Vertical-cavity surface-emitting lasers (VCSELs) are uniquely suited to miniaturized free-space optical systems in which surface-mounting and hybrid assembly techniques can be used to combine different technologies together. Two examples are described of such microsystems that are being developed for sensing applications. The first example is an optical position sensing system for rotating parts. Progress on fabricating similar system by flip-chip bonding techniques is then discussed. The second examples is a chemical sensing/analysis system which uses a miniature fluorescence detection model that is based on surface- mounted VCSELs and diffractive optical elements. The detection modules is integrated with a capillary electrochromatography separation system and uses substrate- mode light propagation to focus the VCSEL beam on the capillary channel.