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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549







FORM 10-K/A

(Amendment No. 1)



|x | Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
|- | -------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2008



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 No. 1-11181







IRIS INTERNATIONAL, INC.

(Exact name of Registrant as Specified In Its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-2579751                          
|(State or other jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



9172 Eton Avenue,
Chatsworth, California 91311

(Address of principal executive offices) (Zip Code)



(818) 709-1244

(Registrants telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:



|                                        |  |                                          
|--------------------------------------- |  | -----------------------------------------
|Title of each class                     |  | Name of each exchange on which registered
|Common Stock, par value $0.01 per share |  | NASDAQ Global Market                     



Securities
registered pursuant to Section 12(g) of the Act: None







Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes   ̈    No  x



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act.    Yes   ̈    No  x



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.    Yes  x    No   ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ̈



Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    Yes   ̈    No   ̈



Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer a non-accelerated filer or a smaller reporting company. See definitions of larger accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):



|                           |  |                      |  |                                             |  |                             
|-------------------------- |  | -------------------- |  | ------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer  x |  | Non accelerated filer   ̈                    |  | Smaller reporting company   ̈
|                           |  |                      |  | (Do not check if smaller reporting company)



Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.    Yes   ̈    No  x



The aggregate market value of the shares of common stock held
by non-affiliates of the Registrant on June 30, 2008 was approximately $288 million based upon the closing price of $15.65 per share of its common stock as reported on the NASDAQ Global Market on such date.



The registrant had 17,791,967 shares of common stock outstanding on
February 24, 2009.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the registrants definitive Proxy
Statement for the 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission, or SEC, pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered on this Form 10-K are incorporated by
reference into Part III, Items 10-14 of this Form 10-K.









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EXPLANATORY NOTE



This Amendment No. 1 to Form 10-K on Form 10-K/A (this Amendment) is being filed for the purpose of
amending and restating Part II, Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission (the SEC) on March 6, 2009 (the Original
Filing). The Company is filing this Amendment solely to amend the Report of Independent Registered Public Accounting Firm that appears in Item 8 of the Original Filing in response to comments received from the SEC. Except as described
above, no other changes have been made to the Original Filing. This Amendment continues to speak as of the date of the Original Filing, and the Company has not updated the disclosures contained therein to reflect any events which occurred at a date
subsequent to the filing of the Original Filing. As a result of these amendments, we are also filing as exhibits to this Amendment the certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.









IRIS INTERNATIONAL, INC.



AMENDMENT NO. 1 TO

ANNUAL REPORT ON FORM 10-K

Fiscal
Year Ended December 31, 2008



|                                                    |  |     
|--------------------------------------------------- |  | ----
|                                                    |  | Page
|PART II                                             |  |     
|                                                    | 
|Item 8. Financial Statements and Supplementary Data |  | 1   
|                                                    | 
|PART IV                                             |  |     
|                                                    | 
|Item 15. Exhibits, Financial Statement Schedules    |  | 34  
|                                                    | 
|Signatures                                          |  | 35  



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PART II



|Item 8. | Financial Statements and Supplementary Data.
|------- | --------------------------------------------



Index to Financial Statements



|                                                                                                   |  |     
|-------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                   |  | Page
|Reports of Independent Registered Public Accounting Firm                                           |  | 2   
|                                                                                                   | 
|Consolidated Balance Sheets at December 31, 2008 and 2007                                          |  | 4   
|                                                                                                   | 
|Consolidated Statements of Operations for the three years ended December 31, 2008                  |  | 5   
|                                                                                                   | 
|Consolidated Statements of Stockholders Equity for the three years ended December 31, 2008        |  | 6   
|                                                                                                   | 
|Consolidated Statements of Cash Flow for the three years ended December 31, 2008                   |  | 8   
|                                                                                                   | 
|Consolidated Statements of Comprehensive Income (loss) for the three years ended December 31,
2008 |  | 9   
|                                                                                                   | 
|Notes to Consolidated Financial Statements                                                         |  | 10  



1



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders

of IRIS International, Inc.

Chatsworth, California



We have
audited the accompanying consolidated balance sheets of IRIS International, Inc. (the Company) as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders equity, cash flows and other
comprehensive income for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits.



We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IRIS
International, Inc. as of December 31, 2008 and 2007, and the results of its operations, cash flows and its other comprehensive income for each of the three years in the period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.



As more fully described in Note 2 to the consolidated financial statements, effective January 1, 2007, the Company adopted the provisions of FASB interpretation No. 48, Accounting for Uncertainty in Income taxes, an
interpretation of FASB Statement No. 109.



We have
also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), IRIS International, Inc.s internal control over financial reporting as of December 31, 2008, based on criteria established in
Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 5, 2009, expressed an unqualified opinion thereon.



/s/ BDO SEIDMAN, LLP



Los Angeles, California

March 5, 2009



2



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Report of Independent Registered Public Accounting Firm



To the Board of Directors and Stockholders

of IRIS International, Inc.

Chatsworth, California



We have
audited IRIS International, Inc.s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). IRIS International Inc.s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, including in the accompanying Item 9A, Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the companys internal control over financial reporting based on
our audit.



We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets
that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, IRIS International, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31,
2008, based on the COSO criteria.



We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of IRIS International, Inc. as of December 31, 2008 and 2007 and the related consolidated statements of operations,
stockholders equity, cash flows and other comprehensive income for each of the three years in the period ended December 31, 2008 and our report dated March 5, 2009 expressed an unqualified opinion thereon.



/s/     BDO SEIDMAN LLP



Los Angeles, California

March 5, 2009



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IRIS INTERNATIONAL, INC.



CONSOLIDATED BALANCE SHEETS

(In thousands)



|                                                                                                                                           |  |                 |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                                           |  | At December 31, |       
|                                                                                                                                           |  | 2008            |        |   | 2007 |  
|Assets                                                                                                                                     |  |                 |        |   |      |   |        |  
|Current assets:                                                                                                                            |  |                 |        |   |      |   |        |  
|Cash and cash equivalents                                                                                                                  |  | $               | 24,445 |   |      | $ | 28,145 |  
|Short-term investments in marketable securities                                                                                            |  |                 | 2,157  |   |      |   | 300    |  
|Accounts receivable, net of allowance for doubtful accounts and sales returns of $445 and $436 at December 31, 2008 and 2007,
respectively |  |                 | 20,261 |   |      |   | 16,075 |  
|Inventories                                                                                                                                |  |                 | 9,957  |   |      |   | 9,886  |  
|Prepaid expenses and other current assets                                                                                                  |  |                 | 2,512  |   |      |   | 707    |  
|Investment in sales-type leases                                                                                                            |  |                 | 3,204  |   |      |   | 2,660  |  
|Deferred tax asset                                                                                                                         |  |                 | 3,727  |   |      |   | 3,368  |  
|                                                                                                                                           |  |                 |        |   |      |   |        |  
|Total current assets                                                                                                                       |  |                 | 66,263 |   |      |   | 61,141 |  
|Property and equipment, net of accumulated depreciation of $8,923 and $7,306 at December 31, 2008 and 2007, respectively                   |  |                 | 9,678  |   |      |   | 8,661  |  
|Goodwill                                                                                                                                   |  |                 | 2,450  |   |      |   | 2,450  |  
|Core Technology, net of accumulated amortization of $254 and $157 at December 31, 2008 and 2007, respectively                              |  |                 | 1,544  |   |      |   | 1,634  |  
|Software development costs, net of accumulated amortization of $2,322 and $1,729 at December 31, 2008 and 2007,
respectively               |  |                 | 2,291  |   |      |   | 1,764  |  
|Deferred tax asset                                                                                                                         |  |                 | 1,811  |   |      |   | 3,568  |  
|Investment in sales-type leases                                                                                                            |  |                 | 5,957  |   |      |   | 6,613  |  
|Other assets                                                                                                                               |  |                 | 644    |   |      |   | 559    |  
|                                                                                                                                           |  |                 |        |   |      |   |        |  
|Total assets                                                                                                                               |  | $               | 90,638 |   |      | $ | 86,390 |  
|                                                                                                                                           |  |                 |        |   |      |   |        |  
|Liabilities and Stockholders Equity                                                                                                       |  |                 |        |   |      |   |        |  
|Current liabilities:                                                                                                                       |  |                 |        |   |      |   |        |  
|Accounts payable                                                                                                                           |  | $               | 6,299  |   |      | $ | 4,289  |  
|Accrued expenses                                                                                                                           |  |                 | 6,475  |   |      |   | 5,713  |  
|Deferred service contract revenue                                                                                                          |  |                 | 1,936  |   |      |   | 1,454  |  
|                                                                                                                                           |  |                 |        |   |      |   |        |  
|Total current liabilities                                                                                                                  |  |                 | 14,710 |   |      |   | 11,456 |  
|Deferred service contract revenue, long term                                                                                               |  |                 | 18     |   |      |   |       |  
|                                                                                                                                           |  |                 |        |   |      |   |        |  
|Total liabilities                                                                                                                          |  |                 | 14,728 |   |      |   | 11,456 |  
|Commitments and contingencies                                                                                                              |  |                 |        |   |      |   |        |  
|                                                                                                                                           |  |                
|Stockholders equity:                                                                                                                      |  |                 |        |   |      |   |        |  
|Common stock, $0.01 par value                                                                                                              |  |                 |        |   |      |   |        |  
|Authorized: 50 million shares; Issued and outstanding: 18,036 shares and 18,601 shares at December 31, 2008 and 2007, respectively         |  |                 | 180    |   |      |   | 186    |  
|Preferred Stock, $0.01 par value; Authorized 1.0 million shares:                                                                           |  |                 |        |   |      |   |        |  
|Callable Series C shares issued and outstanding: none                                                                                      |  |                 |       |   |      |   |       |  
|Additional paid-in capital                                                                                                                 |  |                 | 83,646 |   |      |   | 84,289 |  
|Other comprehensive income                                                                                                                 |  |                 | 415    |   |      |   | 345    |  
|Accumulated deficit                                                                                                                        |  |                 | (8,331 | ) |      |   | (9,886 | )
|                                                                                                                                           |  |                 |        |   |      |   |        |  
|Total stockholders equity                                                                                                                 |  |                 | 75,910 |   |      |   | 74,934 |  
|                                                                                                                                           |  |                 |        |   |      |   |        |  
|Total liabilities and stockholders equity                                                                                                 |  | $               | 90,638 |   |      | $ | 86,390 |  
|                                                                                                                                           |  |                 |        |   |      |   |        |  



The accompanying notes
are an integral part of these consolidated financial statements.



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IRIS INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)



|                                                               |  |                                  |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                               |  | For the Years ended December 31, |       
|                                                               |  | 2008                             |        |   | 2007 |   |        | 2006 | 
|Sales of IVD instruments                                       |  | $                                | 35,128 |   |      | $ | 33,492 |      |  | $ | 29,075 |  
|Sales of IVD consumables and service                           |  |                                  | 46,643 |   |      |   | 38,533 |      |  |   | 31,755 |  
|Sales of sample processing instruments and supplies            |  |                                  | 13,731 |   |      |   | 12,281 |      |  |   | 11,237 |  
|                                                               |  |                                  |        |   |      |   |        |      |  |   |        |  
|Total revenues                                                 |  |                                  | 95,502 |   |      |   | 84,306 |      |  |   | 72,067 |  
|                                                               |  |                                  |        |   |      |   |        |      |  |   |        |  
|Cost of goods  IVD instruments                                |  |                                  | 19,674 |   |      |   | 17,962 |      |  |   | 15,614 |  
|Cost of goods  IVD consumables and service                    |  |                                  | 20,137 |   |      |   | 17,903 |      |  |   | 15,824 |  
|Cost of goods  sample processing instruments and supplies     |  |                                  | 6,863  |   |      |   | 6,143  |      |  |   | 5,815  |  
|                                                               |  |                                  |        |   |      |   |        |      |  |   |        |  
|Total cost of goods sold                                       |  |                                  | 46,674 |   |      |   | 42,008 |      |  |   | 37,253 |  
|                                                               |  |                                  |        |   |      |   |        |      |  |   |        |  
|Gross profit                                                   |  |                                  | 48,828 |   |      |   | 42,298 |      |  |   | 34,814 |  
|                                                               |  |                                  |        |   |      |   |        |      |  |   |        |  
|Marketing and selling                                          |  |                                  | 15,896 |   |      |   | 13,088 |      |  |   | 10,696 |  
|General and administrative                                     |  |                                  | 11,474 |   |      |   | 9,997  |      |  |   | 9,983  |  
|Research and development, net                                  |  |                                  | 10,491 |   |      |   | 10,260 |      |  |   | 13,086 |  
|                                                               |  |                                  |        |   |      |   |        |      |  |   |        |  
|Total operating expenses                                       |  |                                  | 37,861 |   |      |   | 33,345 |      |  |   | 33,765 |  
|                                                               |  |                                  |        |   |      |   |        |      |  |   |        |  
|Operating income                                               |  |                                  | 10,967 |   |      |   | 8,953  |      |  |   | 1,049  |  
|Other income (expense):                                        |  |                                  |        |   |      |   |        |      |  |   |        |  
|Interest income                                                |  |                                  | 1,180  |   |      |   | 1,498  |      |  |   | 1,068  |  
|Interest expense                                               |  |                                  | (11    | ) |      |   | (10    | )    |  |   | (18    | )
|Manufacturing transition rights                                |  |                                  | 1,232  |   |      |   |       |      |  |   |       |  
|Other income (expense)                                         |  |                                  | 8      |   |      |   | (48    | )    |  |   | 39     |  
|                                                               |  |                                  |        |   |      |   |        |      |  |   |        |  
|Income before provision for income taxes                       |  |                                  | 13,376 |   |      |   | 10,393 |      |  |   | 2,138  |  
|Provision for income taxes                                     |  |                                  | 4,363  |   |      |   | 2,844  |      |  |   | 2,313  |  
|                                                               |  |                                  |        |   |      |   |        |      |  |   |        |  
|Net income (loss)                                              |  | $                                | 9,013  |   |      | $ | 7,549  |      |  | $ | (175   | )
|                                                               |  |                                  |        |   |      |   |        |      |  |   |        |  
|Basic net income (loss) per share                              |  | $                                | 0.49   |   |      | $ | 0.42   |      |  | $ | (0.01  | )
|                                                               |  |                                  |        |   |      |   |        |      |  |   |        |  
|Diluted net income (loss) per share                            |  | $                                | 0.48   |   |      | $ | 0.40   |      |  | $ | (0.01  | )
|                                                               |  |                                  |        |   |      |   |        |      |  |   |        |  
|Weighted average number of common shares outstanding  basic   |  |                                  | 18,246 |   |      |   | 18,187 |      |  |   | 17,855 |  
|                                                               |  |                                  |        |   |      |   |        |      |  |   |        |  
|Weighted average number of common shares outstanding  diluted |  |                                  | 18,728 |   |      |   | 18,749 |      |  |   | 17,855 |  
|                                                               |  |                                  |        |   |      |   |        |      |  |   |        |  



The accompanying notes
are an integral part of these consolidated financial statements.



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IRIS INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands)



|                                                                       |  |              |  |                          |     |  |                                     |        |                    |  |   |       |  |   |         |   |  |   |        |  
|---------------------------------------------------------------------- |  | ------------ |  | ------------------------ | --- |  | ----------------------------------- | ------ | ------------------ |  | - | ----- |  | - | ------- | - |  | - | ------ | -
|                                                                       |  | Common Stock |  | AdditionalPaid-InCapital |     |  | AccumulatedOtherComprehensiveIncome |        | AccumulatedDeficit |  |   | Total | 
|                                                                       |  |              |  |                          |    
|                                                                       |  | Shares       |  | Amount                   |     |  |                                     |       
|Balance, January 1, 2006                                               |  | 17,352       |  | $                        | 173 |  | $                                   | 70,309 |                    |  | $ |      |  | $ | (16,713 | ) |  | $ | 53,769 |  
|Common stock issued on exercise of options                             |  | 301          |  |                          | 3   |  |                                     | 1,380  |                    |  |   |      |  |   |        |   |  |   | 1,383  |  
|Tax benefit from stock option exercises                                |  |             |  |                          |    |  |                                     | 866    |                    |  |   |      |  |   |        |   |  |   | 866    |  
|Restricted stock grants to employees                                   |  | 105          |  |                          | 1   |  |                                     | (1     | )                  |  |   |      |  |   |        |   |  |   |       |  
|Common stock issued under employee stock purchase plan for cash        |  | 16           |  |                          |    |  |                                     | 135    |                    |  |   |      |  |   |        |   |  |   | 135    |  
|Stock issued in acquisition of business                                |  | 272          |  |                          | 3   |  |                                     | 4,997  |                    |  |   |      |  |   |        |   |  |   | 5,000  |  
|Translation adjustment, net of tax                                     |  |             |  |                          |    |  |                                     |       |                    |  |   | 48    |  |   |        |   |  |   | 48     |  
|Stock based compensation expense                                       |  |             |  |                          |    |  |                                     | 1,540  |                    |  |   |      |  |   |        |   |  |   | 1,540  |  
|Net loss for year                                                      |  |             |  |                          |    |  |                                     |       |                    |  |   |      |  |   | (175    | ) |  |   | (175   | )
|                                                                       |  |              |  |                          |     |  |                                     |        |                    |  |   |       |  |   |         |   |  |   |        |  
|Balance, December 31, 2006                                             |  | 18,046       |  |                          | 180 |  |                                     | 79,226 |                    |  |   | 48    |  |   | (16,888 | ) |  |   | 62,566 |  
|Adjustment to deferred tax benefits on tax credits (FIN 48 adjustment) |  |             |  |                          |    |  |                                     |       |                    |  |   |      |  |   | (547    | ) |  |   | (547   | )
|Common stock issued on exercise of options                             |  | 437          |  |                          | 4   |  |                                     | 2,068  |                    |  |   |      |  |   |        |   |  |   | 2,072  |  
|Restricted stock grants to employees                                   |  | 64           |  |                          | 1   |  |                                     | (1     | )                  |  |   |      |  |   |        |   |  |   |       |  
|Stock issued in acquisition of business                                |  | 52           |  |                          | 1   |  |                                     |       |                    |  |   |      |  |   |        |   |  |   | 1      |  
|Tax benefit from stock option exercises                                |  |             |  |                          |    |  |                                     | 1,496  |                    |  |   |      |  |   |        |   |  |   | 1,496  |  
|Common stock issued under employee stock purchase plan                 |  | 2            |  |                          |    |  |                                     | 26     |                    |  |   |      |  |   |        |   |  |   | 26     |  
|Translation adjustment, net of tax                                     |  |             |  |                          |    |  |                                     |       |                    |  |   | 297   |  |   |        |   |  |   | 297    |  
|Stock based compensation expense                                       |  |             |  |                          |    |  |                                     | 1,474  |                    |  |   |      |  |   |        |   |  |   | 1,474  |  
|Net income for year                                                    |  |             |  |                          |    |  |                                     |       |                    |  |   |      |  |   | 7,549   |   |  |   | 7,549  |  
|                                                                       |  |              |  |                          |     |  |                                     |        |                    |  |   |       |  |   |         |   |  |   |        |  
|Balance, December 31, 2007                                             |  | 18,601       |  | $                        | 186 |  | $                                   | 84,289 |                    |  | $ | 345   |  | $ | (9,886  | ) |  | $ | 74,934 |  
|                                                                       |  |              |  |                          |     |  |                                     |        |                    |  |   |       |  |   |         |   |  |   |        |  



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IRIS INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (continued)

(In thousands)



|                                           |  |              |        |   |                          |   |     |                                     |  |                    |        |   |       |   |     |  |   |        |   |  |   |         |  
|------------------------------------------ |  | ------------ | ------ | - | ------------------------ | - | --- | ----------------------------------- |  | ------------------ | ------ | - | ----- | - | --- |  | - | ------ | - |  | - | ------- | -
|                                           |  | Common Stock |        |   | AdditionalPaid-InCapital |   |     | AccumulatedOtherComprehensiveIncome |  | AccumulatedDeficit |        |   | Total |  
|                                           |  | Shares       |        |   | Amount                   |   |     |                                     |  |                   
|Balance, December 31, 2007                 |  |              | 18,601 |   |                          | $ | 186 |                                     |  | $                  | 84,289 |   |       | $ | 345 |  | $ | (9,886 | ) |  | $ | 74,934  |  
|Common stock issued on exercise of options |  |              | 369    |   |                          |   | 4   |                                     |  |                    | 1,808  |   |       |   |    |  |   |       |   |  |   | 1,812   |  
|Restricted stock grants to employees       |  |              | 119    |   |                          |   | 1   |                                     |  |                    | (1     | ) |       |   |    |  |   |       |   |  |   |        |  
|Tax benefit from stock option exercises    |  |              |       |   |                          |   |    |                                     |  |                    | 760    |   |       |   |    |  |   |       |   |  |   | 760     |  
|Translation adjustment, net of tax         |  |              |       |   |                          |   |    |                                     |  |                    |       |   |       |   | 70  |  |   |       |   |  |   | 70      |  
|Stock based compensation expense           |  |              |       |   |                          |   |    |                                     |  |                    | 2,467  |   |       |   |    |  |   |       |   |  |   | 2,467   |  
|Purchase of common stock for retirement    |  |              | (1,053 | ) |                          |   | (11 | )                                   |  |                    | (5,677 | ) |       |   |    |  |   | (7,458 | ) |  |   | (13,146 | )
|Net income for year                        |  |              |       |   |                          |   |    |                                     |  |                    |       |   |       |   |    |  |   | 9,013  |   |  |   | 9,013   |  
|                                           |  |              |        |   |                          |   |     |                                     |  |                    |        |   |       |   |     |  |   |        |   |  |   |         |  
|Balance, December 31, 2008                 |  | $            | 18,036 |   |                          | $ | 180 |                                     |  | $                  | 83,646 |   |       | $ | 415 |  | $ | (8,331 | ) |  | $ | 75,910  |  
|                                           |  |              |        |   |                          |   |     |                                     |  |                    |        |   |       |   |     |  |   |        |   |  |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements



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IRIS INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                                                                                                                                                       |  |                                |         |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                                                                                                       |  | For the Year endedDecember 31, |        
|                                                                                                                                                                                                                       |  | 2008                           |         |   | 2007 |   |        | 2006 | 
|Cash flows from operating activities:                                                                                                                                                                                  |  |                                |         |   |      |   |        |      |  |   |        |  
|Net income (loss)                                                                                                                                                                                                      |  | $                              | 9,013   |   |      | $ | 7,549  |      |  | $ | (175   | )
|Adjustments to reconcile net income (loss) to net cash provided by operations:                                                                                                                                         |  |                                |         |   |      |   |        |      |  |   |        |  
|Non-cash in-process research and development charge                                                                                                                                                                    |  |                                |        |   |      |   |       |      |  |   | 5,180  |  
|Loss on disposal of fixed assets                                                                                                                                                                                       |  |                                | 185     |   |      |   |       |      |  |   |       |  
|Deferred taxes                                                                                                                                                                                                         |  |                                | 2,158   |   |      |   | 2,394  |      |  |   | 1,853  |  
|Excess tax benefit from stock based payout arrangement                                                                                                                                                                 |  |                                | (760    | ) |      |   | (1,496 | )    |  |   | (866   | )
|Depreciation and amortization                                                                                                                                                                                          |  |                                | 3,127   |   |      |   | 2,621  |      |  |   | 2,142  |  
|Common stock and stock based compensation                                                                                                                                                                              |  |                                | 2,467   |   |      |   | 2,440  |      |  |   | 1,540  |  
|Changes in operating assets and liabilities:                                                                                                                                                                           |  |                                |         |   |      |   |        |      |  |   |        |  
|Accounts receivable                                                                                                                                                                                                    |  |                                | (4,186  | ) |      |   | (2,909 | )    |  |   | (1,292 | )
|Inventories                                                                                                                                                                                                            |  |                                | (71     | ) |      |   | (2,528 | )    |  |   | 827    |  
|Prepaid expenses and other assets                                                                                                                                                                                      |  |                                | (1,890  | ) |      |   | (241   | )    |  |   | 519    |  
|Investment in sales-type leases                                                                                                                                                                                        |  |                                | 112     |   |      |   | (400   | )    |  |   | (1,577 | )
|Accounts payable                                                                                                                                                                                                       |  |                                | 2,010   |   |      |   | 493    |      |  |   | (667   | )
|Accrued expenses                                                                                                                                                                                                       |  |                                | 762     |   |      |   | (701   | )    |  |   | 2,226  |  
|Deferred service contract revenue                                                                                                                                                                                      |  |                                | 500     |   |      |   | (86    | )    |  |   | 32     |  
|                                                                                                                                                                                                                       |  |                                |         |   |      |   |        |      |  |   |        |  
|Net cash provided by operating activities                                                                                                                                                                              |  |                                | 13,427  |   |      |   | 7,136  |      |  |   | 9,742  |  
|                                                                                                                                                                                                                       |  |                                |         |   |      |   |        |      |  |   |        |  
|Cash flows from investing activities:                                                                                                                                                                                  |  |                                |         |   |      |   |        |      |  |   |        |  
|Acquisition of businesses, net of cash acquired                                                                                                                                                                        |  |                                |        |   |      |   |       |      |  |   | (3,560 | )
|Acquisition of property and equipment                                                                                                                                                                                  |  |                                | (3,588  | ) |      |   | (3,938 | )    |  |   | (4,044 | )
|Software development costs capitalized                                                                                                                                                                                 |  |                                | (1,178  | ) |      |   | (970   | )    |  |   | (376   | )
|Purchase of short-term investments in marketable securities                                                                                                                                                            |  |                                | (1,857  | ) |      |   | (300   | )    |  |   |       |  
|Sale of short-term investments in marketable securities                                                                                                                                                                |  |                                |        |   |      |   | 132    |      |  |   | 15,844 |  
|                                                                                                                                                                                                                       |  |                                |         |   |      |   |        |      |  |   |        |  
|Net cash (used in) provided by investing activities                                                                                                                                                                    |  |                                | (6,623  | ) |      |   | (5,076 | )    |  |   | 7,864  |  
|                                                                                                                                                                                                                       |  |                                |         |   |      |   |        |      |  |   |        |  
|Cash flows from financing activities:                                                                                                                                                                                  |  |                                |         |   |      |   |        |      |  |   |        |  
|Issuance of common stock and warrants for cash                                                                                                                                                                         |  |                                | 1,812   |   |      |   | 1,133  |      |  |   | 1,518  |  
|Repurchase of common stock                                                                                                                                                                                             |  |                                | (13,146 | ) |      |   |       |      |  |   |       |  
|Tax benefit from stock option exercises                                                                                                                                                                                |  |                                | 760     |   |      |   | 1,496  |      |  |   | 866    |  
|Borrowings under line of credit                                                                                                                                                                                        |  |                                |        |   |      |   |       |      |  |   | 3,000  |  
|Repayments of line of credit                                                                                                                                                                                           |  |                                |        |   |      |   |       |      |  |   | (3,000 | )
|                                                                                                                                                                                                                       |  |                                |         |   |      |   |        |      |  |   |        |  
|Net cash (used in) provided by financing activities                                                                                                                                                                    |  |                                | (10,574 | ) |      |   | 2,629  |      |  |   | 2,384  |  
|                                                                                                                                                                                                                       |  |                                |         |   |      |   |        |      |  |   |        |  
|Effect of exchange rate changes on cash and cash equivalents                                                                                                                                                           |  |                                | 70      |   |      |   | 297    |      |  |   |       |  
|                                                                                                                                                                                                                       |  |                                |         |   |      |   |        |      |  |   |        |  
|Net (decrease) increase in cash and cash equivalents                                                                                                                                                                   |  |                                | (3,700  | ) |      |   | 4,986  |      |  |   | 19,990 |  
|Cash and cash equivalents at beginning of year                                                                                                                                                                         |  |                                | 28,145  |   |      |   | 23,159 |      |  |   | 3,169  |  
|                                                                                                                                                                                                                       |  |                                |         |   |      |   |        |      |  |   |        |  
|Cash and cash equivalents at end of year                                                                                                                                                                               |  | $                              | 24,445  |   |      | $ | 28,145 |      |  | $ | 23,159 |  
|                                                                                                                                                                                                                       |  |                                |         |   |      |   |        |      |  |   |        |  
|Supplemental schedule of non-cash investing and financing activities:                                                                                                                                                  |  |                                |         |   |      |   |        |      |  |   |        |  
|Issuance of common stock and common stock warrants                                                                                                                                                                     |  | $                              |        |   |      | $ |       |      |  | $ | 1,553  |  
|Issuance of common stock and deferred stock units to acquire subsidiary                                                                                                                                                |  | $                              |        |   |      | $ |       |      |  | $ | 5,000  |  
|In September 2008, stock options for 130,000 shares of common stock were exercised pursuant to a net cashless exercise and therefore no cash
was received, resulting in the issuance of 62,081 shares of common stock. |  |                                |         |   |      |   |        |      |  |   |        |  
|During the year ended December 31, 2008, the Company disposed of property and equipment with a cost and accumulated depreciation of
$957,000 and $773,000, respectively.                                               |  |                                |         |   |      |   |        |      |  |   |        |  
|During the year ended December 31, 2007, the Company disposed of property and equipment with a cost and accumulated depreciation of $2.3
million.                                                                      |  |                                |         |   |      |   |        |      |  |   |        |  
|Supplemental disclosure of cash flow information:                                                                                                                                                                      |  |                                |         |   |      |   |        |      |  |   |        |  
|Cash paid for income taxes                                                                                                                                                                                             |  | $                              | 2,200   |   |      | $ | 948    |      |  | $ | 47     |  
|Cash paid for interest                                                                                                                                                                                                 |  | $                              | 11      |   |      | $ | 10     |      |  | $ | 18     |  



The accompanying notes
are an integral part of these consolidated financial statements.



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IRIS INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)



|                                         |  |                                |       |      |   |       |  |   |      |  
|---------------------------------------- |  | ------------------------------ | ----- | ---- | - | ----- |  | - | ---- | -
|                                         |  | For the Year endedDecember 31, |      
|                                         |  | 2008                           |       | 2007 |   | 2006  | 
|Net income (loss)                        |  | $                              | 9,013 |      | $ | 7,549 |  | $ | (175 | )
|Foreign currency translation, net of tax |  |                                | 70    |      |   | 297   |  |   | 48   |  
|                                         |  |                                |       |      |   |       |  |   |      |  
|Comprehensive income (loss)              |  | $                              | 9,083 |      | $ | 7,846 |  | $ | (127 | )
|                                         |  |                                |       |      |   |       |  |   |      |  



The accompanying notes
are an integral part of these consolidated financial statements.



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##### Table of Contents

IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. Company History



IRIS International, Inc. was incorporated in California in 1979 and reincorporated during 1987 in Delaware. The Company
designs, develops, manufactures and markets in vitro diagnostic (IVD) products, including IVD imaging systems based on patented and proprietary neural network-based Automated Particle Recognition (APR) software to enable high-speed
digital processing to classify and display images and describe the morphology of microscopic particles, urine chemistry analyzer and related chemistry test strips and accessories, molecular diagnostics assays based on our Nucleic Acid Detection
Immuno-Assay (NADiA) technology, as well as special purpose centrifuges and other small instruments for automating microscopic procedures and DNA processing performed in clinical laboratories.



2. Summary of Significant Accounting Policies



Use of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. The significant estimates in the preparation of the consolidated financial statements relate to the assessment of the carrying allowance for doubtful accounts, inventory reserves, the useful lives, fair
value and recoverability of carrying value of long-lived and intangible assets, including goodwill, unearned income on sales-type-leases, estimated provisions for warranty costs, laboratory information system implementations, currency hedges for
foreign purchases and deferred tax assets. Actual results and outcomes may differ from managements estimates and assumptions.



Principles of Consolidation



Our consolidated financial statements include the accounts of IRIS International, Inc. and its wholly-owned subsidiaries. Inter-company accounts and
transactions have been eliminated in the consolidated financial statements.



Cash Equivalents



The Company considers highly
liquid investments with maturities of three months or less from the date of purchase to be cash equivalents. These investments are carried at cost, which approximates fair value.



Investments in Marketable Securities



In 2008, we adopted SFAS No. 157, Fair Value Measurement (SFAS 157), for assets and liabilities measured at fair value on a recurring basis.
SFAS 157, defines fair values as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 establishes a fair value hierarchy, which
prioritizes the inputs used in measuring fair value into three broad levels as follows:



| |  |  | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the
measurement date.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets
that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3 inputs are unobservable inputs for the asset or liability
| | - |  | -----------------------------------------------------------------



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IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Companys investments in marketable securities primarily include highly liquid government
securities and an auction rate security. These securities are carried at cost which approximates fair value due to their highly liquid nature. Of the $2,157 carrying value of investments at December 31, 2008, and in accordance with the fair value
hierarchy contained in SFAS 157, $1,857 was valued using quoted prices in active markets for identical assets or liabilities (Level 1) and approximately $300 was valued using significant unobservable inputs (Level 3) such as current results, trends
and future prospects, capital market conditions, and other economic factors.



Investments in marketable securities are classified and accounted for as available-for-sale (AFS) at December 31, 2008 and 2007. AFS marketable securities are recorded at fair value for short-term investments.
Management determines the appropriate classification of its investments in marketable securities at the time of purchase and reevaluates such determinations at each balance sheet date.



Investments include auction rate securities with maturity dates greater than three months when purchased, which have readily
determined fair values, bonds, short-term commercial paper and certificates of deposits Auction rate securities are recorded at par value, which equals fair market value, as the rates on such securities reset generally every 7, 28, or 35 days.



Accounts Receivable



The Company sells predominantly to entities in the health care industry. The
Company grants uncollateralized credit to customers, primarily hospitals, clinical and research laboratories, and distributors. The Company performs ongoing credit evaluations of customers financial conditions before granting uncollateralized
credit. Although the Company generally does not require collateral, letters of credit may be required from its customers in certain circumstances. No single customer accounts for 10% or more of the Companys consolidated revenues or 10% or more
of the Companys accounts receivable at the balance sheet date.



Accounts receivable are carried at original invoice amount less allowances made for sales markdowns, returns and doubtful accounts. Accounts receivables are customer obligations due under normal trade terms. Despite the Companys
stated trade terms, several customers are subject to reimbursement delays attributed to government and third party payer compliance and regulation issues. Management determines the allowance for doubtful accounts by identifying troubled accounts and
by using historical experience applied to an aging of accounts. Receivables are written off when deemed uncollectible.



Inventories



Inventories are carried at the lower of cost or market on a first in, first out basis. Provision for potentially obsolete or slow-moving inventory is made
based on managements analysis of inventory levels and future sales forecasts. Other inventory that is considered excess inventory is fully reserved.



Property and Equipment



Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation is generally computed using the straight-line
method over three to seven years, the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of their useful life or the remaining term of the lease.



Goodwill and Core Technology



The Companys intangible assets consist of goodwill, which is not being amortized, and core technology, which is being amortized over its useful life
of 20 years. All intangible assets are subject to impairment tests on an annual or periodic basis. Goodwill is evaluated in accordance with Statement of Financial Accounting



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IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Standards No. 142, Goodwill and Other Intangibles(SFAS No. 142), based on various analyses, including a comparison of the carrying value of
the reporting unit to its estimated fair value, cash flow and profitability projections. The analysis necessarily involves significant management judgment to evaluate the capacity of an acquired business to perform within projections. Core
technology is evaluated for impairment using the methodology set forth in SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS No. 144). Recoverability of these assets is assessed only
when events have occurred that may give rise to a potential impairment. When a potential impairment has been identified, forecasted undiscounted net cash flows of the operations to which the asset relates are compared to the current carrying value
of the long-lived assets present in that operation. If such cash flows are less than such carrying amounts, long-lived assets, including such intangibles, are written down to their respective fair values.



As of December 31, 2008 and December 31, 2007, we had goodwill of
approximately $2.5 million for both dates and core technology intangible assets of $1.5 million and $1.6 million, respectively. During the years ended December 31, 2008 and 2007, no goodwill or other intangible impairment was recorded.



Amortization expense of the core technology intangible asset totaled
$90,000, $89,000 and $67,000 for the years ended December 31, 2008, 2007 and 2006, respectively.



Software Development Costs



The Company capitalizes certain software development costs for new products and product enhancements once all planning, designing, coding and testing activities necessary to establish that the product can be produced to meet our design
specifications are completed, and concludes capitalization when the product is ready for general release. Research and development costs relating to software development are expensed as incurred. Amortization of capitalized software development
costs is provided on a product-by-product basis at the greater of the amount computed using (i) the ratio of current revenues for a product to the total of current and anticipated future revenues or (ii) the straight-line method over the
remaining estimated economic life of the product up to five years.



Total software development costs capitalized totaled $1,178,000, $970,000 and $376,000 for the years ended December 31, 2008, 2007 and 2006, respectively. Amortization expense of software development costs totaled $651,000, $593,000
and $559,000 for the years ended December 31, 2008, 2007 and 2006, respectively.



Impairment of Long-Lived Assets



The Company
will identify and record impairment losses for long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There were no impairments of long-lived assets at December 31, 2008, 2007 and
2006.



Revenue recognition



For products, revenue is recognized when risk of loss transfers, when
persuasive evidence of an arrangement exists, the price to the buyer is fixed and determinable and collectibility is reasonably assured. When a customer enters into an operating-type lease agreement, hardware revenue is recognized on a straight-line
basis over the life of the lease, while the cost of the leased equipment is carried in customer leased equipment within property,



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IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



plant and equipment and amortized over its estimated useful life. Under a sales-type lease agreement, hardware revenue is generally recognized at the time of
shipment based on the present value of the minimum lease payments with interest income recognized over the life of the lease using the interest method. Instrument costs under a sales-type lease agreement are recognized at the time of shipment.
Service revenues on maintenance contracts are recognized ratably over the life of the service agreement or as service is performed, if not under a contract. For those instrument sales that include multiple deliverables, such as instruments,
training, consumables and service, we allocate revenue based on the relative fair values of the individual component sold separately, as determined in accordance with Emerging Issues Task Force (EITF) Issue No. 00-21.



The Companys accounting for leases involves specific determinations
under SFAS No. 13 Accounting for Leases (SFAS 13), which often involve complex provisions and significant judgments. The four criteria of SFAS 13 that the Company uses in the determination of a sales-type lease or operating-type
lease are: (i) a review of the lease term to determine if it is equal to or greater than 75 percent of the economic life of the equipment; (ii) a review of the minimum lease payments to determine if they are equal to or greater than 90
percent of the fair market value of the equipment; (iii) a determination of whether or not the lease transfers ownership to the lessee at the end of the lease term; and (iv) determination of whether or not the lease contains a bargain
purchase option.



Additionally, before classifying a lease as a
sales-type lease, the Company assesses whether collectability of the lease payments is reasonably assured and whether there are any significant uncertainties related to costs that we have yet to incur with respect to the lease. Generally, the
Companys leases that qualify as sales-type lease are non-cancelable leases with a term of 75 percent or more of the economic life of the equipment. Certain of the Companys lease contracts are customized for larger customers and often
result in complex terms and conditions that typically require significant judgment in applying the lease accounting criteria.



The economic life of the Companys leased instrument and its fair value require significant accounting estimates and judgment. These estimates are
based on the Companys historical experience. The most objective measure of the economic life of the Companys leased instrument is the original term of a lease, which is typically five years, since a majority of the instruments are
returned by the lessee at or near the end of the lease term and there is not a significant after-market for our used instruments without substantial remanufacturing. The Company believes that this is representative of the period during which the
instrument is expected to be economically usable, with normal service, for the purpose for which it is intended. The Company regularly evaluates the economic life of existing and new products for purposes of this determination.



The fair value of the Companys leased instruments is determined by a
range of cash selling prices which we deem to be verifiable objective evidence. The Company regularly evaluates available objective evidence of instrument fair values using historical data.



The Company has certain government contracts with cancellation clauses or
renewal provisions that are generally required by law, such as: (i) those dependant on fiscal funding outside of a governmental units control; (ii) those that can be cancelled if deemed in the tax payers best interest; or
(iii) those that must be renewed each fiscal year, given limitations that may exist on multi-year contracts that are imposed by statute. Under these circumstances and in accordance with the relevant accounting literature, as well as considering
the Companys historical experience, a thorough evaluation of these contracts is performed to assess whether cancellation is remote or whether exercise of the renewal option is reasonably assured.



The Company recognizes revenues from service contracts ratably over the term
of the service period, which typically ranges from twelve to sixty months. Payments for service contracts are generally received in advance. Deferred revenue represents the revenues to be recognized over the remaining term of the service contracts.



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##### Table of Contents

IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Shipping and Handling Costs



The Company records shipping and handling costs billed to customers as a component of revenue. Costs to distribute products to customers,
including inbound and outbound freight, and other shipping and handling activities are included in cost of goods sold in accordance with Emerging Issues Task Force (EITF) issue No. 00-10, Accounting for Shipping and Handling Fees and Cost.



Total shipping and handling costs included as a component of
revenue for the years ended December 31, 2008, 2007 and 2006 amounted to approximately $964,000, $1,453,000 and $1,573,000, respectively. Total shipping and handling costs included as a component of cost of sales amounted to $2,343,000,
$2,310,000 and $2,029,000 for years ended December 31, 2008, 2007 and 2006, respectively.



Warranties



The Company
recognizes warranty expense, based on managements estimate of expected cost, as an accrued liability at the time of sale. The Company regularly reevaluates its estimates to assess the adequacy of the recorded warranty liabilities and adjust
the amounts as necessary. Warranty expense was approximately $921,000, $1,262,000 and $1,118,000 during the years ended December 31, 2008, 2007 and 2006, respectively.



Advertising Expenditures



Advertising costs are charged to expense as incurred. Advertising expense for the years ended December 31, 2008, 2007 and 2006 amounted to $234,000,
$264,000 and $483,000, respectively.



Research and Development Expenditures



Except for certain software development costs capitalized
as described above (see Software Development Costs), research and development expenditures are charged to operations as incurred. Net research and development expense includes total research and development costs incurred, including costs incurred
under research and development grants and contracts, less costs reimbursed under research and development contracts.



From time to time the Company receives grants from agencies of the U.S. Government. The Company does not recognize any revenue from such grants since they
are cost reimbursement grants whereby the Company submits requests for reimbursement for certain costs incurred. There are no ongoing obligations or requirements with respect to the grants received, we retain ownership of any intellectual property
that results from the research and development and the U.S. Government agency receives a right to use the results of the research for government projects. The Company received cost reimbursements of $164,000, $135,000 and $1,475,000 during the years
ended December 31, 2008, 2007 and 2006, respectively.



Income Taxes



The Company accounts for income taxes in accordance with
SFAS No. 109 Accounting for Income Taxes, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on the differences between the financial statement and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense represents the tax payable for the period and the change during the period in deferred tax assets
and liabilities.



14



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##### Table of Contents

IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company accounts for uncertain tax positions in accordance with FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109 (FIN 48), which was issued in July 2006. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on various related matters such as derecognition, interest, penalties and disclosures required. The Company recognizes interest
and penalties, if any, related to unrecognized tax benefits in income tax expense.



Foreign Currency Translation



The statement of
operations of foreign operations are translated into U.S. dollars at rates of exchange in effect each month. The balance sheets of these operations are translated at period-end exchange rates, and the differences from historical exchange rates are
reflected in stockholders equity as other comprehensive income (loss).



Fair Value of Financial Instruments



The
carrying amounts of financial instruments including cash and cash equivalents, short term investments in marketable securities, accounts receivable, investment in sales-type leases, accounts payable, accrued expenses and deferred service contract
revenues approximate fair value due to their short maturity. The carrying amount of our long-term liabilities also approximates fair value based on interest rates currently available to us for debt of similar terms and remaining maturities.



Earnings Per Share



The Company computes and presents earnings per share in accordance with SFAS
No. 128, Earnings per share. Basic earnings per share are computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the
weighted average number of common shares and common stock equivalents outstanding, calculated on the treasury stock method for options and warrants using the average market prices during the period. The weighted average number of outstanding
antidilutive common stock options and warrants excluded from the computation of diluted net income per common share for the years ended December 31, 2008, 2007 and 2006 were 715,000, 419,000 and 2,047,000, respectively. A reconciliation of the
shares used in the basic and diluted earnings per common share is as follows:



|                                           |  |                          |  |        |  |       
|------------------------------------------ |  | ------------------------ |  | ------ |  | ------
|                                           |  | Years ended December 31,
|                                           |  | 2008                     |  | 2007   |  | 2006  
|                                           |  | (In thousands)          
|Basic weighted common shares outstanding   |  | 18,246                   |  | 18,187 |  | 17,855
|Effect of dilutive securities              |  |                          |  |        |  |       
|Stock options                              |  | 366                      |  | 494    |  |      
|Restricted common shares                   |  | 80                       |  | 31     |  |      
|Warrants                                   |  | 36                       |  | 37     |  |      
|                                           |  |                          |  |        |  |       
|Diluted weighted common shares outstanding |  | 18,728                   |  | 18,749 |  | 17,855
|                                           |  |                          |  |        |  |       



Stock Based Compensation



The Company accounts for stock based compensation under
Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, which requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the
financial statements based on fair value.



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IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Due to the adoption of SFAS No. 123R, the Companys results for the years ended
December 31, 2008, 2007 and 2006 include incremental share-based compensation expense totaling $2,464,000, $1,457,000 and $992,000, respectively. In addition the Companys results include share-based compensation expense of $3,000, $17,000
and $548,000 relating to stock issuances under our Employee Stock Purchase Plan for the years ended December 31, 2008, 2007 and 2006, respectively. Accordingly, the Companys total stock based compensation totaled $2,467,000, $1,474,000
and $1,540,000 for the years ended December 31, 2008, 2007 and 2006. The total income tax benefit recognized in the statement of operations for share-based compensation arrangements amounted to $987,000, $590,000 and $616,000 for the years
ended December 31, 2008, 2007, and 2006 respectively.



Foreign Currency
Hedge



The Company conducts business in certain foreign
markets, primarily in the European Union and Asia. To mitigate the potential impact of adverse fluctuations in the U.S. Dollar exchange rate for these currencies, we periodically purchase foreign currency forward contracts. The Company does not
speculate in these hedging instruments in order to profit from foreign currency exchanges; nor does it enter into trades for which there are no underlying exposures.



Under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments
and Hedging Activities,the Company documents all relationships between hedging instruments and hedged items, as well as its risk management objective for undertaking these hedging transactions. This process includes relating the forward
contracts that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the inception of the
hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged of the hedged items.



During the year ended December 31, 2008, we entered into such contracts for Euros and Japanese Yen totaling $404,000 and $7.6 million,
respectively. As of December 31, 2008, the Company does not have any remaining foreign currency forward contracts in Japanese Yen or Euros. The contracts were to hedge purchases of product in those countries and the results of these forwards
are included in cost of sales.



Segment Reporting



The Company determines and discloses industry segments in accordance with
SFAS No. 131; Disclosures about Segments of an Enterprise and Related Information, which uses a management approach for determining business segments. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as the source of our reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas, and major customers. See Note 19 
Segment and Geographic Information.



Certain Risks and
Uncertainties



Financial instruments, which potentially
expose the Company to concentration of credit risk, consist primarily of cash and cash equivalents, accounts receivable and investment in sales-type leases. Concentration of credit risk with respect to accounts receivable and investment in
sales-type leases is mitigated by the Companys performance of on-going credit evaluations of its customers and the Company maintains an allowance for doubtful accounts. Investments in sales-type leases are secured by the underlying
instruments.



The Companys cash balances on deposit with
banks are guaranteed by the Federal Deposit Insurance Corporation up to $250,000. The Company may be exposed to risk for the amount of funds held in one bank in excess of the insurance limit. In assessing the risk, the Companys policy is to
maintain cash balances with high quality financial institutions.



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IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company derives most of our revenues from the sale of the urinalysis analyzers, and related
supplies and services. Relatively modest declines in unit sales or gross margins could have a material adverse effect on our revenues and profits.



Certain of the Companys components are obtained from outside vendors, and the loss or breakdown of our relationships with these outside vendors
could subject us to substantial delays in the delivery of our products to our customers. Furthermore certain key components of the Companys instruments and certain consumables are manufactured by only one supplier. For example, ARKRAY is the
single source supplier for our line of urine chemistry analyzers and related consumable products and spare parts. Because this supplier is the only vendor with which we have a relationship for the particular components, the Company may be unable to
sell products if this supplier becomes unwilling or unable to deliver components meeting our specifications. The Companys inability to sell products to meet delivery schedules could have a material adverse effect on its reputation in the
industry, as well as its financial condition and results of operation.



Recent Accounting Pronouncements



In December
2007, the Financial Accounting Standards Board issued SFAS No. 141 (revised 2007), Business Combinations, which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a
number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for us beginning July 1, 2009 and will apply prospectively to business combinations
completed on or after that date.



In December 2007, the FASB
issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as
noncontrolling interests and will be reported as a component of equity separate from the parents equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In
addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at
fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for us beginning July 1, 2009 and will apply prospectively, except for the presentation and disclosure requirements.



In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities  an amendment of SFAS No.133 (SFAS 161). This statement changes the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires us to provide enhance
disclosures about: (i) how and why we use derivative instruments; (ii) how derivative instruments and related hedged items are accounted for under SFAS 133, Accounting for Derivative Instruments and hedging Activities, and related
interpretations; and (iii) how derivative instruments and related hedged items affect our financial position, financial performance, and cash flows. SFAS 161 is effective prospectively for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The adoption of SFAS 161 did not have a material impact to the consolidated financial statements.



In April 2008, the FASB issued FASB Staff Position No. SFAS 142-3, Determination of the Useful Life of Intangible Assets (FSP SFAS 142-3
amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS
142). The intent of FSP SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected



17



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##### Table of Contents

IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



cash flows used to measure the fair value of the asset under SFAS 141 (R) and other applicable accounting literature. FSP SFAS 142-3 is effective for
financial statements issued for fiscal years beginning December 15, 2008 and must be applied prospectively to intangible assets acquired after the effective date. The Company will evaluate the potential impact of FSP SFAS 142-3 on acquisitions
on a prospective basis.



In May 2008, the FASB issued SFAS
No. 162 The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). This is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be
used in preparing financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement will be effective 60 days following the U.S. Securities and Exchange Commissions approval of the Public Company
Accounting Oversight Board amendment to AU Section 411, The Meaning of present fairly in Conformity with Generally Accepted Accounting Principles. Currently, there is no impact of the adoption of SFAS 162 on the Companys
consolidated financial position, results of operations and cash flows.



3.
Acquisitions



On April 3, 2006 the Company acquired
the stock of Leucadia Technologies, Inc., a development stage molecular diagnostics company. With this acquisition the Company acquired significant core technology for an ultra-sensitive immunoassay process and novel in-vitro separation and
concentration process as well as in-process research and development for bacteria and cancer detection applications.



Pursuant to the acquisition agreement the Company paid $3.3 million of cash, 272,375 shares of its common stock, valued at $4.2 million, deferred stock
units for 51,879 shares of IRIS common stock valued at $800,000 and $230,000 of transaction fees. The Companys common stock and deferred stock units were valued based on the average closing market price of the Companys common stock a few
days before and a few days following the acquisition. In addition, we will issue up to 108,950 shares of the Companys common stock and deferred stock units for 20,752 shares of the Companys common stock as earn-out consideration if
certain regulatory and sales milestones are achieved. As of December 31, 2008, the earn-out consideration were not yet achieved and will expire on December 31, 2009. The acquisition was accounted for as a purchase with the allocation,
based on fair value, as follows:



|                                            |  |                |      
|------------------------------------------- |  | -------------- | -----
|                                            |  | 2006          
|                                            |  | (In thousands)
|Cash and cash equivalents                   |  | $              | 2    
|Fixed assets                                |  |                | 21   
|Core Technology                             |  |                | 1,790
|Goodwill                                    |  |                | 2,231
|                                            |  |                |      
|Total assets acquired                       |  | $              | 4,044
|                                            |  |                |      
|Total liabilities  deferred tax liability  |  | $              | 662  
|                                            |  |                |      
|In-process research and development expense |  | $              | 5,180
|                                            |  |                |      



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##### Table of Contents

IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following unaudited condensed consolidated pro forma statement of operations data shows the
results of the Companys operations for the year ended December 31, 2006 as if the acquisition had occurred at the beginning of the period presented:



|                             |  |                                      |        |  
|---------------------------- |  | ------------------------------------ | ------ | -
|                             |  | 2006                                 |       
|                             |  | (In thousands,except per share data) |       
|Revenues                     |  | $                                    | 70,494 |  
|Income from operations       |  |                                      | 829    |  
|Net loss                     |  |                                      | (307   | )
|Net loss per share  diluted |  |                                      | (0.02  | )



These unaudited
condensed consolidated pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisitions taken place as of the beginning of the respective periods or the
results of the Companys future operations. Furthermore, the pro forma results do not give effect to all cost savings or incremental costs that may occur as a result of the integration and consolidation of the acquisitions.



4.Investments in Marketable Securities



In 2008, we adopted SFAS No. 157, Fair Value Measurement (SFAS
157), for assets and liabilities measured at fair value on a recurring basis. SFAS 157, defines fair values as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. SFAS 157 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:



| |  |  | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the
measurement date.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets
that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3 inputs are unobservable inputs for the asset or liability
| | - |  | -----------------------------------------------------------------



The Companys investments in marketable securities primarily include highly liquid government securities and an auction rate security.
These securities are carried at cost which approximates fair value due to their highly liquid nature. Of the $2,157 carrying value of investments at December 31, 2008, and in accordance with the fair value hierarchy contained in SFAS 157, $1,857 was
valued using quoted prices in active markets for identical assets or liabilities (Level 1) and approximately $300 was valued using significant unobservable inputs (Level 3) such as current results, trends and future prospects, capital market
conditions, and other economic factors.



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##### Table of Contents

IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table presents the estimated fair value of the Companys investment in marketable
securities at December 31, 2008.



|                      |  |                |       |                 |   |                  |  |            |   |  |   |      
|--------------------- |  | -------------- | ----- | --------------- | - | ---------------- |  | ---------- | - |  | - | -----
|                      |  | Cost           |       | UnrealizedGains |   | UnrealizedLosses |  | Fair Value
|                      |  | (In thousands)
|Auction rate security |  | $              | 300   |                 | $ |                 |  | $          |  |  | $ | 300  
|Government securities |  |                | 1,857 |                 |   |                 |  |            |  |  |   | 1,857
|                      |  |                |       |                 |   |                  |  |            |   |  |   |      
|                      |  | $              | 2,157 |                 | $ |                 |  | $          |  |  | $ | 2,157
|                      |  |                |       |                 |   |                  |  |            |   |  |   |      



The following table
presents the estimated fair value of the Companys investment in marketable securities at December 31, 2007.



|                      |  |                |     |                 |   |                  |  |            |   |  |   |    
|--------------------- |  | -------------- | --- | --------------- | - | ---------------- |  | ---------- | - |  | - | ---
|                      |  | Cost           |     | UnrealizedGains |   | UnrealizedLosses |  | Fair Value
|                      |  | (In thousands)
|Auction rate security |  | $              | 300 |                 | $ |                 |  | $          |  |  | $ | 300
|                      |  |                |     |                 |   |                  |  |            |   |  |   |    



The Companys
investment in the auction rate security is tied to short-term interest rates that are periodically reset through an auction process. The auction process resets the applicable interest rates at prescribed calendar intervals and is intended to provide
liquidity to the holders of auction rate securities by matching buyers and sellers in a market context, enabling the holders to gain immediate liquidity by selling such securities at par, or rolling over their investment. If there is an imbalance
between buyers and sellers, there is a risk of a failed auction. Throughout 2008, auctions relating to those types of auction rate securities have failed. An auction failure is not a default. As of December 31, 2008, the Companys
investment was carried at par value as we believe the investment approximated full value based upon comparable and similar investments. In October 2008, JP Morgan Chase reached an agreement with state and federal regulators to buy back at par value
all auction rate securities from its retail customers. Due to this settlement, the Companys brokerage company announced that beginning on January 15, 2009 they will purchase auction rate security at par value. Currently, the Company does
intend to liquidate this investment at fair value and no impairment charge is required. Nevertheless, as market conditions continue to evolve the Company may take an impairment charge in the future, which may be significant.



For the years end December 31, 2008 and 2007, there were no impairment
losses on the Companys available for sale marketable securities. Based on the Companys assessment of the credit quality of the underlying collateral and credit support available to each of the securities in which it invested, we believe
no other then temporary impairment has occurred as the Company has the ability to hold these investments long enough to avoid realizing any significant loss.



5. Inventories



Inventories consist of the following:



|                                        |  |                 |       |      |   |      
|--------------------------------------- |  | --------------- | ----- | ---- | - | -----
|                                        |  | At December 31,
|                                        |  | 2008            |       | 2007
|                                        |  | (In thousands) 
|Finished goods                          |  | $               | 2,234 |      | $ | 3,237
|Work-in-process                         |  |                 | 270   |      |   | 324  
|Raw materials, parts and sub-assemblies |  |                 | 7,453 |      |   | 6,325
|                                        |  |                 |       |      |   |      
|Inventories                             |  | $               | 9,957 |      | $ | 9,886
|                                        |  |                 |       |      |   |      



20



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IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



6.Properties and Equipment



Property and equipment consist of the following:



|                                                |  |                 |        |   |      |   |        |  
|----------------------------------------------- |  | --------------- | ------ | - | ---- | - | ------ | -
|                                                |  | At December 31, |       
|                                                |  | 2008            |        |   | 2007 |  
|                                                |  | (In thousands)  |       
|Machinery and equipment                         |  | $               | 9,002  |   |      | $ | 7,036  |  
|Leasehold improvements                          |  |                 | 6,003  |   |      |   | 5,810  |  
|Tooling, dies and molds                         |  |                 | 1,985  |   |      |   | 1,731  |  
|Furniture and fixtures                          |  |                 | 1,147  |   |      |   | 1,116  |  
|Rental units                                    |  |                 | 459    |   |      |   | 274    |  
|                                                |  |                 |        |   |      |   |        |  
|                                                |  |                 | 18,597 |   |      |   | 15,967 |  
|Less: accumulated depreciation and amortization |  |                 | (8,918 | ) |      |   | (7,306 | )
|                                                |  |                 |        |   |      |   |        |  
|                                                |  | $               | 9,678  |   |      | $ | 8,661  |  
|                                                |  |                 |        |   |      |   |        |  



Depreciation and
amortization expense for the years ended December 31, 2008, 2007 and 2006 was $2.4 million, $1.9 million, and $1.6 million, respectively.



7. Sales-type Leases



The components of net investment in sales-type leases consist of the following:



|                                                         |  |                 |        |   |      |   |        |  
|-------------------------------------------------------- |  | --------------- | ------ | - | ---- | - | ------ | -
|                                                         |  | At December 31, |       
|                                                         |  | 2008            |        |   | 2007 |  
|                                                         |  | (In thousands)  |       
|Total minimum lease payments                             |  | $               | 10,380 |   |      | $ | 10,627 |  
|Less: unearned income                                    |  |                 | (1,219 | ) |      |   | (1,354 | )
|                                                         |  |                 |        |   |      |   |        |  
|Net investment in sales-type leases                      |  |                 | 9,161  |   |      |   | 9,273  |  
|Less: current portion                                    |  |                 | (3,204 | ) |      |   | (2,660 | )
|                                                         |  |                 |        |   |      |   |        |  
|Net investment in sales-type leases, non-current portion |  | $               | 5,957  |   |      | $ | 6,613  |  
|                                                         |  |                 |        |   |      |   |        |  



Future minimum lease
payments due from customers under sales-type leases for each of the five succeeding years:



|                         |  |                |      
|------------------------ |  | -------------- | -----
|                         |  | (In thousands)
|Year Ending December 31, |  |                |      
|2009                     |  | $              | 3,204
|2010                     |  |                | 2,464
|2011                     |  |                | 1,750
|2012                     |  |                | 1,132
|2013                     |  |                | 602  
|Thereafter               |  |                | 9    
|                         |  |                |      
|                         |  | $              | 9,161
|                         |  |                |      



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IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



8. Bank Loan Agreement



The Company has a credit facility with a commercial bank. The credit facility consists of a $6.5 million revolving line of
credit for working capital and a $10.0 million line of credit for acquisitions and product opportunities. The credit facility has variable interest rates, which will change from time to time based on changes to either the LIBOR rate or the
lenders prime rate. Borrowings under the credit facility are secured by all of the Companys assets and mature in June 2010 and June of 2015, respectively.



As of December 31, 2008 and 2007, there were no borrowings under the credit facility. However, the Company is subject
to certain financial and non financial covenants under the credit facility with the bank and as of December 31, 2008, the Company was in compliance with such covenants.



9. Accrued Expenses



Accrued expenses consist of the following:



|                                                      |  |                 |       |      |   |      
|----------------------------------------------------- |  | --------------- | ----- | ---- | - | -----
|                                                      |  | At December 31,
|                                                      |  | 2008            |       | 2007
|                                                      |  | (In thousands) 
|Accrued bonuses                                       |  | $               | 1,460 |      | $ | 988  
|Accrued commissions                                   |  |                 | 490   |      |   | 498  
|Accrued payroll                                       |  |                 | 1,034 |      |   | 972  
|Accrued vacation                                      |  |                 | 1,080 |      |   | 961  
|Accrued professional fees                             |  |                 | 502   |      |   | 284  
|Accrued warranty                                      |  |                 | 808   |      |   | 800  
|Accrued laboratory information system implementations |  |                 | 614   |      |   | 473  
|Accrued  other                                       |  |                 | 487   |      |   | 737  
|                                                      |  |                 |       |      |   |      
|                                                      |  | $               | 6,475 |      | $ | 5,713
|                                                      |  |                 |       |      |   |      



Changes in the accrued
warranty were as follows:



|                                     |  |                 |      |   |      |   |        |  
|------------------------------------ |  | --------------- | ---- | - | ---- | - | ------ | -
|                                     |  | At December 31, |     
|                                     |  | 2008            |      |   | 2007 |  
|                                     |  | (In thousands)  |     
|Balance  beginning of year          |  | $               | 800  |   |      | $ | 1,039  |  
|Additions for provisions during year |  |                 | 921  |   |      |   | 1,262  |  
|Reductions during year               |  |                 | (913 | ) |      |   | (1,501 | )
|                                     |  |                 |      |   |      |   |        |  
|Balance  end of year                |  | $               | 808  |   |      | $ | 800    |  
|                                     |  |                 |      |   |      |   |        |  



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IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



10. Income Taxes



The provision for income taxes from operations consists of the following:



|          |  |                                |       |   |      |   |       |      |  |   |       
|--------- |  | ------------------------------ | ----- | - | ---- | - | ----- | ---- |  | - | ------
|          |  | For the Year EndedDecember 31,
|          |  | 2008                           |       |   | 2007 |   |       | 2006
|          |  | (In thousands)                
|Current:  |  |                                |       |   |      |   |       |      |  |   |       
|Federal   |  | $                              | 2,323 |   |      | $ | 1,399 |      |  | $ | 186   
|State     |  |                                | 644   |   |      |   | 488   |      |  |   | 274   
|          |  |                                |       |   |      |   |       |      |  |   |       
|          |  |                                | 2,967 |   |      |   | 1,887 |      |  |   | 460   
|          |  |                                |       |   |      |   |       |      |  |   |       
|Deferred: |  |                                |       |   |      |   |       |      |  |   |       
|Federal   |  |                                | 1,182 |   |      |   | 1,514 |      |  |   | 3,090 
|Foreign   |  |                                | (55   | ) |      |   | (11   | )    |  |   | (79   
|State     |  |                                | 269   |   |      |   | (546  | )    |  |   | (1,158
|          |  |                                |       |   |      |   |       |      |  |   |       
|          |  |                                | 1,396 |   |      |   | 957   |      |  |   | 1,853 
|          |  |                                |       |   |      |   |       |      |  |   |       
|          |  | $                              | 4,363 |   |      | $ | 2,844 |      |  | $ | 2,313 
|          |  |                                |       |   |      |   |       |      |  |   |       



Income taxes have been
based on the following components of pre-tax income:



|         |  |                                 |        |   |      |   |        |      |  |   |        |  
|-------- |  | ------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|         |  | For the Year Ended December 31, |       
|         |  | 2008                            |        |   | 2007 |   |        | 2006 | 
|         |  | (In thousands)                  |       
|Domestic |  | $                               | 13,557 |   |      | $ | 10,428 |      |  | $ | 3,452  |  
|Foreign  |  |                                 | (181   | ) |      |   | (35    | )    |  |   | (1,314 | )
|         |  |                                 |        |   |      |   |        |      |  |   |        |  
|         |  | $                               | 13,376 |   |      | $ | 10,393 |      |  | $ | 2,138  |  
|         |  |                                 |        |   |      |   |        |      |  |   |        |  



The provision for
income taxes differs from the amount obtained by applying the federal statutory income tax rate to income before provision for income taxes as follows:



|                                                 |  |                                |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------ |  | ------------------------------ | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                 |  | For the Year EndedDecember 31, |      
|                                                 |  | 2008                           |       |   | 2007 |   |       | 2006 | 
|                                                 |  | (In thousands)                 |      
|Tax provision computed at Federal statutory rate |  | $                              | 4,549 |   |      | $ | 3,533 |      |  | $ | 727   |  
|State taxes, net of federal benefit              |  |                                | 499   |   |      |   | 402   |      |  |   | 213   |  
|R&D tax credits                                  |  |                                | (507  | ) |      |   | (677  | )    |  |   | (583  | )
|In-process purchased R&D                         |  |                                |      |   |      |   |      |      |  |   | 1,959 |  
|Nondeductible expenses                           |  |                                | (130  | ) |      |   | 151   |      |  |   | 594   |  
|Change in valuation allowance                    |  |                                | (259  | ) |      |   | (593  | )    |  |   | (271  | )
|Foreign branch losses                            |  |                                | (55   | ) |      |   | (11   | )    |  |   | (512  | )
|Other                                            |  |                                | 266   |   |      |   | 39    |      |  |   | 186   |  
|                                                 |  |                                |       |   |      |   |       |      |  |   |       |  
|                                                 |  | $                              | 4,363 |   |      | $ | 2,844 |      |  | $ | 2,313 |  
|                                                 |  |                                |       |   |      |   |       |      |  |   |       |  



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IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At December 31, 2008, the Company has tax effected foreign and federal net operating loss carry
forwards of approximately $818,000 and $414,000, respectively. The Company also has tax credit carry forwards of $1.8 million for federal and $2.1 million for state, net of valuation allowances.



The primary components of temporary differences, which give rise to our net
deferred tax asset at December 31, 2008 and 2007, are as follows:



|                                   |  |                 |       |   |      |   |       |  
|---------------------------------- |  | --------------- | ----- | - | ---- | - | ----- | -
|                                   |  | At December 31, |      
|                                   |  | 2008            |       |   | 2007 |  
|                                   |  | (In thousands)  |      
|Depreciation and amortization      |  | $               | (818  | ) |      | $ | (279  | )
|Allowance for doubtful accounts    |  |                 | 176   |   |      |   | 189   |  
|Accrued liabilities                |  |                 | 1,278 |   |      |   | 2,059 |  
|Deferred revenue-service contracts |  |                 | 14    |   |      |   | 14    |  
|Net operating loss carry forward   |  |                 | 1,232 |   |      |   | 1,054 |  
|Tax credits                        |  |                 | 3,931 |   |      |   | 4,695 |  
|Valuation allowance                |  |                 | (596  | ) |      |   | (856  | )
|Other                              |  |                 | 321   |   |      |   | 60    |  
|                                   |  |                 |       |   |      |   |       |  
|                                   |  | $               | 5,538 |   |      | $ | 6,936 |  
|                                   |  |                 |       |   |      |   |       |  



Realization of
deferred tax assets associated with net operating losses (NOL), foreign losses and tax credit carry forward is dependent upon our ability to generate sufficient taxable income prior to their expiration. Management believes it is more
likely than not that the deferred tax assets will be realized through future taxable income or alternative tax strategies. However, the net deferred tax assets could be reduced in the near term if managements estimates of taxable income during
the carryforward period are not realized or are significantly reduced or alternative tax strategies are not available. However, the Company has established a valuation allowance for NOLs, capital loss carryforward and foreign losses based on its
estimate of future utilization. The Company will continue to review estimates of taxable income and will adjust the valuation allowance, when necessary.



Also, should the Company undergo an ownership change as defined in Section 382 of the Internal Revenue Code, its NOLs generated prior to the
ownership change would be subject to an annual limitation. If this occurs, a valuation allowance may be necessary.



The Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an
Interpretation of FASB Statement 109 (FIN 48), on January 1, 2007, which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that we recognize the impact of a tax position in our financial statements if
that position is more likely than not of being sustained upon audit, based on the technical merits of the position. The Companys consolidated financial statements for 2007 reflect the impact of FIN 48, but the consolidated financial statements
for 2006 have not been restated to reflect, and do not include, the impact of FIN 48.



As a result of the initial adoption of FIN 48, the Company recognized a $547,000 reduction in its deferred tax benefit relating to federal and California tax credits for which the Company could not conclude that it is
more likely than not that such tax credits will be sustainable on audit by the respective taxing authorities. As a result the Company reduced the deferred tax asset by $547,000 and recorded a charge to retained earnings as of January 1, 2007,
by a like amount.



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##### Table of Contents

IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As of December 31, 2008, the total amount of unrecognized tax benefits, including related
interest and penalties, was $998,000. The unrecognized tax benefits primarily related to uncertainties from the deductibility of certain operating expenses in various jurisdictions.



The following changes occurred in the amount of unrecognized tax benefits (including related interest and penalties) during
the year ended December 31, 2008 are as follows:



|                                         |  |                |    
|---------------------------------------- |  | -------------- | ---
|                                         |  | (In thousands)
|Balance at December 31, 2007             |  | $              | 616
|Additions for current year tax positions |  |                | 382
|                                         |  |                |    
|Balance at December 31, 2008             |  | $              | 998
|                                         |  |                |    
|                                         |  |                |    



The Company will
recognize potential interest and penalties related to income tax positions as a component of the provision for income taxes on the consolidated statements of income in any future periods in which the Company must record a liability. Since the
Company has not recorded a liability at December 31, 2008 and 2007, there was no impact to its effective tax rate.



11. Stock-Based Compensation



Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123R,
Share-Based Payment, which requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial statements based on fair value. Share-based compensation expense for
the years ended December 31, 2008 and 2007 includes incremental share-based compensation expense as follows:



|                           |  |                                 |       |   |      |   |       |      |  |   |       |  
|-------------------------- |  | ------------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                           |  | For the years endedDecember 31, |      
|                           |  | 2008                            |       |   | 2007 |   |       | 2006 | 
|                           |  | (In thousands)                  |      
|Cost of sales              |  | $                               | 341   |   |      | $ | 273   |      |  | $ | 245   |  
|Marketing and selling      |  |                                 | 398   |   |      |   | 162   |      |  |   | 236   |  
|General and administrative |  |                                 | 1,210 |   |      |   | 628   |      |  |   | 778   |  
|Research and development   |  |                                 | 518   |   |      |   | 411   |      |  |   | 281   |  
|                           |  |                                 |       |   |      |   |       |      |  |   |       |  
|Stock-based compensation   |  | $                               | 2,467 |   |      | $ | 1,474 |      |  | $ | 1,540 |  
|                           |  |                                 |       |   |      |   |       |      |  |   |       |  
|Income tax benefit         |  | $                               | (987  | ) |      | $ | (590  | )    |  | $ | (616  | )
|                           |  |                                 |       |   |      |   |       |      |  |   |       |  



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##### Table of Contents

IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Stock Options



As of December 31, 2008, the Company had stock option plans under which we may grant future non-qualified stock options, incentive stock options and
stock appreciation rights. No stock appreciation rights have been granted under and stock option plans. On July 13, 2007, the Companys stockholders approved the adoption of the IRIS International, Inc. 2007 Stock Incentive Plan, which
authorizes the issuance of up to 1,750,000 shares of our common stock pursuant to equity awards granted under the plan.



The following schedule sets forth options authorized, exercised, outstanding and available for grant under our existing stock option plans as of
December 31, 2008:



|          |  |                         |  |           |  |             |  |                   
|--------- |  | ----------------------- |  | --------- |  | ----------- |  | ------------------
|          |  | Number of Option Shares
|Plan      |  | Authorized              |  | Exercised |  | Outstanding |  | Availablefor Grant
|          |  | (In thousands)         
|1994 Plan |  | 700                     |  | 669       |  | 31          |  |                  
|1998 Plan |  | 4,100                   |  | 2,509     |  | 1,294       |  | 511               
|2007 Plan |  | 1,750                   |  |          |  | 649         |  | 910               
|          |  |                         |  |           |  |             |  |                   
|          |  | 6,550                   |  | 3,178     |  | 1,974       |  | 961               
|          |  |                         |  |           |  |             |  |                   



In addition to the
above, as of December 31, 2008 there were no stock options outstanding to purchase shares of common stock that were issued in 2003 under special inducement grants.



The following table sets forth certain information relative to stock options during the three years ended December 31, 2008.



|                                                                     |  |                                      |   |  |                                |       |                        |   |      
|-------------------------------------------------------------------- |  | ------------------------------------ | - |  | ------------------------------ | ----- | ---------------------- | - | -----
|                                                                     |  | Shares                               |   |  | Weighted AverageExercise Price |       | AverageIntrinsic Value
|                                                                     |  | (In thousands, except for per share)
|Outstanding at January 1, 2006                                       |  | 1,717                                |   |  | $                              | 6.89  |                        |   |      
|Granted                                                              |  | 569                                  |   |  | $                              | 16.55 |                        |   |      
|Exercised                                                            |  | (301                                 | ) |  | $                              | 4.59  |                        |   |      
|Canceled or expired                                                  |  | (12                                  | ) |  | $                              | 18.26 |                        |   |      
|                                                                     |  |                                      |   |  |                                |       |                        |   |      
|Outstanding at December 31, 2006                                     |  | 1,973                                |   |  | $                              | 9.98  |                        |   |      
|Granted                                                              |  | 558                                  |   |  | $                              | 13.19 |                        |   |      
|Exercised                                                            |  | (437                                 | ) |  | $                              | 4.74  |                        |   |      
|Canceled or expired                                                  |  | (233                                 | ) |  | $                              | 14.12 |                        |   |      
|                                                                     |  |                                      |   |  |                                |       |                        |   |      
|Outstanding at December 31, 2007                                     |  | 1,861                                |   |  | $                              | 11.62 |                        |   |      
|Granted                                                              |  | 502                                  |   |  | $                              | 13.03 |                        |   |      
|Exercised                                                            |  | (369                                 | ) |  | $                              | 4.90  |                        |   |      
|Canceled or expired                                                  |  | (20                                  | ) |  | $                              | 11.47 |                        |   |      
|                                                                     |  |                                      |   |  |                                |       |                        |   |      
|Outstanding at December 31, 2008 average remaining life  3.3 years  |  | 1,974                                |   |  | $                              | 13.24 |                        | $ | 5,310
|Exercisable at December 31, 2008, average remaining life  2.9 years |  | 1,118                                |   |  | $                              | 13.06 |                        | $ | 3,996



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IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The weighted average grant-date fair value of options granted during the years ended
December 31, 2008, 2007 and 2006 was $4.48, $4.29, and $5.76, respectively. The intrinsic value of options exercised during the years ended December 31, 2008, 2007 and 2006 was $4,073,000, $4,994,000 and $3,555,000, respectively.



The aggregate intrinsic value in the table above represents
the total pretax intrinsic value (the difference between our closing stock price on December 31, 2008 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders, had all option
holders exercised their options on December 31, 2008. Total intrinsic value of options exercised for the year ended December 31, 2008 amounted to $4,073,000. As of December 31, 2008, total unrecognized stock-based compensation expense
related to nonvested stock options was $2,870,000.



The
Compensation Committee of the Companys board of directors determines the exercise price of options. Payment of the exercise price may be made either in cash or with shares of common stock that have been held at least six months. The options
generally vest over either three or four years and expire either five or ten years from the date of grant. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following
weighted average assumptions:



|                        |  |                                |   |  |      |   |  |      |  
|----------------------- |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                        |  | For the Year EndedDecember 31, |  
|                        |  | 2008                           |   |  | 2007 |   |  | 2006 |  
|                        |  | (In thousands)                 |  
|Risk free interest rate |  | 2.4                            | % |  | 4.4  | % |  | 4.6  | %
|Expected lives (years)  |  | 3.0                            |   |  | 3.0  |   |  | 3.0  |  
|Expected volatility     |  | 48                             | % |  | 46   | % |  | 47   | %
|Expected dividend yield |  |                               |   |  |     |   |  |     |  



The expected
volatilities are based on the historical volatility of our stock. The observation is made on a weekly basis. The expected terms of the stock options are based on the average vesting period on a basis consistent with the historical experience for
similar option grants. The risk-free rate is consistent with the expected terms of the stock options and based on the U.S. Treasury yield curve in effect at the time of grant. The Company estimates forfeitures rates based on historical data.



A summary of our non-vested stock options during the year
ended December 31, 2008 is presented below:



|                                        |  |                |   |  |                                     |      
|--------------------------------------- |  | -------------- | - |  | ----------------------------------- | -----
|                                        |  | Shares         |   |  | WeightedAverageGrant DateFair Value
|                                        |  | (In thousands)
|Non-vested options at January 1, 2008   |  | 715            |   |  | $                                   | 14.49
|Granted                                 |  | 502            |   |  | $                                   | 13.03
|Vested                                  |  | (346           | ) |  | $                                   | 14.90
|Forfeited or expired                    |  | (15            | ) |  | $                                   | 14.26
|                                        |  |                |   |  |                                     |      
|Non-vested options at December 31, 2008 |  | 856            |   |  | $                                   | 13.48
|                                        |  |                |   |  |                                     |      



As of
December 31, 2008, there was approximately $2,870,000 of accumulated unrecognized stock compensation based on fair value on the grant date related to non-vested options granted under the stock option plans. That cost is expected to be
recognized during the weighted average service period of 2.8 years. The share-based compensation will be amortized based on the straight line method over the vesting period and the expense includes an estimate of the awards that will be forfeited.
The total fair value of shares vested during the year ended December 31, 2008 was $339,000.



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IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Restricted Shares



The Company began awarding restricted shares of our common stock in 2006. Restricted shares currently vest 25% after one year and
61/4% quarterly thereafter. Unvested restricted shares are
forfeited if the recipients employment terminates for any reason other than death, disability, or special circumstances as determined by the Compensation Committee of the Companys board of directors. Restricted shares activity during the
year ended December 31, 2008 is as follows:



|                              |  |                                     |   |  |                                               |      
|----------------------------- |  | ----------------------------------- | - |  | --------------------------------------------- | -----
|                              |  | Shares                              |   |  | WeightedAverage GrantDate Fair ValuePer Share
|                              |  | (In thousands, except forper share)
|Unvested at January 1, 2008   |  | 136                                 |   |  | $                                             | 14.64
|Granted                       |  | 130                                 |   |  | $                                             | 13.15
|Vested during period          |  | (53                                 | ) |  | $                                             | 14.49
|Cancelled during period       |  | (11                                 | ) |  | $                                             | 12.95
|                              |  |                                     |   |  |                                               |      
|Unvested at December 31, 2008 |  | 202                                 |   |  | $                                             | 13.81
|                              |  |                                     |   |  |                                               |      



Fair value of our
restricted shares is based on our closing stock price on the date of grant. As of December 31, 2008, total unrecognized stock-based compensation expense related to non vested restricted share grants was $2,102,000 which is expected to be
recognized over the remaining weighted average period of approximately 2.7 years.



12. Capital Stock  Warrants



At
December 31, 2008, there were warrants outstanding to purchase 74,300 shares of common stock at $7.80 per share. These warrants are exercisable and will expire April 23, 2009. During the years ended December 31, 2008, 2007 and 2006,
no warrants were issued, exercised, cancelled or expired.



13. Common Stock
Repurchase Plan



On March 3, 2008, the Companys
board of directors authorized a share repurchase and retirement plan of up to $15 million of the Companys common stock over a 12-month period. Under this plan the Company repurchased 492,068 shares of our common stock for approximately
$5,748,000. On July 25, 2008 the Companys board of directors terminated the share repurchase and retirement plan.



On November 21, 2008, the Companys board of directors authorized a share repurchase and retirement plan of up to $10 million of the
Companys common stock over a 12-month period. As of December 31, 2008, the Company repurchased 491,511 shares of common stock for approximately $6,160,000. Subsequent to December 31, 2008, the Company repurchased an additional
250,800 of common stock for approximately $2,500,000 under the plan.



On September 11, 2008, the Companys Chief Executive Officer exercised a stock option to purchase an aggregate of 130,000 shares of common stock with an exercise price of $4.34 per share, on a net issue basis in a transaction
approved by the compensation committee of the Companys board of directors. The Company issued 62,081 shares of common stock to its Chief Executive Officer, and retained 67,919 shares of common stock with an aggregate market value of $1,219,000
based on the last closing price of the common stock immediately prior to exercise of $17.95 per share. The amount $564,000 was applied in payment of the aggregate exercise price of the stock options and $655,000 was applied in payment to payroll
taxes arising from the option exercise. These options had a term expiring on November 18, 2008.



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IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



14. Employee Benefits



All employees are eligible to participate in a 401(k) Plan at the beginning of the first quarter following their employment
start date. The Companys contributions are discretionary. Effective January 1, 2006 we commenced matching $0.50 per $1 contributed by the employees up to 4% of the employee annual salary, prior to 2006 the Companys practice
was to match $0.25 per $1 contributed by the employees up to 4% of the employees annual salary. Employees vest in amounts contributed by the Company immediately. The Company contributed $312,000, $256,000 and $223,000 to the 401(k) Plan for
the years ended December 31, 2008, 2007, and 2006, respectively.



15.
Manufacturing Transition Rights



On December 30, 2008, the
Company entered into a manufacturing, supply and transition agreement (manufacturing transition rights) with IDEXX Operations, Inc. Under this agreement, the Company sold its exclusive rights to manufacture and distribute rotors
compatible with the drives of IDEXX machines to IDEXX. The Company received a nonrecurring $1.5 million payment, which was offset by $268,000 related to costs associated with the manufacturing transition rights. The $1.5 million payment was
classified as other income and does not impact revenue from operations, as this payment is not contingent upon any significant action by the Company.



During the transition period, the Company will provide IDEXX with its know how related to the manufacturing of the rotors and will manufacture any rotors
needed by IDEXX. Prices for these transition services and rotors are exclusive of the aforementioned nonrecurring payment. We expect this transition period to be completed by mid 2009.



In addition, IDEXX owns the rights to manufacture the rotors without any further involvement or commitment from the Company.
Commencing in January 2014 and continuing through December 2020, if IDEXX uses this manufacturing technology, a royalty fee for each rotor unit sold will be assessed.



16. Shelf Registration



In November 2007, the Company filed a Form S-3 shelf registration statement ($125 million shelf) to provide for financial flexibility. The
$125 million shelf allows the Company to issue common stock, preferred stock and debt securities of the Company. Under the $125 million shelf, all of the securities available for issuance may be offered from time to time with terms to be determined
at the time of issuance. In December 2007, the Form S-3 registration statement was declared effective. As of December 31, 2008, no securities had been issued under the $125 million shelf.



17. Commitments and Contingencies



Leases



The Company leases real property, automobiles and equipment under operating lease agreements, which expire at various times through 2015.
Certain leases contain renewal options and generally require us to pay utilities, insurance, taxes and other operating expenses.



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IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Future minimum rental payments required under operating lease agreements that have an initial term in
excess of one year as of December 31, 2008, are as follows:



|                        |  |                 |      
|----------------------- |  | --------------- | -----
|                        |  | OperatingLeases
|                        |  | (In thousands) 
|Year Ended December 31, |  |                 |      
|2009                    |  | $               | 1,803
|2010                    |  |                 | 1,740
|2011                    |  |                 | 1,019
|2012                    |  |                 | 694  
|2013                    |  |                 | 644  
|Thereafter              |  |                 | 782  
|                        |  |                 |      
|                        |  | $               | 6,682
|                        |  |                 |      



Consolidated rental
expense under all operating leases during the years ended December 31, 2008, 2007 and 2006 was $1,787,000, $1,553,000 and $1,359,000, respectively.



Litigation



From time to time, the Company is party to certain litigation arising in the normal course of business. Management believes that the resolution of such
matters will not have a material adverse effect on the Companys financial position, results of operations or cash flows.



Guarantees



The Company enters into indemnification provisions under (i) agreements with other companies in its ordinary course of business, typically with
business partners, contractors, and customers, landlords and (ii) agreements with investors. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified
party as a result of its activities or, in some cases, as a result of the indemnified partys activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by the Company with
regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. In addition, in some cases, the Company has agreed to reimburse employees for certain expenses and to provide salary
continuation during short-term disability. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company reviews its exposure under these agreements no less
than annually, or more frequently when events indicate. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these
agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of December 31, 2008 and 2007.



18. Supplier Concentration



One supplier comprised greater that 10% of the Companys consolidated purchases. Consolidated purchases from this supplier amounted to 15%, 16%, and
15% for the years end December 31, 2008, 2007, and 2006, respectively.



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IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



19. Segments and Geographic Information



The Companys operations are organized on the basis of products and related services and under SFAS No. 131, we
operate in two segments: (i) IVD and (ii) sample processing.



The IVD segment designs, develops, manufactures, markets and distributes in-vitro diagnostic systems based on patented and proprietary technology for automating microscopic and clinical chemistry procedures for urinalysis. The segment also
provides ongoing sales of consumables and service necessary for the operation of installed urinalysis workstations. In the United States, these products are mostly sold through a direct sales and service force. Internationally, these products are
sold and serviced through distributors, with the exception of France. The segment also includes the operations of the IMD Subsidiary.



The sample processing segment designs, develops, manufactures and markets a variety of benchtop centrifuges, small instruments and supplies. These
products are used primarily for manual specimen preparation and dedicated applications in coagulation, cytology, hematology urinalysis and DNA processing. These products are sold worldwide through distributors.



The accounting policies of the segments are the same as those described in
the Summary of Significant Accounting Policies. The Company evaluates the performance of its segments and allocates resources to them based on earnings before income taxes, excluding corporate charges.



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IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The tables below present information about reported segments for the three years ended
December 31, 2008:



|                                     |  |                |        |                  |   |                              |  |   |        |   |  |   |       
|------------------------------------ |  | -------------- | ------ | ---------------- | - | ---------------------------- |  | - | ------ | - |  | - | ------
|                                     |  | IVD            |        | SampleProcessing |   | UnallocatedCorporateExpenses |  |   | Total 
|                                     |  | (In thousands)
|For the Year Ended December 31, 2008 |  |                |        |                  |   |                              |  |   |        |   |  |   |       
|Revenues                             |  | $              | 81,771 |                  | $ | 13,731                       |  | $ |       |   |  | $ | 95,502
|Interest income                      |  |                | 1,180  |                  |   |                             |  |   |       |   |  |   | 1,180 
|Interest expense                     |  |                | 11     |                  |   |                             |  |   |       |   |  |   | 11    
|Depreciation and amortization        |  |                | 2,893  |                  |   | 218                          |  |   | 16     |   |  |   | 3,127 
|Other non-cash items                 |  |                |       |                  |   |                             |  |   |       |   |  |   |      
|Segment pre-tax profit               |  |                | 12,223 |                  |   | 5,113                        |  |   | (3,960 | ) |  |   | 13,376
|Segment assets                       |  |                | 61,092 |                  |   | 24,008                       |  |   | 5,538  |   |  |   | 90,638
|Investment in long-lived assets      |  |                | 25,349 |                  |   | 419                          |  |   |       |   |  |   | 25,768
|                                     |  |                |        |                 
|For the Year Ended December 31, 2007 |  |                |        |                  |   |                              |  |   |        |   |  |   |       
|Revenues                             |  | $              | 72,025 |                  | $ | 12,281                       |  | $ |       |   |  | $ | 84,306
|Interest income                      |  |                | 1,498  |                  |   |                             |  |   |       |   |  |   | 1,498 
|Interest expense                     |  |                | 10     |                  |   |                             |  |   |       |   |  |   | 10    
|Depreciation and amortization        |  |                | 2,394  |                  |   | 212                          |  |   | 15     |   |  |   | 2, 621
|Other non-cash items                 |  |                |       |                  |   |                             |  |   |       |   |  |   |      
|Segment pre-tax profit               |  |                | 12,114 |                  |   | 3,027                        |  |   | (4,748 | ) |  |   | 10,393
|Segment assets                       |  |                | 60,446 |                  |   | 19,008                       |  |   | 6,936  |   |  |   | 86,390
|Investment in long-lived assets      |  |                | 21,188 |                  |   | 493                          |  |   |       |   |  |   | 21,681
|                                     |  |                |        |                 
|For the Year Ended December 31, 2006 |  |                |        |                  |   |                              |  |   |        |   |  |   |       
|Revenues                             |  |                | 60,830 |                  | $ | 11,237                       |  | $ |       |   |  | $ | 72,067
|Interest income                      |  |                | 1,062  |                  |   | 6                            |  |   |       |   |  |   | 1,068 
|Interest expense                     |  |                | 18     |                  |   |                             |  |   |       |   |  |   | 18    
|Depreciation and amortization        |  |                | 1,908  |                  |   | 221                          |  |   | 13     |   |  |   | 2,142 
|Other non-cash items                 |  |                |       |                  |   |                             |  |   |       |   |  |   |      
|Segment pre-tax profit               |  |                | 4,686  |                  |   | 2,460                        |  |   | (5,008 | ) |  |   | 2,138 
|Segment assets                       |  |                | 49,845 |                  |   | 16,018                       |  |   | 8,454  |   |  |   | 74,317
|Investment in long-lived assets      |  |                | 19,328 |                  |   | 462                          |  |   |       |   |  |   | 19,790



The Company ships
products from two locations in the United States and one location in Germany. Substantially all long-lived assets are located in the United States. Sales to international customers amounted to approximately $31.6 million in 2008, $25.4 million in
2007 and $20.1 million in 2006. For the year ended December 31, 2008, two customers represented 21% and 10% of international sales. For the year ended December 31, 2007, two customers represented 22% and 11% of international sales. For the
year ended December 31, 2006, two customers represented 16% and 13% of international sales.



Segment assets attributed to corporate unallocated expenses are deferred taxes. Long-lived assets include property and equipment, intangible assets,
long-term portion of inventory and other long-term assets. Deferred income tax is excluded from long-lived assets.



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IRIS INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



20. Valuation and Qualifying Accounts



|                                   |  |                  |       |                            |   |                                  |  |            |  |   |               |      |  |   |      
|---------------------------------- |  | ---------------- | ----- | -------------------------- | - | -------------------------------- |  | ---------- |  | - | ------------- | ---- |  | - | -----
|                                   |  | BeginningBalance |       | Charged ToCost andExpenses |   | AdditionsChargedto OtherAccounts |  | Deductions |  |   | EndingBalance
|                                   |  | (In thousands)  
|Year Ended December 31, 2008       |  |                  |       |                            |   |                                  |  |            |  |   |               |      |  |   |      
|Allowance for doubtful accounts    |  | $                | 401   |                            | $ | 26                               |  |           |  | $ | (17           | )(1) |  | $ | 410  
|Allowance for sales returns        |  |                  | 35    |                            |   | 0                                |  |           |  |   | (0            | )(1) |  |   | 35   
|Reserve for inventory obsolescence |  |                  | 623   |                            |   | 462                              |  |           |  |   | (239          | )(1) |  |   | 846  
|Valuation of deferred tax assets   |  |                  | 856   |                            |   |                                 |  |           |  |   | (260          | )(2) |  |   | 596  
|                                   |  |                  |       |                            |  
|Year Ended December 31, 2007       |  |                  |       |                            |   |                                  |  |            |  |   |               |      |  |   |      
|Allowance for doubtful accounts    |  | $                | 483   |                            | $ | 14                               |  |           |  | $ | (96           | )(1) |  | $ | 401  
|Allowance for sales returns        |  |                  | 205   |                            |   | 6                                |  |           |  |   | (176          | )(1) |  |   | 35   
|Reserve for inventory obsolescence |  |                  | 881   |                            |   | 250                              |  |           |  |   | (508          | )(1) |  |   | 623  
|Valuation of deferred tax assets   |  |                  | 1,510 |                            |   |                                 |  |           |  |   | (654          | )(2) |  |   | 856  
|                                   |  |                  |       |                            |  
|Year Ended December 31, 2006       |  |                  |       |                            |   |                                  |  |            |  |   |               |      |  |   |      
|Allowance for doubtful accounts    |  | $                | 231   |                            | $ | 507                              |  |           |  | $ | (255          | )(1) |  | $ | 483  
|Allowance for sales returns        |  |                  | 57    |                            |   | 148                              |  |           |  |   |              |      |  |   | 205  
|Reserve for inventory obsolescence |  |                  | 889   |                            |   |                                 |  |           |  |   | (8            | )(1) |  |   | 881  
|Valuation of deferred tax assets   |  |                  | 1,781 |                            |   |                                 |  |           |  |   | (271          | )(2) |  |   | 1,510



|(1) | Relates to the write-off of accounts receivable, return of merchandise, disposal of obsolete inventory or specific portion of the accounts receivable reserve or reserve for sales
returns no longer needed.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Valuation adjustment relating to realization of deferred tax assets.
|--- | --------------------------------------------------------------------



21. Selected Quarterly Data (Unaudited)



The following table summarizes certain financial information by quarter:



|                               |  |                                  |        |         |   |              |  |             |        |  |   |       
|------------------------------ |  | -------------------------------- | ------ | ------- | - | ------------ |  | ----------- | ------ |  | - | ------
|                               |  | 2008 Quarter Ended              
|                               |  | March 31                         |        | June 30 |   | September 30 |  | December 31
|                               |  | (In thousands, except per share)
|Net revenues                   |  | $                                | 21,607 |         | $ | 23,783       |  | $           | 23,424 |  | $ | 26,688
|Gross profit                   |  |                                  | 11,604 |         |   | 12,339       |  |             | 11,802 |  |   | 13,083
|Net income(1)                  |  |                                  | 1,821  |         |   | 2,205        |  |             | 1,618  |  |   | 3,369 
|Net income per share  basic   |  |                                  | 0.10   |         |   | 0.12         |  |             | 0.09   |  |   | 0.19  
|Net income per share  diluted |  |                                  | 0.10   |         |   | 0.12         |  |             | 0.09   |  |   | 0.18  



|                               |  |                                  |        |         |   |              |  |             |        |  |   |       
|------------------------------ |  | -------------------------------- | ------ | ------- | - | ------------ |  | ----------- | ------ |  | - | ------
|                               |  | 2007 Quarter Ended              
|                               |  | March 31                         |        | June 30 |   | September 30 |  | December 31
|                               |  | (In thousands, except per share)
|Net revenues(2)                |  | $                                | 20,511 |         | $ | 21,349       |  | $           | 20,563 |  | $ | 21,883
|Gross profit                   |  |                                  | 10,008 |         |   | 10,766       |  |             | 10,767 |  |   | 10,757
|Net income                     |  |                                  | 1,462  |         |   | 1,790        |  |             | 1,618  |  |   | 2,679 
|Net income per share  basic   |  |                                  | 0.08   |         |   | 0.10         |  |             | 0.09   |  |   | 0.15  
|Net income per share  diluted |  |                                  | 0.08   |         |   | 0.10         |  |             | 0.09   |  |   | 0.14  



|(1) | 2008 results include the one-time gain related to the $1.2 million net payment to IRIS as part of the manufacturing transition rights agreement signed with IDEXX Laboratories in
December 2008.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The consolidated net revenues include reclassification of freight revenue from cost of goods and marketing and selling expenses in accordance with EITF 00-10. The reclassification
in consolidated revenues amounted to $389,000, $372,000, $372,000 and $320,000 for the each quarters ended December 31, 2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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PART IV



|Item 15. | Exhibits, Financial Statement Schedules.
|-------- | ----------------------------------------



3. The following exhibits are included herein:



|              |  |                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                    
|              | 
|23.1          |  | Consent of BDO Seidman, LLP.                                                                   
|              | 
|31.1          |  | Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 By Chief Executive Officer.
|              | 
|31.2          |  | Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 By Chief Financial Officer.
|              | 
|32.1          |  | Statement Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 By Chief Executive Officer.
|              | 
|32.2          |  | Statement Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 By Chief Financial Officer.



34



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##### Table of Contents

SIGNATURES



Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on
Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized, in Chatsworth, California, on July 17, 2009.



IRIS INTERNATIONAL, INC.By:

/s/ Cesar M. GarcíaCesar M. García, President and Chief Executive Officer




Pursuant to the
requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities indicated and on the date indicated:



|                                    |  |                                                                                    |  |              
|----------------------------------- |  | ---------------------------------------------------------------------------------- |  | -------------
|Signature                           |  | Title                                                                              |  | Date         
|                                    |  |                                                                                   
|/s/ Cesar M. Garcia Cesar M. Garcia |  | President, Chief Executive Officer and Chairman (Principal Executive Officer)      |  | July 17, 2009
|                                    |  |                                                                                   
|* Peter L. Donato                   |  | Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) |  | July 17, 2009
|                                    |  |                                                                                   
|* Thomas H. Adams                   |  | Director                                                                           |  | July 17, 2009
|                                    |  |                                                                                   
|* Steven M. Besbeck                 |  | Director                                                                           |  | July 17, 2009
|                                    |  |                                                                                   
|Beth Y. Karlan                      |  | Director                                                                           |  |              
|                                    |  |                                                                                   
|* Michael D. Matte                  |  | Director                                                                           |  | July 17, 2009
|                                    |  |                                                                                   
|* Richard G. Nadeau                 |  | Director                                                                           |  | July 17, 2009
|                                    |  |                                                                                   
|* Edward F. Voboril                 |  | Director                                                                           |  | July 17, 2009
|                                    |  |                                                                                   
|* Stephen E. Wasserman              |  | Director                                                                           |  | July 17, 2009

|      |  |                    
|----- |  | -------------------
|      | 
|* By: |  | /s/ Cesar M. Garcia
|      |  | As Attorney-In-Fact



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EXHIBIT INDEX



|              |  |                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                    
|              | 
|23.1          |  | Consent of BDO Seidman, LLP.                                                                   
|              | 
|31.1          |  | Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 By Chief Executive Officer.
|              | 
|31.2          |  | Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 By Chief Financial Officer.
|              | 
|32.1          |  | Statement Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 By Chief Executive Officer.
|              | 
|32.2          |  | Statement Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 By Chief Financial Officer.



36