ended
                                         June 30, 1999 and June 30, 1998

              Statements of Cash Flows - Six Month Periods ended June 30, 1999
                                         and June 30, 1998

              Notes to Financial Statements

           Item 2.    Management's Discussion and Analysis of Financial
                      Condition and Results of Operations


Part II.   Other Information

           Item 6.    Exhibits and Reports on Form 8-K

                                       1
<PAGE>

                          Optical Sensors Incorporated

                                 Balance Sheets

<TABLE>
<CAPTION>
                                                              June 30,       December 31,
                                                                1999             1998
                                                            ----------------------------
                                                             (Unaudited)        (Note)
<S>                                                         <C>             <C>
Assets
Current assets:
   Cash and cash equivalents                                $  3,738,143    $  8,079,871
   Accounts receivable                                            44,342         162,858
   Inventory                                                   1,703,137       1,846,294
   Prepaid expenses and other current assets                      56,510          99,610
                                                            ----------------------------
Total current assets                                           5,542,132      10,188,633

Property and equipment:
   Leased Equipment                                            1,073,438       1,017,953
   Research and development equipment                            742,674         740,444
   Leasehold improvements                                        351,079         339,614
   Furniture and equipment                                       159,313         148,621
   Marketing equipment                                         1,004,840       1,004,840
   Production equipment                                          472,934         460,118
                                                            ----------------------------
                                                               3,804,278       3,711,590
   Less accumulated depreciation                              (2,364,033)     (1,866,074)
                                                            ----------------------------
                                                               1,440,245       1,845,516
Other assets:
   Patents                                                       529,730         513,547
   Other assets                                                   16,278          16,833
                                                            ----------------------------
                                                                 546,008         530,380
                                                            ----------------------------
Total assets                                                $  7,528,385    $ 12,564,529
                                                            ============================

Liabilities and shareholders' equity
Current liabilities:
   Accounts payable                                         $    138,050    $    353,563
   Employee compensation                                         202,093         441,917
   Other liabilities and accrued expenses                         76,116          29,714
   Obligations under capital lease, current portion              274,670         260,319
                                                            ----------------------------
Total current liabilities                                        690,929       1,085,513

Obligations under capital lease, less current portion            402,620         494,909

Shareholders' equity
Convertible Preferred Stock, par value $.01
   per share:
     Authorized shares--5,000,000
Common Stock, par value $.01 per share:
   Authorized shares--30,000,000
   Issued and outstanding shares 1999--8,856,354 and
     1998--8,829,401                                              88,564          88,294
Additional paid-in capital                                    69,346,423      69,317,467
Accumulated deficit                                          (62,990,568)    (58,366,050)
Deferred compensation                                             (9,583)        (55,604)
                                                            ----------------------------
Total shareholders' equity                                     6,434,836      10,984,107
                                                            ----------------------------
Total liabilities and shareholders' equity                  $  7,528,385    $ 12,564,529
                                                            ============================
</TABLE>

Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

See accompanying notes.

                                       2
<PAGE>

                          Optical Sensors Incorporated

                            Statements of Operations
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                        Three Months Ended            Six Months Ended
                                                             June 30                       June 30
                                                        1999           1998           1999           1998
                                                   --------------------------------------------------------
<S>                                                <C>            <C>            <C>            <C>
Net sales                                          $     1,607    $   313,820    $    61,567    $   479,193
Cost of goods sold                                     308,577        911,549      1,053,665      1,468,920
                                                   --------------------------------------------------------
Gross margin                                          (306,970)      (597,729)      (992,098)      (989,727)

Operating expenses:
   Research and development expenses                   841,168      1,070,980      1,809,943      2,045,495
   Selling, general and administrative expenses        537,809      1,595,321      1,899,940      3,103,672
                                                   --------------------------------------------------------
Operating loss                                      (1,685,947)    (3,264,030)    (4,701,981)    (6,138,894)

Interest expense                                       (22,101)       (23,873)       (45,766)       (46,501)
Interest income                                         48,922        205,478        123,347        433,749
Other expense                                             (782)       (18,007)          (118)       (17,750)
                                                   --------------------------------------------------------
                                                        26,039        163,598         77,463        369,498
                                                   --------------------------------------------------------

Net loss                                           $(1,659,908)   $(3,100,432)   $(4,624,518)   $(5,769,396)
                                                   ========================================================

Net loss per common share:
Basic and diluted                                  $      (.19)   $      (.35)   $      (.52)   $      (.66)
                                                   ========================================================

Shares used in calculation of net loss per share     8,848,517      8,851,514      8,843,889      8,797,353
                                                   ========================================================
</TABLE>

See accompanying notes.

                                       3
<PAGE>

                          Optical Sensors Incorporated

                            Statements of Cash Flows

                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                        Six Months Ended
                                                                     June 30,       June 30,
                                                                       1999           1998
                                                                  ----------------------------
<S>                                                               <C>             <C>
Operating activities
Net loss                                                          $ (4,624,518)   $ (5,769,396)
Adjustments to reconcile net loss to net cash used in
   operating activities:
     Depreciation and amortization                                     583,463         479,054
     Deferred compensation amortization                                 46,023          83,091
     Amortization of warrants in connection with debt and lease
       financings                                                        3,989           8,572
     Changes in operating assets and liabilities:
         Receivables                                                   118,516        (279,804)
         Inventories                                                    87,613         152,754
       Prepaid expenses and other assets                                (2,488)       (113,304)
       Accounts payable and accrued expenses                          (408,936)         26,024
                                                                  ----------------------------
Net cash (used in) operating activities                             (4,196,338)     (5,413,009)

Investing activities
Purchases of property and equipment                                    (37,203)       (649,747)
                                                                  ----------------------------
Net cash (used in) investing activities                                (37,203)       (649,747)

Financing activities
Net proceeds from issuance of Common Stock                              25,236       2,228,958
Proceeds (payments) on long-term debt and lease obligations           (133,423)        155,398
                                                                  ----------------------------
Net cash (used in) provided by financing activities                   (108,187)      2,384,356
                                                                  ----------------------------

(Decrease) in cash and cash equivalents                             (4,341,728)     (3,678,400)
Cash and cash equivalents at beginning of period                     8,079,871      17,101,130
                                                                  ----------------------------
Cash and cash equivalents at end of period                        $  3,738,143    $ 13,422,730
                                                                  ============================
</TABLE>

See accompanying notes.

                                       4
<PAGE>

                          Optical Sensors Incorporated

                          Notes to Financial Statements
                                   (Unaudited)

                                  June 30, 1999

Note A - Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended June 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. For further information, refer to the financial
statements and footnotes thereto included in the Optical Sensors Incorporated
Annual Report on Form 10-K for the year ended December 31, 1998. Certain
reclassifications of 1998 amounts have been made to conform with the 1999
presentation.

Note B - Net Loss Per Share

Basic and diluted net loss per common share is computed using the weighted
average number of common shares outstanding during the period. Options and
warrants were outstanding during the quarters ended June 30, 1999 and 1998, but
were not included in the computation of diluted net loss per common share
because the effect would be antidilutive. All earnings per share amounts for all
periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements.

                                       5
<PAGE>

Management's Discussion and Analysis of Financial Condition and Results of
Operations

Overview

Since October 1998, Optical Sensors Incorporated (the "Company"), has been
focussing its resources on development and commercialization of the CapnoProbe,
which is a handheld device with a carbon dioxide ("CO2") probe that is slipped
under the tongue like a thermometer. It non-invasively measures the tissue CO2
of the mucous membrane in the mouth - a sensitive measure that may indicate
early clinical shock, even when traditional vital signs may still appear
relatively normal. Generalized inadequacy of tissue perfusion is the hallmark of
clinical shock. 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 and may be in early shock.

In December 1998, the Company filed a 510(k) application for FDA clearance of
the CapnoProbe as a Class II medical device. Prototype versions of the
CapnoProbe system are currently being evaluated at clinical sites in the United
States. The Company has completed set up of one manufacturing pod for manual
assembly of the prototype probes and finished preliminary plans for automated
probe assembly. The Company currently estimates that the CapnoProbe product will
be available for commercialization in the first half of 2000.

Prior to January 1999, the Company had also been actively marketing its
SensiCath system, a patient-connected, on-demand arterial blood gas ("ABG")
monitoring system, which provides precise and accurate ABG results within 60
seconds without exposure to potentially infectious blood or depleting the
patient's blood supply (the "SensiCath System"). ABG tests measure oxygen,
carbon dioxide and acid-base in a sample of blood taken from a patient's artery.
Because of the Company's need to conserve resources, in January 1999, the
Company significantly reduced its workforce, suspended direct sales activities
and product cost reduction programs for the SensiCath System and reduced
associated expenses. The Company recognized approximately $300,000 in employee
severance costs for the first quarter of 1999 related to the workforce
reduction. The Company also exercised its right to convert Instrumentation
Laboratory Company ("IL") to a non-exclusive distributor of the SensiCath System
in January 1999, and is currently pursuing termination of the IL distribution
agreement. Since that time, IL has not placed any material orders for the
SensiCath, and the only sales of the SensiCath have been to existing customers
who have continued to order SensiCath sensors. Accordingly, the Company does not
expect meaningful sales of the SensiCath System in the future. The Company
currently has approximately 30 employees.

                                       6
<PAGE>

In January 1999, the Company also announced that it had engaged Volpe Brown
Whelan & Company, LLC, to serve as financial advisor to the Company. The Company
is working with Volpe Brown Whelan to explore strategic alternatives. Currently,
the Company is actively pursuing a sale of the Company as a whole, as well as
the separate sale of its two product lines and its intellectual property
portfolio.


Results of Operations

Net sales in the second quarter of 1999 decreased $312,213 or 99% to $1,607 from
$313,820 in the second quarter in 1998. Net sales for the six month period ended
June 30, 1999 decreased $417,626 or 87% to $61,567 from $479,193 for the six
month period ended June 30, 1998. The decrease in sales is the result of OSI's
suspension of direct sales and support activities of the SensiCath System in
January 1999. Net sales for the quarter consisted of SensiCath disposable
products ordered by existing customers less OpticalCAM product returns. No new
customer sales were made nor were any OpticalCAM instruments sold during the six
month period ended June 30, 1999. The Company does not expect meaningful sales
of the SensiCath System in the future.

Costs of products sold in the second quarter of 1999 decreased $602,972 or 66%
to $308,577 from $911,549 in the second quarter in 1998. Costs of products sold
for the six months ended June 30, 1999 decreased $415,255 or 28% to $1,053,665
from $1,468,920 for the six months ended June 30, 1998. The decreased cost of
products sold for the second quarter was directly related to the suspension of
SensiCath production in January of 1999. The smaller decrease for the six month
period ended June 30, 1999 is due to first quarter 1999 costs for suspension of
production activities and layoffs of personnel. Manufacturing personnel levels
were reduced by 62% during the first quarter of 1999. Remaining fixed overhead
costs and costs of personnel that remain in support of CapnoProbe activities and
maintenance of SensiCath technologies are expected to continue at the second
quarter level for the foreseeable future.


Research and development costs for the second quarter of 1999 decreased $229,812
or 21% to $841,168 from $1,070,980 in the second quarter of 1998. Research and
development costs for the six months ended June 30, 1999 decreased $235,552 or
12% to $1,809,943 from $2,045,495. The decrease for the quarter and six month
periods ended June 30, 1999 is due primarily to a reduction in research and
development staffing of approximately 25% in the first quarter of 1999. Research
and development efforts during the quarter were directed towards product
development and regulatory activities for the CapnoProbe product. Research and
development expenses are expected to remain at approximately the same levels for
the next several quarters as CapnoProbe development efforts are completed. Under
the July 1998 license agreement with ICCM, the Company expects to pay $300,000
in minimum royalties in 1999. The minimum royalty payments will be recorded as
research and development expenses because no CapnoProbe sales are anticipated in
1999. 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
of the

                                       7
<PAGE>

CapnoProbe. However, the Company does not currently expect to have any
commercial sales of the CapnoProbe in 1999.

Selling, general and administrative expenses in the second quarter of 1999
decreased $1,057,512 or 66% to $537,809 from $1,595,321 in the second quarter of
1998. Selling, general and administrative expenses for the six months ended June
30, 1999 decreased $1,203,732 or 39% to $1,899,940 from $3,103,672 for the six
months ended June 30, 1998. Substantially all sales and marketing activities
related to the SensiCath product line were suspended during the first quarter of
1999, accounting for the decreases from comparable periods in the prior year.
The Company expects selling, general and administrative expenses to remain at
the second quarter levels for the balance of 1999, not including expenses which
might result from its activities in securing a corporate merger, distribution
partner or sale of a portion or all of the Company. Selling, general and
administrative expenses consist primarily of the cost of CapnoProbe marketing
clinical activities, ongoing administrative activities and costs of maintaining
the Company's public status.

Net interest income in the second quarter of 1999 decreased $154,784 to $26,821
from $181,605 in the second quarter of 1998. Net interest income for the six
month period ended June 30, 1999 decreased $309,667 to $77,581 from $387,248 for
the six month period ended June 30, 1998. The decrease in net interest income in
the second quarter of 1999 is due to declining cash balances. The Company
expects interest income to continue to decline in future periods as it uses cash
for operations.

Since its inception, the Company has experienced significant operating losses.
The Company incurred a net loss of $1,659,908 for the quarter ended June 30,
1999, compared to a net loss of $3,100,432 for the quarter ended June 30, 1998.
As of June 30, 1999, the Company had an accumulated deficit of $62,990,568. The
Company anticipates that its 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".

                                       8
<PAGE>

Liquidity and Capital Resources

To date, the Company has financed its operations primarily through the sale of
equity securities. From inception through December 31, 1995, the Company raised
net proceeds of $30,400,000 from private equity financings and stock option
exercises. In the first quarter of 1996, the Company completed an initial public
offering of 2,875,000 shares of Common Stock. The net proceeds to the Company
from the public offering were approximately $33,916,000. In January 1998, the
Company sold 441,203 shares of Common Stock to IL, which represented 4.99% of
the Company's outstanding Common Stock following completion of the transaction,
at a price of $5.00 per share (which is equal to the closing market price on the
date before signing of the agreement) for a total price of $2,206,015. The
proceeds from the sales of stock have been used to fund costs of producing
products and for the operating expenses described above and capital expenditures
described below. The Company's Common Stock is quoted on the Nasdaq National
Market under the symbol "OPSI."

The Company granted IL and its affiliates certain pre-emptive rights to
participate in future sales of equity securities by the Company, and certain
demand and incidental registration rights under a registration rights agreement
previously entered into by the Company and shareholders that purchased shares of
stock in private transactions prior to the Company's initial public offering in
February 1996. IL is prohibited from selling or otherwise transferring its
shares of Common Stock for a period of one year, except to an affiliate or
pursuant to the exercise of its registration rights. IL and its affiliates are
also subject to certain standstill provisions for a period of five years that
prohibit them from (a) acquiring more than 5.0% of the Company's outstanding
Common Stock, (b) entering into a voting agreement with respect to the shares IL
purchased from the Company, (c) participating in any proxy solicitation or
becoming a participant in an election contest, or (d) joining a group for the
purpose of acquiring, holding, voting or disposing of shares of Common Stock.



The Company's cash and cash equivalents were $3,738,143 and $8,079,871 at June
30, 1999 and December 31, 1998, respectively. The decrease in the Company's cash
balance is due to the operating losses described above. The Company incurred
cash expenditures for the six months ended June 30, 1999 of $4,196,338 for
operations and $37,203 for capital expenditures. All of the inventory at June
30, 1999 consisted of SensiCath components, OpticalCAM monitors and ABG Modules
for which the Company currently has no customers from which significant sales
are being generated. Also, a significant portion of the Company's fixed assets
are related to SensiCath production and sales. The Company has previously
announced that it has embarked on an effort to sell the SensiCath product line
and/or the Company. The Company is working towards recovery of the value of
these assets through such a sale.

                                       9
<PAGE>

The Company has contracts to purchase minimum quantities of instrumentation and
other sole source inventory items with an outstanding aggregate commitment of
approximately $900,000 in 1999 and 2000. The Company also has a potential
$500,000 obligation payable to Marquette Medical Systems, Inc. under a
previously disclosed technology purchase agreement and is obligated to pay ICCM
$300,000 annually under the previously described royalty agreement. As of June
30, 1999, the Company had no material commitments outstanding for tooling and
equipment. Subsequent to June 30, 1999 the Company received notice from its
lease provider that the provider was exercising a contract provision whereby the
Company is required to prepay certain end of lease payments as a result of
underutilizing a lease line commitment. A prepayment amount of $238,393 will be
paid in the third quarter of 1999.

The Company believes that sufficient liquidity is available to satisfy its
operating needs through 1999. However, the Company anticipates that additional
funding will be necessary to continue operations past 1999. No assurances can be
made that the Company would be able to secure such funding.

SensiCath(R) and OpticalCAM(TM) are trademarks of Optical Sensors Incorporated.

Year 2000 Software Performance Exposure

The Company has determined that the software embedded in the ABG Modules is Year
2000 compliant and that its major internal information technology systems are
Year 2000 compliant. The Company has ancillary software programs which may not
be Year 2000 compliant. Should any of these programs require replacement, the
Company anticipates that the total cost will not exceed $50,000. The Company
does not believe this amount nor any impact on ongoing information technology
projects will have any material affect on its ongoing operations. The Company
has initiated discussions with its significant suppliers, large customers and
financial institutions to ensure that those parties have appropriate plans to
remediate Year 2000 issues where their systems interface with the Company's
systems or otherwise impact its operations. The Company is assessing the extent
to which its operations are vulnerable should those organizations fail to
properly remediate their computer systems. For those vendors that have not yet
certified year 2000 compliance and which are sole suppliers of critical product
components, the Company plans to have sufficient inventories on hand at the end
of 1999 to support its needs for at least six months. For the Company's
distributor, the Company has the ability to ship product directly to the end
customer and to invoice and collect receivables should it be necessary to do so.
The Company's Year 2000 initiative is being managed by an internal staff. While
the Company believes its planning efforts are adequate to address its Year 2000
concerns, there can be no assurance that the systems of other companies which
may impact the Company's operations will be converted on a timely basis and will
not have a material effect on the Company. The cost of the Year 2000 initiatives
is not expected to be material to the Company's results of operations or
financial position.

                                       10
<PAGE>

Certain Important Factors

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

o    Development and Commercialization of CapnoProbe. The Company's future
     success will depend, in part, on successful development and
     commercialization of the CapnoProbe product. The Company is in the later
     stages of developing and testing prototypes and is currently engaged human
     clinical trials of the CapnoProbe product. The Company has set up one
     manufacturing pod for manual assembly of the prototype probes and finished
     preliminary plans for automated probe assembly. The Company currently
     projects that the product will be available for commercialization in the
     first quarter of 2000. The Company has not yet established commercial
     manufacturing for the CapnoProbe. Accordingly, there can be no assurance
     that the Company will successfully develop a commercial CapnoProbe product.

o    Completion of Corporate Alliance or Business Combination. In January 1999,
     the Company announced that it had engaged Volpe Brown Whelan & Company,
     LLC, to serve as financial advisor to the Company. The Company is working
     with Volpe Brown Whelan to explore strategic alternatives, including joint
     ventures, corporate strategic alliances, sale of the business or product
     lines, or other business combinations. The Company's future success will
     depend on its ability to complete such a strategic transaction, and there
     can be no assurance that the Company will be able to complete such a
     transaction or complete a transaction with terms favorable to the Company.

o    Nasdaq Listing Requirements. The Company's Common Stock is currently quoted
     on the Nasdaq National Market under the symbol "OPSI." In order to be
     listed on the Nasdaq National Market, the Company must maintain total net
     tangible assets of at least $4.0 million. As of June 30, 1999, the Company
     had total net tangible assets of approximately $6.4 million. In addition,
     the closing bid price for the Company's Common Stock cannot be less than
     $1.00 per share for thirty consecutive days. If, in the future, the Company
     had less than $4.0 million in total net tangible assets but more than $2.0
     million in total net tangible assets, the Company's Common Stock would be
     eligible for quotation on the Nasdaq Small Cap Market, provided that the
     $1.00 minimum bid price requirement was met. If the Common Stock were not
     eligible for either the Nasdaq National Market or the Nasdaq Small Cap
     Market it would likely be quoted in the "over-the-counter" market and
     eligible to trade on the OTC bulletin board. If the Company's Common Stock
     traded on the OTC bulletin board, trading, if any, would be subject to the
     "penny stock" rules under the Securities Exchange Act of 1934 as amended,
     and the public trading market for the Company's Common Stock could be
     adversely affected.

                                       11
<PAGE>

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

o    Regulatory Approvals. The Company's ability to market its current products
     and any products that it 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 the Company will be able
     to maintain or obtain necessary regulatory approvals and clearances in the
     future.


Part II.  Other Information

Item 4.   Submission of Matters to a Vote of Security Holders

On May 6, 1999, the Company held its annual meeting of stockholders. The
following matters were voted on at the annual meeting:

(a)  The following directors were elected to serve until the 1999 Annual Meeting
     of Stockholders:

         Director                   Votes For               Votes Withheld
         --------                   ---------               --------------
Paulita M. LaPlante                 6,732,850                   157,565
Sam B. Humphries                    6,727,374                   163,041
Richard B. Egen                     6,732,850                   157,565
Richard J. Meelia                   6,732,295                   158,120
Demetre M. Nicoloff, M.D.           6,732,850                   157,565
Gary A. Peterson                    6,729,978                   160,437

(b)  The selection of Ernst & Young, LLP as the Company's independent auditors
     for the year ending December 31, 1998 was ratified with 6,679,240 shares
     voting in favor, 17,905 shares voting against, 193,270 shares abstaining
     and zero broker non-votes.

                                       12
<PAGE>

Item 6.   Exhibits and Reports on Form 8-K

(a)    The following exhibit is included herein:

       (27)  Financial Data Schedule

(b)    Reports on Form 8-K

       None

                                       13
<PAGE>

                                   Signatures


Pursuant to the requirements 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



Date   August 11, 1999
                                  ----------------------------------------------
                                             /s/ Paulita M. LaPlante
                                      President and Chief Executive Officer
                                          (Principal Executive Officer)


Date   August 11, 1999
                                  ----------------------------------------------
                                              /s/ Wesley G. Peterson
                                    Chief Financial Officer, Vice President of
                                     Finance and Administration and Secretary
                                   (Principal Financial and Accounting Officer)

                                       14
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UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

                                   (Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
     For the quarter ended June 30, 1999

                                       or

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
      For the transition period from _______________ to _______________

                         Commission File Number: 0-27600

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

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

 7615 Golden Triangle Drive, Suite A, Minneapolis, Minnesota    55344-3733
           (Address of principal executive offices)              (Zip Code)

        Registrant's telephone number, including area code (612) 944-5857

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. [X] Yes [ ] No

         As of July 23, 1999, the Registrant had 8,856,354 shares of Common
Stock outstanding.
Index

                          OPTICAL SENSORS INCORPORATED

Part I.    Financial Information

           Item 1.    Financial Statements (Unaudited)

              Balance Sheets - June 30, 1999 and December 31, 1998

              Statements of Operations - Three and Six Month Periods ended
                                         June 30, 1999 and June 30, 1998

              Statements of Cash Flows - Six Month Periods ended June 30, 1999
                                         and June 30, 1998

              Notes to Financial Statements

           Item 2.    Management's Discussion and Analysis of Financial
                      Condition and Results of Operations

Part II.   Other Information

           Item 6.    Exhibits and Reports on Form 8-K

                                       1
Optical Sensors Incorporated

                                 Balance Sheets
June 30,       December 31,
                                                                1999             1998
                                                            ----------------------------
                                                             (Unaudited)        (Note)
Assets
Current assets:
   Cash and cash equivalents                                $  3,738,143    $  8,079,871
   Accounts receivable                                            44,342         162,858
   Inventory                                                   1,703,137       1,846,294
   Prepaid expenses and other current assets                      56,510          99,610
                                                            ----------------------------
Total current assets                                           5,542,132      10,188,633

Property and equipment:
   Leased Equipment                                            1,073,438       1,017,953
   Research and development equipment                            742,674         740,444
   Leasehold improvements                                        351,079         339,614
   Furniture and equipment                                       159,313         148,621
   Marketing equipment                                         1,004,840       1,004,840
   Production equipment                                          472,934         460,118
                                                            ----------------------------
                                                               3,804,278       3,711,590
   Less accumulated depreciation                              (2,364,033)     (1,866,074)
                                                            ----------------------------
                                                               1,440,245       1,845,516
Other assets:
   Patents                                                       529,730         513,547
   Other assets                                                   16,278          16,833
                                                            ----------------------------
                                                                 546,008         530,380
                                                            ----------------------------
Total assets                                                $  7,528,385    $ 12,564,529
                                                            ============================

Liabilities and shareholders' equity
Current liabilities:
   Accounts payable                                         $    138,050    $    353,563
   Employee compensation                                         202,093         441,917
   Other liabilities and accrued expenses                         76,116          29,714
   Obligations under capital lease, current portion              274,670         260,319
                                                            ----------------------------
Total current liabilities                                        690,929       1,085,513

Obligations under capital lease, less current portion            402,620         494,909

Shareholders' equity
Convertible Preferred Stock, par value $.01
   per share:
     Authorized shares--5,000,000
Common Stock, par value $.01 per share:
   Authorized shares--30,000,000
   Issued and outstanding shares 1999--8,856,354 and
     1998--8,829,401                                              88,564          88,294
Additional paid-in capital                                    69,346,423      69,317,467
Accumulated deficit                                          (62,990,568)    (58,366,050)
Deferred compensation                                             (9,583)        (55,604)
                                                            ----------------------------
Total shareholders' equity                                     6,434,836      10,984,107
                                                            ----------------------------
Total liabilities and shareholders' equity                  $  7,528,385    $ 12,564,529
                                                            ============================
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

See accompanying notes.

                                       2
Optical Sensors Incorporated

                            Statements of Operations
                                   (Unaudited)
Three Months Ended            Six Months Ended
                                                             June 30                       June 30
                                                        1999           1998           1999           1998
                                                   --------------------------------------------------------
Net sales                                          $     1,607    $   313,820    $    61,567    $   479,193
Cost of goods sold                                     308,577        911,549      1,053,665      1,468,920
                                                   --------------------------------------------------------
Gross margin                                          (306,970)      (597,729)      (992,098)      (989,727)

Operating expenses:
   Research and development expenses                   841,168      1,070,980      1,809,943      2,045,495
   Selling, general and administrative expenses        537,809      1,595,321      1,899,940      3,103,672
                                                   --------------------------------------------------------
Operating loss                                      (1,685,947)    (3,264,030)    (4,701,981)    (6,138,894)

Interest expense                                       (22,101)       (23,873)       (45,766)       (46,501)
Interest income                                         48,922        205,478        123,347        433,749
Other expense                                             (782)       (18,007)          (118)       (17,750)
                                                   --------------------------------------------------------
                                                        26,039        163,598         77,463        369,498
                                                   --------------------------------------------------------

Net loss                                           $(1,659,908)   $(3,100,432)   $(4,624,518)   $(5,769,396)
                                                   ========================================================

Net loss per common share:
Basic and diluted                                  $      (.19)   $      (.35)   $      (.52)   $      (.66)
                                                   ========================================================

Shares used in calculation of net loss per share     8,848,517      8,851,514      8,843,889      8,797,353
                                                   ========================================================
See accompanying notes.

                                       3
Optical Sensors Incorporated

                            Statements of Cash Flows

                                  (Unaudited)
Six Months Ended
                                                                     June 30,       June 30,
                                                                       1999           1998
                                                                  ----------------------------
Operating activities
Net loss                                                          $ (4,624,518)   $ (5,769,396)
Adjustments to reconcile net loss to net cash used in
   operating activities:
     Depreciation and amortization                                     583,463         479,054
     Deferred compensation amortization                                 46,023          83,091
     Amortization of warrants in connection with debt and lease
       financings                                                        3,989           8,572
     Changes in operating assets and liabilities:
         Receivables                                                   118,516        (279,804)
         Inventories                                                    87,613         152,754
       Prepaid expenses and other assets                                (2,488)       (113,304)
       Accounts payable and accrued expenses                          (408,936)         26,024
                                                                  ----------------------------
Net cash (used in) operating activities                             (4,196,338)     (5,413,009)

Investing activities
Purchases of property and equipment                                    (37,203)       (649,747)
                                                                  ----------------------------
Net cash (used in) investing activities                                (37,203)       (649,747)

Financing activities
Net proceeds from issuance of Common Stock                              25,236       2,228,958
Proceeds (payments) on long-term debt and lease obligations           (133,423)        155,398
                                                                  ----------------------------
Net cash (used in) provided by financing activities                   (108,187)      2,384,356
                                                                  ----------------------------

(Decrease) in cash and cash equivalents                             (4,341,728)     (3,678,400)
Cash and cash equivalents at beginning of period                     8,079,871      17,101,130
                                                                  ----------------------------
Cash and cash equivalents at end of period                        $  3,738,143    $ 13,422,730
                                                                  ============================
See accompanying notes.

                                       4
Optical Sensors Incorporated

                          Notes to Financial Statements
                                   (Unaudited)

                                  June 30, 1999

Note A - Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended June 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. For further information, refer to the financial
statements and footnotes thereto included in the Optical Sensors Incorporated
Annual Report on Form 10-K for the year ended December 31, 1998. Certain
reclassifications of 1998 amounts have been made to conform with the 1999
presentation.

Note B - Net Loss Per Share

Basic and diluted net loss per common share is computed using the weighted
average number of common shares outstanding during the period. Options and
warrants were outstanding during the quarters ended June 30, 1999 and 1998, but
were not included in the computation of diluted net loss per common share
because the effect would be antidilutive. All earnings per share amounts for all
periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements.

                                       5
Management's Discussion and Analysis of Financial Condition and Results of
Operations

Overview

Since October 1998, Optical Sensors Incorporated (the "Company"), has been
focussing its resources on development and commercialization of the CapnoProbe,
which is a handheld device with a carbon dioxide ("CO2") probe that is slipped
under the tongue like a thermometer. It non-invasively measures the tissue CO2
of the mucous membrane in the mouth - a sensitive measure that may indicate
early clinical shock, even when traditional vital signs may still appear
relatively normal. Generalized inadequacy of tissue perfusion is the hallmark of
clinical shock. 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 and may be in early shock.

In December 1998, the Company filed a 510(k) application for FDA clearance of
the CapnoProbe as a Class II medical device. Prototype versions of the
CapnoProbe system are currently being evaluated at clinical sites in the United
States. The Company has completed set up of one manufacturing pod for manual
assembly of the prototype probes and finished preliminary plans for automated
probe assembly. The Company currently estimates that the CapnoProbe product will
be available for commercialization in the first half of 2000.

Prior to January 1999, the Company had also been actively marketing its
SensiCath system, a patient-connected, on-demand arterial blood gas ("ABG")
monitoring system, which provides precise and accurate ABG results within 60
seconds without exposure to potentially infectious blood or depleting the
patient's blood supply (the "SensiCath System"). ABG tests measure oxygen,
carbon dioxide and acid-base in a sample of blood taken from a patient's artery.
Because of the Company's need to conserve resources, in January 1999, the
Company significantly reduced its workforce, suspended direct sales activities
and product cost reduction programs for the SensiCath System and reduced
associated expenses. The Company recognized approximately $300,000 in employee
severance costs for the first quarter of 1999 related to the workforce
reduction. The Company also exercised its right to convert Instrumentation
Laboratory Company ("IL") to a non-exclusive distributor of the SensiCath System
in January 1999, and is currently pursuing termination of the IL distribution
agreement. Since that time, IL has not placed any material orders for the
SensiCath, and the only sales of the SensiCath have been to existing customers
who have continued to order SensiCath sensors. Accordingly, the Company does not
expect meaningful sales of the SensiCath System in the future. The Company
currently has approximately 30 employees.

                                       6
In January 1999, the Company also announced that it had engaged Volpe Brown
Whelan & Company, LLC, to serve as financial advisor to the Company. The Company
is working with Volpe Brown Whelan to explore strategic alternatives. Currently,
the Company is actively pursuing a sale of the Company as a whole, as well as
the separate sale of its two product lines and its intellectual property
portfolio.

Results of Operations

Net sales in the second quarter of 1999 decreased $312,213 or 99% to $1,607 from
$313,820 in the second quarter in 1998. Net sales for the six month period ended
June 30, 1999 decreased $417,626 or 87% to $61,567 from $479,193 for the six
month period ended June 30, 1998. The decrease in sales is the result of OSI's
suspension of direct sales and support activities of the SensiCath System in
January 1999. Net sales for the quarter consisted of SensiCath disposable
products ordered by existing customers less OpticalCAM product returns. No new
customer sales were made nor were any OpticalCAM instruments sold during the six
month period ended June 30, 1999. The Company does not expect meaningful sales
of the SensiCath System in the future.

Costs of products sold in the second quarter of 1999 decreased $602,972 or 66%
to $308,577 from $911,549 in the second quarter in 1998. Costs of products sold
for the six months ended June 30, 1999 decreased $415,255 or 28% to $1,053,665
from $1,468,920 for the six months ended June 30, 1998. The decreased cost of
products sold for the second quarter was directly related to the suspension of
SensiCath production in January of 1999. The smaller decrease for the six month
period ended June 30, 1999 is due to first quarter 1999 costs for suspension of
production activities and layoffs of personnel. Manufacturing personnel levels
were reduced by 62% during the first quarter of 1999. Remaining fixed overhead
costs and costs of personnel that remain in support of CapnoProbe activities and
maintenance of SensiCath technologies are expected to continue at the second
quarter level for the foreseeable future.

Research and development costs for the second quarter of 1999 decreased $229,812
or 21% to $841,168 from $1,070,980 in the second quarter of 1998. Research and
development costs for the six months ended June 30, 1999 decreased $235,552 or
12% to $1,809,943 from $2,045,495. The decrease for the quarter and six month
periods ended June 30, 1999 is due primarily to a reduction in research and
development staffing of approximately 25% in the first quarter of 1999. Research
and development efforts during the quarter were directed towards product
development and regulatory activities for the CapnoProbe product. Research and
development expenses are expected to remain at approximately the same levels for
the next several quarters as CapnoProbe development efforts are completed. Under
the July 1998 license agreement with ICCM, the Company expects to pay $300,000
in minimum royalties in 1999. The minimum royalty payments will be recorded as
research and development expenses because no CapnoProbe sales are anticipated in
1999. 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
of the

                                       7
CapnoProbe. However, the Company does not currently expect to have any
commercial sales of the CapnoProbe in 1999.

Selling, general and administrative expenses in the second quarter of 1999
decreased $1,057,512 or 66% to $537,809 from $1,595,321 in the second quarter of
1998. Selling, general and administrative expenses for the six months ended June
30, 1999 decreased $1,203,732 or 39% to $1,899,940 from $3,103,672 for the six
months ended June 30, 1998. Substantially all sales and marketing activities
related to the SensiCath product line were suspended during the first quarter of
1999, accounting for the decreases from comparable periods in the prior year.
The Company expects selling, general and administrative expenses to remain at
the second quarter levels for the balance of 1999, not including expenses which
might result from its activities in securing a corporate merger, distribution
partner or sale of a portion or all of the Company. Selling, general and
administrative expenses consist primarily of the cost of CapnoProbe marketing
clinical activities, ongoing administrative activities and costs of maintaining
the Company's public status.

Net interest income in the second quarter of 1999 decreased $154,784 to $26,821
from $181,605 in the second quarter of 1998. Net interest income for the six
month period ended June 30, 1999 decreased $309,667 to $77,581 from $387,248 for
the six month period ended June 30, 1998. The decrease in net interest income in
the second quarter of 1999 is due to declining cash balances. The Company
expects interest income to continue to decline in future periods as it uses cash
for operations.

Since its inception, the Company has experienced significant operating losses.
The Company incurred a net loss of $1,659,908 for the quarter ended June 30,
1999, compared to a net loss of $3,100,432 for the quarter ended June 30, 1998.
As of June 30, 1999, the Company had an accumulated deficit of $62,990,568. The
Company anticipates that its 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".

                                       8
Liquidity and Capital Resources

To date, the Company has financed its operations primarily through the sale of
equity securities. From inception through December 31, 1995, the Company raised
net proceeds of $30,400,000 from private equity financings and stock option
exercises. In the first quarter of 1996, the Company completed an initial public
offering of 2,875,000 shares of Common Stock. The net proceeds to the Company
from the public offering were approximately $33,916,000. In January 1998, the
Company sold 441,203 shares of Common Stock to IL, which represented 4.99% of
the Company's outstanding Common Stock following completion of the transaction,
at a price of $5.00 per share (which is equal to the closing market price on the
date before signing of the agreement) for a total price of $2,206,015. The
proceeds from the sales of stock have been used to fund costs of producing
products and for the operating expenses described above and capital expenditures
described below. The Company's Common Stock is quoted on the Nasdaq National
Market under the symbol "OPSI."

The Company granted IL and its affiliates certain pre-emptive rights to
participate in future sales of equity securities by the Company, and certain
demand and incidental registration rights under a registration rights agreement
previously entered into by the Company and shareholders that purchased shares of
stock in private transactions prior to the Company's initial public offering in
February 1996. IL is prohibited from selling or otherwise transferring its
shares of Common Stock for a period of one year, except to an affiliate or
pursuant to the exercise of its registration rights. IL and its affiliates are
also subject to certain standstill provisions for a period of five years that
prohibit them from (a) acquiring more than 5.0% of the Company's outstanding
Common Stock, (b) entering into a voting agreement with respect to the shares IL
purchased from the Company, (c) participating in any proxy solicitation or
becoming a participant in an election contest, or (d) joining a group for the
purpose of acquiring, holding, voting or disposing of shares of Common Stock.

The Company's cash and cash equivalents were $3,738,143 and $8,079,871 at June
30, 1999 and December 31, 1998, respectively. The decrease in the Company's cash
balance is due to the operating losses described above. The Company incurred
cash expenditures for the six months ended June 30, 1999 of $4,196,338 for
operations and $37,203 for capital expenditures. All of the inventory at June
30, 1999 consisted of SensiCath components, OpticalCAM monitors and ABG Modules
for which the Company currently has no customers from which significant sales
are being generated. Also, a significant portion of the Company's fixed assets
are related to SensiCath production and sales. The Company has previously
announced that it has embarked on an effort to sell the SensiCath product line
and/or the Company. The Company is working towards recovery of the value of
these assets through such a sale.

                                       9
The Company has contracts to purchase minimum quantities of instrumentation and
other sole source inventory items with an outstanding aggregate commitment of
approximately $900,000 in 1999 and 2000. The Company also has a potential
$500,000 obligation payable to Marquette Medical Systems, Inc. under a
previously disclosed technology purchase agreement and is obligated to pay ICCM
$300,000 annually under the previously described royalty agreement. As of June
30, 1999, the Company had no material commitments outstanding for tooling and
equipment. Subsequent to June 30, 1999 the Company received notice from its
lease provider that the provider was exercising a contract provision whereby the
Company is required to prepay certain end of lease payments as a result of
underutilizing a lease line commitment. A prepayment amount of $238,393 will be
paid in the third quarter of 1999.

The Company believes that sufficient liquidity is available to satisfy its
operating needs through 1999. However, the Company anticipates that additional
funding will be necessary to continue operations past 1999. No assurances can be
made that the Company would be able to secure such funding.

SensiCath(R) and OpticalCAM(TM) are trademarks of Optical Sensors Incorporated.

Year 2000 Software Performance Exposure

The Company has determined that the software embedded in the ABG Modules is Year
2000 compliant and that its major internal information technology systems are
Year 2000 compliant. The Company has ancillary software programs which may not
be Year 2000 compliant. Should any of these programs require replacement, the
Company anticipates that the total cost will not exceed $50,000. The Company
does not believe this amount nor any impact on ongoing information technology
projects will have any material affect on its ongoing operations. The Company
has initiated discussions with its significant suppliers, large customers and
financial institutions to ensure that those parties have appropriate plans to
remediate Year 2000 issues where their systems interface with the Company's
systems or otherwise impact its operations. The Company is assessing the extent
to which its operations are vulnerable should those organizations fail to
properly remediate their computer systems. For those vendors that have not yet
certified year 2000 compliance and which are sole suppliers of critical product
components, the Company plans to have sufficient inventories on hand at the end
of 1999 to support its needs for at least six months. For the Company's
distributor, the Company has the ability to ship product directly to the end
customer and to invoice and collect receivables should it be necessary to do so.
The Company's Year 2000 initiative is being managed by an internal staff. While
the Company believes its planning efforts are adequate to address its Year 2000
concerns, there can be no assurance that the systems of other companies which
may impact the Company's operations will be converted on a timely basis and will
not have a material effect on the Company. The cost of the Year 2000 initiatives
is not expected to be material to the Company's results of operations or
financial position.

                                       10
Certain Important Factors

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

o    Development and Commercialization of CapnoProbe. The Company's future
     success will depend, in part, on successful development and
     commercialization of the CapnoProbe product. The Company is in the later
     stages of developing and testing prototypes and is currently engaged human
     clinical trials of the CapnoProbe product. The Company has set up one
     manufacturing pod for manual assembly of the prototype probes and finished
     preliminary plans for automated probe assembly. The Company currently
     projects that the product will be available for commercialization in the
     first quarter of 2000. The Company has not yet established commercial
     manufacturing for the CapnoProbe. Accordingly, there can be no assurance
     that the Company will successfully develop a commercial CapnoProbe product.

o    Completion of Corporate Alliance or Business Combination. In January 1999,
     the Company announced that it had engaged Volpe Brown Whelan & Company,
     LLC, to serve as financial advisor to the Company. The Company is working
     with Volpe Brown Whelan to explore strategic alternatives, including joint
     ventures, corporate strategic alliances, sale of the business or product
     lines, or other business combinations. The Company's future success will
     depend on its ability to complete such a strategic transaction, and there
     can be no assurance that the Company will be able to complete such a
     transaction or complete a transaction with terms favorable to the Company.

o    Nasdaq Listing Requirements. The Company's Common Stock is currently quoted
     on the Nasdaq National Market under the symbol "OPSI." In order to be
     listed on the Nasdaq National Market, the Company must maintain total net
     tangible assets of at least $4.0 million. As of June 30, 1999, the Company
     had total net tangible assets of approximately $6.4 million. In addition,
     the closing bid price for the Company's Common Stock cannot be less than
     $1.00 per share for thirty consecutive days. If, in the future, the Company
     had less than $4.0 million in total net tangible assets but more than $2.0
     million in total net tangible assets, the Company's Common Stock would be
     eligible for quotation on the Nasdaq Small Cap Market, provided that the
     $1.00 minimum bid price requirement was met. If the Common Stock were not
     eligible for either the Nasdaq National Market or the Nasdaq Small Cap
     Market it would likely be quoted in the "over-the-counter" market and
     eligible to trade on the OTC bulletin board. If the Company's Common Stock
     traded on the OTC bulletin board, trading, if any, would be subject to the
     "penny stock" rules under the Securities Exchange Act of 1934 as amended,
     and the public trading market for the Company's Common Stock could be
     adversely affected.

                                       11
o    Competition. Competition among medical device companies is intense and
     increasing. There can be no assurance that the Company's competitors will
     not succeed in developing or marketing technologies and products that are
     more effective or less expensive than the Company's products or that would
     render the Company's products obsolete or non-competitive.

o    Regulatory Approvals. The Company's ability to market its current products
     and any products that it 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 the Company will be able
     to maintain or obtain necessary regulatory approvals and clearances in the
     future.

Part II.  Other Information

Item 4.   Submission of Matters to a Vote of Security Holders

On May 6, 1999, the Company held its annual meeting of stockholders. The
following matters were voted on at the annual meeting:

(a)  The following directors were elected to serve until the 1999 Annual Meeting
     of Stockholders:

         Director                   Votes For               Votes Withheld
         --------                   ---------               --------------
Paulita M. LaPlante                 6,732,850                   157,565
Sam B. Humphries                    6,727,374                   163,041
Richard B. Egen                     6,732,850                   157,565
Richard J. Meelia                   6,732,295                   158,120
Demetre M. Nicoloff, M.D.           6,732,850                   157,565
Gary A. Peterson                    6,729,978                   160,437

(b)  The selection of Ernst & Young, LLP as the Company's independent auditors
     for the year ending December 31, 1998 was ratified with 6,679,240 shares
     voting in favor, 17,905 shares voting against, 193,270 shares abstaining
     and zero broker non-votes.

                                       12
Item 6.   Exhibits and Reports on Form 8-K

(a)    The following exhibit is included herein:

       (27)  Financial Data Schedule

(b)    Reports on Form 8-K

       None

                                       13
Signatures

Pursuant to the requirements 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

Date   August 11, 1999
                                  ----------------------------------------------
                                             /s/ Paulita M. LaPlante
                                      President and Chief Executive Officer
                                          (Principal Executive Officer)

Date   August 11, 1999
                                  ----------------------------------------------
                                              /s/ Wesley G. Peterson
                                    Chief Financial Officer, Vice President of
                                     Finance and Administration and Secretary
                                   (Principal Financial and Accounting Officer)

                                       14