Oxford Medical Diagnostics is working in partnership with the city's children's hospital to test its new desktop device.
The machine can accurately measure tiny amounts of the chemical acetone on a patient's breath.
This can then be used to estimate how much insulin is needed.
Paediatric consultant Julie Edge said staff at the hospital were excited about the trial, which was likely to start in the spring.
During the six-month trial, children will still have to take finger-prick blood tests. The results of these will be compared with the breath test to see how closely they match.
Children with type 1 diabetes need at least four finger-prick tests a day and sometimes up to 10 in very small children.
Dr Edge said: "A hand-held meter that would just say what your [blood sugar] level is would be really helpful."
Diana Davies, from Oxford Medical Diagnostics, said: "It's well known by doctors that the sweet, fruity odour of acetone in your breath is an indicator for diabetes.
"We can extrapolate that to develop a device that is capable of measuring the blood glucose levels."
If the trial is successful, the company hopes to develop a portable hand held prototype.