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The theory, design, and initial evaluation of an optkal sensor for the measurement of blood oxygen saturation (SO2) and hematocrit (Hct) are presented. A model based on the diffusion of light in an anisotropically scattering medium is developed and used to predict the effects of physiological parameters and the source/detector configuration on the diffuse reflectance of blood measured by the sensor. From model results, a ratiometric method is developed by which SO2 and Hct can be determined using a sensor comprised of three light sources and a detector. An implantable integrated circuit-based sensor was built to perform the blood reflectance measurements. The design of the monolithic signal processor is discussed, along with techniques for combining the chip with hybrid optoelectronics on the same glasscapped silicon substrate. Finally, preliminary results of an in vitro evaluation of prototype sensors are presented.