<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                ----------------

                                    FORM 10-K

        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                           COMMISSION FILE NO. 1-9767

                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

                DELAWARE                               94-2579751
     (STATE OR OTHER JURISDICTION OF                (I.R.S. EMPLOYER
      INCORPORATION OR ORGANIZATION)               IDENTIFICATION NO.)

                 9162 ETON AVENUE, CHATSWORTH, CALIFORNIA 91311
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

                        TELEPHONE NUMBER: (818) 709-1244

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                     COMMON STOCK (AMERICAN STOCK EXCHANGE)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                      NONE

     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. [ X ]

     On March 16, 2001, the aggregate market value of the shares of Common Stock
held by non-affiliates of the Registrant was approximately $14.8 million based
upon the closing price of $1.95 per share of Common Stock as reported on the
American Stock Exchange. Solely for the purpose of determining "non-affiliates"
in this context, shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded. This determination of affiliate status is not necessarily a
determination for other purposes.

     The Registrant had 9,868,855 shares of Common Stock outstanding on March
16, 2001.

     Part III incorporates information by reference from the Proxy Statement for
the Registrant's 2001 Annual Meeting of Stockholders.

<PAGE>   2
                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

                             FORM 10-K ANNUAL REPORT
                       FISCAL YEAR ENDED DECEMBER 31, 2000

<TABLE>
                                                       PART I
<S>       <C>                                                                                               <C>
Item 1.   Business.......................................................................................      1
Item 2.   Properties.....................................................................................      8
Item 3.   Legal Proceedings..............................................................................      9
Item 4.   Submission of Matters to a Vote of Security Holders............................................      9

                                                       PART II

Item 5.   Market for the Registrant's Common Stock and Related Stockholder Matters.......................      9
Item 6.   Selected Financial Data........................................................................      9
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations..........     10
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.....................................     17
Item 8.   Financial Statements and Supplementary Data....................................................     17
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........     17

                                                       PART III

Item 10.  Directors and Executive Officers of the Registrant.............................................     17
Item 11.  Executive Compensation.........................................................................     18
Item 12.  Security Ownership of Certain Beneficial Owners and Management.................................     18
Item 13.  Certain Relationships and Related Transactions.................................................     18

                                                        PART IV

Item 14.  Exhibits, Financial Statements Schedules, and Reports on Form 8-K..............................     18
</TABLE>

<PAGE>   3
                                     PART I

ITEM 1. BUSINESS

OVERVIEW

     We design, develop, manufacture and market in vitro diagnostic, or IVD,
imaging systems for urinalysis testing based on patented and proprietary
automated intelligent microscopy, or AIM, technology for automating microscopic
procedures performed in clinical laboratories, as well as special purpose
centrifuges and other small instruments. Our microscopy technology combines our
capabilities in automated specimen presentation, including our patented
slideless microscope, and proprietary high-speed digital processing hardware and
software to classify and present images of microscopic particles in easy-to-view
displays. Our systems provide customers with better and more rapid results and
labor cost-savings over manual methods of performing microscopy. We sell our
products directly and through distributors to hospital and reference clinical
laboratories, as well as to veterinary, physician office and research
laboratories. IRIS was incorporated in California in 1979 and reincorporated in
1987 in Delaware.

     We pioneered our first urinalysis system in 1983 with the introduction of
The Yellow IRIS family of workstations, and we introduced a high volume,
fully-automated urine pathology system, the Model 939UDx, in 2000. We believe
that we are the only supplier of laboratory systems which fully automate a
complete urinalysis. We also provide ongoing sales of supplies and service for
our urinalysis workstations. Most supplies are purchased under standing orders
and, following an initial one-year warranty period, the majority of customers
purchase annual service contracts.

     Through our subsidiary StatSpin, Inc., we manufacture and market a variety
of benchtop centrifuges, small instruments and supplies for the laboratory
market. These products are used primarily for manual specimen preparation and
dedicated applications in cytology, hematology and urinalysis. They appeal to
laboratories and physician offices performing too few tests to justify the cost
of an automated IVD imaging system.

     In December 1997, we began distributing the IRIS/Sysmex UF-100 urine cell
analyzer in the United States under an exclusive agreement with its
manufacturer, Sysmex Corporation. In September 1998, Sysmex started procedures
to end the exclusive nature of our distribution rights, claiming inadequate
performance. We denied these allegations. Sysmex claims that it has the right to
appoint additional distributors and has announced that its U.S. subsidiary and
Allegiance Healthcare will distribute the UF-100 in North America. We dispute
that Sysmex has the right to appoint additional distributors and may take legal
action. We cannot predict the impact on the Company of the announcement by
Sysmex or any legal action we may take.

     We sold Perceptive Scientific Instruments, our genetic analysis business,
on July 6, 2000 as part of a plan to refocus on our core business. We have
treated this business as a discontinued operation for accounting purposes, and
we have removed it from most of the discussion and financial information in this
Annual Report. For a further discussion of the sale of this business, please see
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Discontinued Business Operations" on page
15. We retained the Houston-based research group and changed the name to
Advanced Digital Imaging Research (ADIR). ADIR is a research and development
organization specializing in digital imaging software and algorithm development
for IRIS and government entities. We believe ADIR's existing government research
grants are sufficient to fund all of its planned operations through at least
2001. ADIR is refocusing its efforts and plans to build a commercial research
and development business.

THE INDUSTRY

     The healthcare industry has undergone profound changes in the last decade,
and healthcare providers are continually focusing on the most efficient use of
their resources. This goal drives them to reduce costs while simultaneously
improving the outcome potential of patient care. Toward that end, they must
reduce the cost and improve the accuracy of medical tests for diagnosing and
monitoring diseases and improve the reporting of test results.

<PAGE>   4
     Medical tests are performed either on the patient or on a specimen removed
from the patient. In vitro diagnostic, or IVD, testing is conducted outside of
the body in a laboratory apparatus using a specimen obtained from the patient
(blood, urine, tissue, etc.) to identify or monitor a disease. The specimen is
removed from the patient, usually in the clinical laboratory. Many IVD tests
rely on chemical or simple physical measures of specific characteristics of the
specimen. Over the last five decades, the chemical and particle-counting aspects
of these tests have been largely converted from manual methods to automated
instruments, such as clinical chemistry analyzers and blood cell counters.
However, many other IVD tests still require a manual microscopy -- the visual
examination of the specimen through a microscope. Manual microscopy requires
numerous steps, from specimen preparation to visual examination, making the
method labor-intensive, cumbersome, biohazardous, inefficient and imprecise.
More time is spent in performing manual microscopy than in any other IVD testing
procedure in the clinical laboratory. Even so, the vast majority of microscopic
procedures are still performed manually.

     The pressure to reduce the costs and improve the accuracy of IVD tests,
together with recent technological developments, have created an opportunity for
automating microscopic procedures. Advances in image processing software,
computer hardware and solid-state cameras have made it possible uniformly to
capture digital images of microscopic specimens and to perform sophisticated
image analysis and classification. The test results can then be electronically
transmitted to the central computer system of the hospital or reference
laboratory for clinical use and billing. The digital images of the specimen can
also be stored in electronic format for future review and, theoretically,
transmitted to remote locations for review by other technologists or
specialists.

THE COMPANY'S STRATEGY

     Our current objectives are to enhance our core business in urinalysis,
maintain our technological leadership, continue market penetration of our
existing products, expand the geographic markets for existing products and
increase sales of related supplies and service. We are pursuing these objectives
through the following strategies:

     -   Enhancement of Existing Product and Continued Market Penetration. Our
         business plan emphasizes accelerated development of the next
         generation, higher performance, lower-cost platform for our urinalysis
         workstations.

     -   Expanding into New Geographic Markets. We intend to continue to
         increase our overseas marketing effort initiated in 1999. Until 1999,
         we had not made significant international sales of our urinalysis
         workstations outside the United States. International markets are
         consolidating and focusing on increased productivity. We are
         introducing our urinalysis workstations in selected overseas markets
         where consolidation has already occurred and are developing
         relationships with local distributors.

     -   Increasing Sales of Supplies and Service. Once our urinalysis
         workstation is installed, we generate significant recurring revenue
         from sales of supplies and service for its operation. We are expanding
         these revenues by installing more systems and increasing our product
         offering of supplies for our workstations.

     -   Maintaining Technological Edge. We maintain an active research and
         development program to continually enhance our core technology.

AIM TECHNOLOGY

     An effective system for most automated microscopy applications requires
technology for fast, consistent and easily discernable presentation of the
specimen to the microscope ("front end processing") and for rapidly capturing,
analyzing, classifying, enhancing, arranging and displaying images of the
specimen ("back end imaging"). Over the past twenty years, we have created and
developed our patented and proprietary Automated Intelligent Microscopy, or AIM,
technology to address both of these requirements. AIM technology involves the
synthesis of visual microscopy, digital image processing and automated image
interpretation/pattern recognition to analyze microscopic specimens.

     Traditional urine sediment analysis requires manual preparation of a slide
from the specimen requiring several steps, including centrifugation followed by
carefully positioning, staining and coverslipping a sample extracted from the
specimen. The slide is then placed under the microscope and manually manipulated
and scanned by a technologist. This procedure is time-consuming, imprecise, and
potentially hazardous. In contrast, our patented slideless microscope automates
the front end processing and allows microscopic examination of a moving specimen
precisely positioned in a stream of fluid. This eliminates the need for manual
slide preparation,


                                       2
<PAGE>   5
manipulation and scanning. The slideless microscope positions the specimen to
within microns as it flows past the microscope at high-speed ensheathed in a
larger stream of fluid. This method of alignment, particle orientation, focus
and measurement is called "imaging flow cytometry." We hold a patent on this
method, and we are unaware of any other company which has developed similar
technology.

     Once the specimen is located and presented to the microscope, AIM's back
end processing automatically captures, digitizes, classifies, organizes and
presents the microscopic images displayed on a video monitor for review by the
medical specialist. These digital images of the specimen can then be stored on
magnetic or optical media for later retrieval, even years later.

PRODUCTS

     Urinalysis Systems

     Our principal product is our family of urinalysis workstations. These
systems require customers to make substantial capital investments and are
designed for sale to hospitals and clinical laboratories performing a large
number of IVD tests. Our urinalysis workstations are used nationwide, including
hospitals affiliated with over 80% of all United States medical schools. We have
two models. The Model 500 Urine Fluids Workstation can also perform IVD imaging
tests on a number of body fluids other than urine, including cerebrospinal,
peritoneal, pleural, pericardial, synovial and seminal fluids as well as
peritoneal dialyzates and lavages. The Model 939UDx, is a fully-automated,
walkaway system designed for laboratories testing medium to high numbers of
urine specimens. The 939UDx has FDA clearance to transmit final test results
directly to the laboratory information system without review by laboratory
personnel. Our urinalysis workstations have prices ranging from $100,000 to
$195,000.

     In the fourth quarter of 1997, we began marketing the IRIS/Sysmex UF-100
urine cell analyzer in the United States. The UF-100, developed in Japan by
Sysmex Corporation, utilizes flow cytometric laser scanning principles to screen
large volumes of urine specimens for the presence of abnormal sediment
compositions. We are the exclusive distributor for the UF-100 in North America
and receive royalties from Sysmex on sales of the UF-100 outside of North
America. The UF-100 currently has a list price in the United States of $125,000.
It provides only the sediment portion of a complete urinalysis.

     In September 1998, Sysmex started procedures to end the exclusive nature of
our distribution rights, claiming inadequate performance. We disputed these
allegations and began discussions with Sysmex about the pricing and marketing of
the UF-100. Those discussions did not resolve the matter. Sysmex has asserted
the right to appoint additional distributors and has announced that its U.S.
subsidiary and Allegiance Healthcare will distribute the UF-100 in North
America. We dispute that Sysmex has the right to appoint additional distributors
and may take legal action. We cannot predict the impact on the Company of the
announcement by Sysmex or any legal action we may take.

     System Supplies and Service

     We realize significant recurring revenue from sales of supplies used in the
operation of our urinalysis workstations and from their service and repair.
These supplies include the sheath fluid used to position the particles and
cleanse the system in slideless microscopy and "controls" used in calibrating
and monitoring the performance quality of the systems. We also sell the
CHEMSTRIP/IRIStrip for testing urine chemistry on some or our workstations.
CHEMSTRIP/IRIStrips urine test strips are produced for us through a distribution
agreement with Roche Diagnostics. Roche Diagnostics has exercised its right to
terminate the distribution agreement effective in 2003. They will continue to
supply CHEMSTRIP/IRIStrips for our installed base of workstations after
termination until 2009. We plan to phase out their test strips. After
termination, we will be permitted to modify our workstations to accommodate
other test strip readers.



     Small Instruments and Supplies

     We also manufacture and market a variety of small instruments and supplies
for the clinical laboratory market through our StatSpin subsidiary. These
products complement our line of urinalysis systems because they appeal to
smaller laboratories and physician offices that do not perform enough tests to
justify the capital cost of a large automated system. StatSpin's
technologically-advanced small benchtop centrifuges prepare certain biological
specimens for instrumental or microscopic examination in a fraction of the time
required by larger, common laboratory centrifuges. They have proven ideal for
on-demand, point-of-use testing in hospitals, physician's offices and veterinary
laboratories. The basic StatSpin centrifuge unit is adaptable to a variety of
uses through application-specific rotors and consumables. Noted for their
compact design and simple, quiet, and unobtrusive


                                       3
<PAGE>   6
operation, they are well-suited to laboratories in which technicians are located
close to the equipment. These products also serve integrated healthcare
providers who want to purchase systems and supplies for a variety of clinical
settings (both large and small) from one supplier. This category of products
includes special-purpose centrifuges, digital refractometers for measuring the
specific gravity of urine, the CenSlide System for manual microscopic
examination of urine and other supplies intended primarily for specimen
preparation.

     Summary of Revenues by Product Line for Each Segment

     The following tables present a summary of revenues for each segment by
product line for the three years ended December 31, 2000:

<TABLE>
<CAPTION>
                                                               Small
                                                             Laboratory
                                             Urinalysis        Devices        Total
                                             -----------     ----------     -----------
<S>                                          <C>             <C>            <C>
For the Year Ended December 31, 1998
Sales of IVD systems ......................  $ 4,985,718     $       --     $ 4,985,718
Sales of IVD system supplies and service ..   11,785,184             --      11,785,184
Sales of small instruments and supplies ...           --      4,345,304       4,345,304
Royalty and license revenues ..............      229,972        235,000         464,972
                                             -----------     ----------     -----------
Total .....................................  $17,000,874     $4,580,304     $21,581,178
                                             ===========     ==========     ===========
</TABLE>

<TABLE>
<CAPTION>
                                                               Small
                                                             Laboratory
                                             Urinalysis        Devices        Total
                                             -----------     ----------     -----------
<S>                                          <C>             <C>            <C>
For the Year Ended December 31, 1999
Sales of IVD systems ......................  $ 6,505,821            $--     $ 6,505,821
Sales of IVD system supplies and service ..   13,611,676             --      13,611,676
Sales of small instruments and supplies ...           --      5,297,385       5,297,385
Royalty and license revenues ..............      310,587             --         310,587
                                             -----------     ----------     -----------
Total .....................................  $20,428,084     $5,297,385     $25,725,469
                                             ===========     ==========     ===========
</TABLE>

<TABLE>
<CAPTION>
                                                               Small
                                                             Laboratory
                                             Urinalysis        Devices        Total
                                             -----------     ----------     -----------
<S>                                          <C>             <C>            <C>
For the Year Ended December 31, 2000
Sales of IVD systems ......................  $ 6,981,886     $       --     $ 6,981,886
Sales of IVD system supplies and service ..   14,849,392             --      14,849,392
Sales of small instruments and supplies ...           --      6,209,967       6,209,967
Royalty and license revenues ..............      601,511             --         601,511
                                             -----------     ----------     -----------
Total .....................................  $22,432,789     $6,209,967     $28,642,756
                                             ===========     ==========     ===========
</TABLE>

BACKLOG

     We had a sales backlog for our urinalysis systems of $341,000 at December
31, 1999 and $100,000 at December 31, 2000. We believe the amount of backlog at
a given date is not necessarily indicative of sales for any succeeding period.

RESEARCH AND DEVELOPMENT

     We maintain an active research and development program to continually
enhance our urinalysis systems and centrifuges. Our product technology
investments (including amounts reimbursed by third parties under research and
development contracts) totaled $3.0 million in 1998, $1.9 million in 1999 and
$3.8 million in 2000.

     During 1999, we began a major project to improve our urinalysis workstation
product line. We are devoting a significant portion of our research and
development budget to this project. Our goal is to develop a lower cost, faster
workstation while simultaneously reducing the amount of technologist time
required to operate it. During this process, we will incorporate more than 20
years of experience and the latest developments in computer technology. We also
expect to benefit from the increased availability of "off-the-shelf"
components and thereby reduce our dependence on single source suppliers. We
believe that this project is important to maintaining our competitive position
in the urinalysis market and that our failure to successfully complete this
project on schedule could have a material and adverse effect on future system
sales.


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<PAGE>   7
     We have historically received partial funding for research and development
programs through grants from NASA and the National Institutes of Health, joint
development programs with strategic partners, and Company-sponsored research and
development entities. From 1994 to 1996, we collaborated with Boehringer
Mannheim Corporation and Boehringer Mannheim GmbH, entities subsequently
acquired by Roche Diagnostics, in the development of CHEMSTRIP/IRIStrip urine
test strips and the Model 900UDx.

     The collaboration involved a series of distribution and supply agreements
under which Roche Diagnostics supplies us with CHEMSTRIP/IRIStrip urine test
strips and strip readers for most of our urinalysis workstations. Roche
Diagnostics has exercised its right to terminate these agreements effective in
2003. They will continue to supply CHEMSTRIP/IRIStrips and components for our
installed base of workstations after termination of the agreements for an
additional six years. We plan to phase out their test strips and components.
We do not believe the termination of the agreements with Roche Diagnostics will
have a material impact on the manufacture or sale of our workstations. After
termination, we will be permitted to modify our workstations to accommodate
other test strip readers.

     We sold our genetic analysis business in July 2000, but we retained the
Houston-based research group and changed the name to Advanced Digital Imaging
Research (ADIR). ADIR is a research and development organization specializing in
digital imaging software and algorithm development for IRIS and government
entities. Under a typical government grant program, the government has the right
to use any new technology royalty-free but ADIR retains the right to
commercially exploit the new technology. ADIR applies for government grants with
potential application to the imaging part of our business. We believe ADIR's
existing government research grants are sufficient to fund all of its planned
operations through at least 2001. ADIR also performs some of our internal
research and development work. ADIR is refocusing its efforts and plans to build
a commercial research and development business.

     In 1992, we entered into a project with LDA Systems, Inc. for development
of The White IRIS leukocyte differential analyzer and later acquired LDA for
approximately 498,000 shares of our common stock. In 1999, we conducted a
reassessment of our business and developed a new, near-term business plan. We
elected not to include The White IRIS in our new plan, and, as a result, we
wrote off all costs of development and inventory related to The White IRIS in
the third quarter of 1999.

     In 1995, we entered into a project with Poly/UA Systems, Inc. for
development of several new products to enhance automated urinalysis.
Subsequently, certain disputes arose with the Poly/UA shareholders. In 1999, we
acquired approximately 77% of the outstanding shares of Poly/UA stock in a
tender offer for a package of IRIS securities with an estimated value of up to
$1.5 million. We subsequently acquired additional shares of Poly U/A common
stock in two, private negotiated transactions. We now own more than 99% of the
outstanding common stock of Poly UA Systems.

MARKETING AND SALES

     In the United States, we sell and service our products through our own
sales and service forces. Sales activities consist of direct sales by field
sales representatives, telemarketing to initiate and aid in pursuing sales
opportunities, logistics support of the field sales representatives and
after-sales support to customers in the operation of their systems. In addition
to our sales activities, we promote our products through advertising in trade
journals, attendance at trade shows and direct mail. All sales of our
workstations include installation,


                                       5
<PAGE>   8
customer training and a one-year warranty. Our small instruments, targeted
primarily at smaller customers, are sold through distributors.

     We also maintain a rental program for our urinalysis workstations. Under
the terms of the rental agreements, payments generally are based on the number
of tests performed, with a guaranteed monthly minimum payment. We are
responsible for supply and service of the systems. Alternatively, some customers
lease our workstations from medical equipment leasing companies which, in turn,
purchase the systems from us.

     We market most of the supplies used in the operation of our urinalysis
workstations and maintain these systems through our own national service
organization. Service (after a one-year warranty period) is generally sold under
an annual service contract or, less frequently, on a per-call basis.

COMPETITION

     Our primary product is the IRIS urinalysis workstation. We have not had
significant sales of the Sysmex UF-100 urine cell analyzer. The principal
competitive factors in the urinalysis market are cost-per-test, ease of use, and
quality of result. We believe our workstation competes favorably with regard to
these factors in its target markets.

     A number of hospitals conduct urine sediment examinations using the Kova
system made by Hycor Biomedical, Inc., as well as several other similar
products, all of which are composed largely of disposable plastic parts. These
products provide a more standardized method of preparing urine sediment for
microscopical examination as opposed to traditional means. While these
disposable products help somewhat to overcome manipulative imprecision, most of
them do so at the added expense of an increased number of disposable parts and
offer little in time savings. One exception is the CenSlide System, which we
acquired in March 1996. This system uses a combination centrifuge tube and
microscope slide, thereby actually eliminating much of the manipulation required
in preparing the urine specimen for microscopic observation. These types of
products are better suited for laboratories performing a small number of
urinalysis tests.

     Bayer Diagnostics, Roche Diagnostics and Dade Behring Corporation sell
lines of urine test strips which are useful in determining the concentration of
various chemical substances often found in urine. Some claims have been made
that the absence of certain results determined with these test strips can
preclude the need for microscopic examinations of some specimens. In 1998, we
obtained FDA clearance to claim of improved performance of our urinalysis
workstations over reagent strip measures in detecting microscopic abnormalities
in urine. Nonetheless, a substantial portion of the urinalysis market has
subscribed to the theory that these test strips can be relied upon to reduce the
number of microscopic examinations. We believe that this is largely due to
laboratories' reacting to cost-cutting pressures. The result is significantly
slower growth in the demand for microscopic examinations at certain hospitals
and reference laboratories.

     Our urinalysis workstations currently support only automated test strip
readers supplied by Roche Diagnostics, and some potential customers who have
previously purchased automated test strip readers from Bayer Diagnostics (the
dominant company in the urine test strip business) cannot connect those readers
to our workstations. Our ability to modify our workstations to support a
connection to test strip readers from Bayer Diagnostics and Dade Behring is
presently subject to significant restrictions under our existing agreements with
Roche Diagnostics. Roche Diagnostics has exercised its right to terminate these
agreements effective in 2003. After termination, we will be permitted to modify
our workstations to accommodate other test strip readers.

     We are also experiencing increased competitive pressures in the urinalysis
market due to the ongoing consolidation of both hospitals and medical device
suppliers. Large hospital chains and groups of affiliated hospitals are
negotiating comprehensive supply contracts with the larger medical device
suppliers. The larger suppliers often equip an entire laboratory and offer
one-stop shopping for laboratory instruments, supplies and service. In addition,
they typically offer the hospitals annual rebates based on the total volume of
business with the suppliers. These rebates create financial incentives against
purchasing instruments or supplies from others and act as a barrier to the
penetration of hospital laboratories covered by the contract. For example, we
have had significant difficulty in marketing our urinalysis products to
hospitals which are members of Premier Enterprises, a nationwide buying
cooperative of hospitals and healthcare systems. Premier generally establishes a
single vendor for particular product lines and has designated Bayer Diagnostics
as its vendor for urinalysis test strips. Our family of urinalysis workstation
uses test strips manufactured for us by Roche Diagnostics and many Premier
affiliated hospitals are reluctant to purchase our workstation for this reason.


                                       6
<PAGE>   9
INTELLECTUAL PROPERTY

     Our commercial success depends on our ability to protect and maintain our
proprietary rights. We protect our proprietary technology by filing various
patent applications. We have received numerous United States patents for AIM
technology and related applications, as well as a number of corresponding
foreign patents. These patents also cover developments in image analysis and
blood processing. A number of additional patent applications are pending in the
United States and abroad. These patents also cover image analysis, urine and
blood processing. Also, numerous patents relating to digital refractometers,
centrifuges, automated slide handling and disposable urinalysis products were
acquired in various acquisitions.

     We granted Sysmex a royalty-bearing license to use pre-1989 technology for
urine sediment analyzers and non-medical industrial instruments. We also granted
Dade International a royalty-bearing license to use certain centrifuge
technology.

     We have trade secrets and unpatented technology and proprietary knowledge
about the sale, promotion, operation, development and manufacturing of our
products. We have confidentiality agreements with our employees and consultants
to protect these rights.

     We claim copyright in our software and the ways in which it assembles and
displays images, and have filed copyright registrations with the United States
Copyright Office. We also own various federally registered trademarks, including
"IRIS," "The Yellow IRIS" and "StatSpin." We own numerous other registered and
unregistered trademarks, and have certain trademark rights in foreign
jurisdictions. We intend to aggressively protect our copyrights and trademarks.

GOVERNMENT REGULATIONS

     Most of the our products are subject to stringent government regulation in
the United States and other countries. These laws and regulations govern product
testing, manufacture, labeling, storage, record-keeping, distribution, sale,
marketing, advertising and promotion. The regulatory process can be lengthy,
expensive and uncertain, and securing clearances or approvals often requires the
submission of extensive official data and other supporting information. If we
don't comply with regulatory requirements, we may be subject to fines, recall or
seizure of products, total or partial suspension of production, withdrawal of
existing product approvals or clearances, refusal to approve or clear new
applications or notices and criminal prosecution. Further, any change in
existing federal, state or foreign laws or regulations, or in their
interpretation or enforcement, or the enactment of any additional laws or
regulations, could affect us both materially and adversely.

     In the United States, the FDA regulates medical devices under the Food,
Drug, and Cosmetic Act (the "FDC Act"). Before a new medical device can be
commercially introduced in the United States, the manufacturer usually must
obtain FDA clearance by filing a pre-market notification under Section 510(k) of
the FDC Act (a "510(k) Notification") or obtain FDA approval by filing a
pre-market approval application (a "PMA Application"). The PMA Application
process is significantly more complex, expensive, time-consuming and uncertain
than the 510(k) Notification process. To date, we have cleared all of our
regulated products with the FDA through the 510(k) Notification process. Of
course, we can't guarantee that we will be able to use the 510(k) Notification
process for future products. Furthermore, FDA clearance of a 510(k) Notification
or approval of a PMA Application is subject to continual review, and the
subsequent discovery of previously unknown facts may result in restrictions on a
product's marketing or withdrawal of the product from the market.

     We are also required to register as a medical device manufacturer with the
FDA and comply with FDA regulations concerning good manufacturing practices for
medical devices ("GMP Standards"). In 1997, the FDA expanded the scope of the
GMP Standards with new regulations requiring medical device manufacturers to
maintain control procedures for the design process, component purchases and
instrument servicing. The FDA periodically inspects our manufacturing facilities
for compliance with GMP Standards. We believe that we are in substantial
compliance with the expanded GMP Standards.

     The FDA also regulates computer software of the type used in our urinalysis
workstations and is currently reevaluating the regulation of such software. We
can't predict the extent to which the FDA will regulate such software in the
future.


                                       7
<PAGE>   10
     Labeling, advertising and promotional activities for medical devices are
subject to scrutiny by the FDA and, in certain instances, by the Federal Trade
Commission. The FDA also enforces statutory and policy prohibitions against
promoting or marketing medical devices for unapproved uses.

     Many states have also enacted statutory provisions regulating medical
devices. The State of California's requirements in this area, in particular, are
extensive, and require registration with the state and compliance with
regulations similar to the GMP Standards established by the FDA. While the
impact of such laws and regulations has not been significant to date, it is
possible that future developments in this area could affect us both materially
and adversely.

     In addition to domestic regulation of medical devices, many of our products
are subject to regulations in foreign jurisdictions. The requirements for the
sale of medical devices in foreign markets vary widely from country to country,
ranging from simple product registrations to detailed submissions similar to
those required by the FDA. We have not yet applied for regulatory clearances or
approvals to market our urinalysis workstation in most of these foreign
countries. Our business strategy includes expanding the geographic distribution
of these and other products, and we cannot guarantee that we will be able to
secure the necessary clearances and approvals in the relevant foreign
jurisdictions. Furthermore, the regulations in certain foreign jurisdictions
continue to develop and we cannot be sure that new laws or regulations will not
have a material adverse effect on our existing business or future plans. Among
other things, CE Mark certifications are, or may soon be, required for the sale
of many products in certain international markets such as the European
Community. We secured CE Mark certification for our urinalysis workstations in
2000.

     Our products are also subject to regulation by the United States Department
of Commerce export controls, primarily as they relate to the associated
computers and peripherals. We have not experienced any material difficulties in
obtaining necessary export licenses to date.

SEGMENT AND GEOGRAPHIC INFORMATION

     See Note 17 to the Consolidated Financial Statements, "Segment and
Geographic Information," for financial information regarding our operating
segments and geographic areas.

EMPLOYEES

     We had 123 full-time employees at December 31, 2000 and 143 full-time
employees at the December 31, 1999. The change is primarily the result of the
sale of our genetic analysis business partially offset by the hiring of several
new employees for our other businesses. We also use outside consultants and
part-time and temporary employees in production, administration, marketing and
engineering. No employees are covered by collective bargaining agreements, and
we believe that our employee relations are satisfactory.

ITEM 2. PROPERTIES

     We lease all of our facilities. The leases expire at various times over the
next five years. Our headquarters are located at 9162 Eton Avenue, Chatsworth,
California 91311. The table below sets forth certain information regarding our
leaseholds as of December 31, 2000:

<TABLE>
<CAPTION>
                       Approximate Floor    Monthly
Location                Space (Sq. Ft.)      Rent      Use
---------              -----------------    -------    ---
<S>                    <C>                  <C>        <C>
Chatsworth, CA                29,500        $17,600    Sales and Marketing, Research and
                                                       Development, Manufacturing and
                                                       Corporate Administration
Norwood, MA                   11,000        $ 7,800    Sales and Marketing, Research and Development and
                                                       Manufacturing
League City, TX                2,000        $ 4,000    Research and Development
</TABLE>

     We believe our facilities are adequate to meet our current needs. Although
we have limited expansion space at our Chatsworth facility, we believe we can
accommodate planned growth at this facility for the near term by


                                       8
<PAGE>   11
leasing additional office space for certain non-manufacturing related
activities, making modifications to the Chatsworth facility and adding a second
shift to our manufacturing operations.

ITEM 3. LEGAL PROCEEDINGS

     We are not presently involved in any litigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     We did not submit any matters to vote of security holders during the
quarter ended December 31, 2000.

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     IRIS Common Stock is traded on the American Stock Exchange under the symbol
"IRI." The closing price of the Common Stock on March 16, 2001 was $1.95 per
share. The table below sets forth high and low closing prices reported by
American Stock Exchange for the period January 1, 1999 through December 31,
2000:

<TABLE>
<CAPTION>
                                                           Price per share
                                                        ---------------------
                                                          High          Low
                                                        --------      -------
<S>                                                     <C>           <C>
      FISCAL 1999
         First Quarter................................  $  1-1/8      $ 11/16
         Second Quarter...............................     1-1/2         9/16
         Third Quarter................................     1-1/4        15/16
         Fourth Quarter...............................    1-3/16         9/16
      FISCAL 2000
         First Quarter................................  $3-11/16      $ 11/16
         Second Quarter...............................    2-7/16        1-1/8
         Third Quarter................................   2-11/16       1-9/16
         Fourth Quarter...............................         2       1-1/16
</TABLE>

     As of March 16, 2001, we had approximately 3,900 holders of record of our
common stock.

     We intend to use all available funds in business development and debt
repayment. As a result, we do not expect to pay any cash dividends for the
foreseeable future. Furthermore, we may not pay any cash dividends on the common
stock, or repurchase any shares of the common stock, without the written consent
of our lender, Foothill Capital Corporation, and the holders of a majority of
the outstanding shares of Series B Preferred Stock.

     In March 2001, we issued a 3-year warrant to purchase 853,040 shares of
common stock at $1.90 per share in connection with the refinancing of a $7.0
million subordinated note. The warrant replaced an expiring warrant for the same
number of shares. We believe the subordinated note holder is an "accredited
investor" under Regulation D and acquired the securities for its own account and
not with a view to resale or distribution violation of the Securities Act of
1933. We did not engage in general solicitation or advertising in this
transaction, and the securities issued in the transaction have restrictive
legends concerning the registration requirements of the Securities Act of 1933.
We believe this transaction was exempt from the registration requirements of the
Securities Act of 1933 based on Section 4(2) of the Securities Act of 1933.

ITEM 6. SELECTED FINANCIAL DATA

     This information as of December 31, 1999 and 2000 and for the years ended
December 31, 1998, 1999 and 2000, is derived in part from, and should be read in
conjunction with, the Company's Financial Statements, including the Notes
thereto, included elsewhere in this Annual Report.


                                       9
<PAGE>   12
<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                  -------------------------------------------------------------
                                                   1996(1)       1997(1)       1998(1)       1999(1)    2000
                                                  --------      --------      --------      --------   --------
                                                                (in thousands, except per share data)
<S>                                               <C>           <C>           <C>           <C>        <C>
FINANCIAL STATEMENT DATA
Net revenue ....................................  $ 18,130      $ 20,724      $ 21,581      $ 25,725   $ 28,643
Operating income (loss) from continuing
  operations ...................................    (2,419)        1,007         2,202           390      5,152
Interest and other income (expense), net .......      (437)       (1,099)       (1,115)         (947)      (763)
Income (loss) from continuing operations .......    (2,441)          (58)          667        (1,088)     2,794
Income (loss) from continuing operations
  per share -- basic ...........................      (.40)         (.01)          .11          (.15)       .29
Income (loss) from continuing operations
  per share -- diluted .........................      (.40)         (.01)          .09          (.15)       .27
Working capital ................................     1,914         1,650         3,570         5,092      8,472
Total assets ...................................    37,860        32,735        32,107        26,661     28,288
Long term debt, including current portion ......    13,000        10,942        10,442         8,700      7,500
Total liabilities ..............................    24,096        17,942        17,108        16,439     14,668
Shareholders' equity ...........................    13,765        14,792        14,999        10,222     13,619
Other Financial Data
Operating income (loss) from continuing
  operations as adjusted(2) ....................      (560)        2,346         2,395         4,549      5,152
</TABLE>

-------------

(1)  The year ended December 31, 1996 also includes unusual charges totaling
     $1.9 million relating primarily to pooling-of-interest expenses, the
     write-off of deferred public offering costs, expenses relating to
     litigation and arbitration matters, severance and other incremental costs
     associated with a restructuring of the Company's personnel. The year ended
     December 31, 1997 includes unusual charges totaling $1.3 million relating
     to expenses for litigation and assets related to the White IRIS leukocyte
     differential analyzer program, the write-down of deferred private offering
     costs and the write-off of goodwill no longer considered recoverable. The
     year ended December 31, 1998 includes unusual charges totaling $193,000
     primarily for legal expenses associated with an arbitration matter. Unusual
     charges in the year ended December 31, 1999 totaled $4.2 million and
     primarily relate to a litigation settlement, write off of assets related to
     the White IRIS leukocyte differential analyzer program and a retirement
     agreement.

(2)  Operating income (loss) from continuing operations as adjusted represents
     operating income (loss) from continuing operations before unusual charges
     of $1.9 million, $1.3 million, $193,000 and $4.2 million in the years ended
     December 31, 1996, 1997, 1998 and 1999, respectively.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

INTRODUCTION

         We sold Perceptive Scientific Instruments, our genetic analysis
business, on July 6, 2000 as part of a plan to refocus on our core business. We
have treated this business as a discontinued operation for accounting purposes,
and we have removed it from most of the discussion and financial information in
this Annual Report. For a further discussion of the sale of this business,
please see the discussion below in this section entitled "Discontinued Business
Operations" on page 15 of this Annual Report.

OVERVIEW

         We generate revenues primarily from sales of our urinalysis
workstation, an in vitro diagnostic, or IVD, imaging system based on our
patented and proprietary AIM technology, and the related supplies and service
required to operate this workstation. We also earn revenues from sales of
ancillary lines of small laboratory instruments and supplies. Until 1996, we
marketed just two models of our urinalysis workstation. These models differ
mainly in speed and price. In 1996, we introduced a third model, the Model
900UDx urine pathology system, for the high-volume testing requirements of large
hospitals and reference laboratories. We replaced that model with an improved
version in August 2000 by launching the Model 939UDx which added automated
analyte


                                       10
<PAGE>   13
pattern recognition. The new model can transmit test results directly to the
laboratory information system without operator review or intervention.

     In December 1997, we began distributing the IRIS/Sysmex UF-100 urine cell
analyzer in the United States under an exclusive agreement with its
manufacturer, Sysmex Corporation. We did not have significant sales of the
UF-100 in 1998, 1999 or 2000. In September 1998, Sysmex started procedures to
end the exclusive nature of our distribution rights, claiming inadequate sales
performance. We denied these allegations. Sysmex claims that it has the right to
appoint additional distributors and has announced that its U.S. subsidiary and
Allegiance Healthcare will distribute the UF-100 in North America. We dispute
that Sysmex has the right to appoint additional distributors and may take legal
action. We cannot predict the impact on the Company of the announcement by
Sysmex or any legal action we may take.

     Because of the nature of our business, we make significant investments in
research and development for new products and enhancements to existing products.
In the past, we have partially funded our research and development programs
through grants from the National Institutes of Health, joint development
programs with strategic partners and Company-sponsored research and development
entities. We anticipate that future expenditures on research and development
will increase in 2001 and will be funded primarily out of the Company's
earnings.

     The following table summarizes total product technology expenditures for
the periods indicated:

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                                                 --------------------------
                                                                  1998      1999      2000
                                                                 ------    ------    ------
                                                                       (in thousands)
<S>                                                              <C>       <C>       <C>
Research and development expense, net .......................     1,879    $1,124    $2,526
Capitalized software development costs ......................       179       248       279
Reimbursed costs for research and development grants
  and contracts .............................................       921       535       972
                                                                 ------    ------    ------
        Total product technology expenditures ...............    $2,979    $1,907    $3,777
                                                                 ======    ======    ======
</TABLE>

     In 1995, we entered into a project with Poly/UA Systems, Inc. for
development of several new products to enhance automated urinalysis.
Subsequently, certain disputes arose with the Poly/UA shareholders. In 1999, we
acquired approximately 77% of the outstanding shares of Poly/UA stock in a
tender offer for a package of IRIS securities with an estimated value of up to
$1.5 million. We subsequently acquired additional shares of Poly U/A common
stock in two, private negotiated transactions. We now own more than 99% of the
outstanding common stock of Poly UA Systems.

RESULTS OF OPERATIONS

     COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999

     Net revenues for the year ended December 31, 2000 increased to $28.6
million from $25.7 million, an increase of $2.9 million, or 11% over last year.
Sales of IVD imaging systems increased to $7.0 million from $6.5 million, an
increase of $476,000, or 7% from the last year. The increase is due primarily to
higher sales to domestic hospitals, partially offset by decreased sales to
international distributors. Sales of IVD imaging system supplies and services
increased to $14.8 million from $13.6 million, an increase of $1.2 million or 9%
over last year, primarily due to the larger installed base of urinalysis
workstations. Sales of small instruments and supplies increased to $6.2 million
from $5.3 million, an increase of $913,000, or 17%. The increase is due
primarily to increased sales of small instruments. Royalties and licensing
revenues increased to $602,000 from $311,000 in the prior year. The increase was
due to a $300,000 license fee in connection with expanded licensing of several
existing patents.

     Revenues from the urinalysis segment totaled $22.4 million in the current
period as compared to $20.4 million last year, an increase of $2.0 million or
10%. This growth is due to increased sales of our urinalysis workstations and
increased sales of related system supplies and services to the growing installed
base. Revenues from the


                                       11
<PAGE>   14
small laboratory devices segment increased to $6.2 million in the current
period, as compared to $5.3 million last year, an increase of $913,000. This
growth is due primarily to increased sales of small instruments.

     Cost of goods for IVD systems as a percentage of sales of IVD imaging
systems totaled 62% in the current period as compared to 66% last year. The
decrease is primarily attributable to a relatively lower proportion of low
margin international sales in the current year. Cost of goods for IVD imaging
system supplies and services as a percentage of sales of such products decreased
to 37% for the current period as compared to 44% for the same period last year.
This decrease is due primarily to efficiencies derived from higher volumes and
improved manufacturing processes. Cost of goods for small instruments and
supplies as a percentage of sales of small instruments and supplies totaled 52%
for the current year and is comparable to last year. The aggregate gross margin
totaled 54% for the year ended December 31, 2000 as compared to 49% in the prior
year.

     Cost of goods sold as a percentage of revenues from the urinalysis segment
totaled 44%, as compared to 50% last year. This decrease is primarily due to
improvements in the manufacturing process, as well as changes in the
international/domestic sales mix and the impact on revenues of the license fee.
Cost of goods for small laboratory devices as a percentage of revenues totaled
52% in the current period, which is comparable with the prior year.

     Marketing and selling expenses totaled $3.6 million, compared to $3.3
million last year, an increase of $255,000, or 8%, due primarily to increased
promotional activities associated with our urinalysis workstation. Marketing and
selling expenses as a percentage of net revenues declined to 12% in 2000 as
compared to 13% in 1999.

     General and administrative expenses increased to $4.2 million from $3.5
million, an increase of $764,000 or 22% from last year. This increase is
primarily due to accrued management bonuses based on improved profitability.
General and administrative expenses for the period as a percentage of net
revenue was 15% as compared to 13% in the prior year.

     Net research and development expenses increased to $2.5 million for the
year ended December 31, 2000, as compared to $1.1 million in 1999, an increase
of $1.4 million or 125%. Net research and development expenses as a percentage
of revenues increased to 9% in 2000 from 4% in the prior year. Total product
technology expenditures, including capitalized software development costs and
reimbursed costs under research and development grants and contracts, increased
to $3.8 million from $1.9 million, an increase of $1.9 million or 100% as
compared to the prior year. The increase in total product technology
expenditures is due to increased spending under a major project begun in 1999 to
improve our urinalysis workstation product line. We expect our net research and
development expenses will increase in 2001 primarily due to work on the
urinalysis workstation project . We believe that this project is important to
maintaining our competitive position in the urinalysis market and that our
failure to successfully complete this project on schedule could have a material
and adverse effect on future system sales.

     Amortization of intangible assets reflects the amortization of acquired
intangible assets and patents. Amortization of intangible assets for the year
decreased to $143,000 from $231,000, a decrease of $88,000 or 38% from the prior
year. The decline is the result of the write-off in the third quarter of 1999 of
the White IRIS and deferred warrant costs.

     The results of operations for the year ended December 31, 2000 do not
include any unusual expenses as compared to $4.2 million in the prior year. The
prior year's expenses related primarily to the settlement with Poly UA ($1.7
million), legal expenses for an arbitration with the former owner of our genetic
analysis business ($392,000), the write-off of the White IRIS ($797,000) and
related deferred warrant costs ($807,000).

     Operating income for the year ended December 31, 2000 increased to $5.2
million as compared to an operating income of $390,000 in the prior year.
Excluding unusual charges and write-offs, operating income totaled $5.2 million
for 2000 as compared to $4.5 million in 1999.

     Interest expense increased to $979,000 in 2000 from $966,000 in the prior
year due to increased interest rates on the credit facility, partially offset by
reduced indebtedness.


                                       12
<PAGE>   15
     For the year ended December 31, 2000, urinalysis segment profits increased
to $5.8 million from $3.7 million in the prior year. This increase is
attributable to higher revenues and lower operating expenses described above, as
well as the fact that the 1999 segment profit figure included the effect of $1.7
million of write-offs which did not recur in 2000. Segment profits for the small
laboratory devices segment totaled $1.6 million, as compared to $1.4 million in
the prior year. The increase results from increased product sales in that
segment. Unallocated corporate expenses totaled $3.0 million in the current
period as compared to $5.6 million last year. The decrease is due primarily to
the fact that 1999's figures included charges related to the arbitration with
the former owner of our genetic analysis business, the settlement with Poly UA
and expenses associated with the Office of the Chief Executive and Board of
Directors which did not recur in 2000.

     The income tax provision for the year ended December 31, 2000 totaled $1.6
million, as compared to $531,000 in 1999. The increase reflects the increased
taxable income experienced by the Company in 2000.

     Income from continuing operations increased to $2.8 million, or $0.27 per
diluted share, for the year ended December 31, 2000 as compared to a loss from
continuing operations of $1.1 million, or $0.15 per diluted share, for the prior
year.

     COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998

     Net revenues for the year ended December 31, 1999 increased to $25.7
million from $21.6 million, an increase of $4.1 million, or 19%, over the prior
year. Sales of IVD imaging systems increased to $6.5 million from $5.0 million,
an increase of $1.5 million, or 30% from the prior year. The increase is due
primarily to higher sales to both domestic hospitals and international
distributors. Sales of IVD imaging system supplies and services increased to
$13.6 million from $11.8 million, an increase of $1.8 million or 15% over prior
year, primarily due to the larger installed base of urinalysis workstations.
Sales of small instruments and supplies increased to $5.3 million from $4.3
million, an increase of $952,000, or 22%.

     Revenues from the urinalysis segment totaled $20.4 million in 1999 as
compared to $17.0 million in 1998, an increase of $3.4 million or 20%. This
growth is due to increased sales of urinalysis workstations and increased sales
of related system supplies and services to the growing installed base. Revenues
from small laboratory devices increased to $5.3 million in 1999, as compared to
$4.6 million in 1998, an increase of $717,000. If the non-recurring royalty fee
earned in 1998 is excluded, small laboratory device sales increased $952,000.
This growth is primarily due to increased sales of instruments and consumables
to a larger installed base and one of its distributors.

     Cost of goods for IVD systems as a percentage of sales of IVD imaging
systems totaled 66% in 1999 and is comparable to 1998. An increase in the
proportion of lower margin sales of urinalysis workstations through
international distributors and high costs associated with the write-off of The
White IRIS inventory were offset by lower costs associated with domestic sales.
Cost of goods for IVD imaging system supplies and services as a percentage of
sales of such products decreased to 44% for 1999 as compared to 46% for 1998.
This decrease is due to increased revenues while related expenses decreased.
Cost of goods for small instruments and supplies as a percentage of sales of
small instruments and supplies totaled 52% for 1999 compared to 55% for 1998 due
to a change in the sales mix and increased volume. The aggregate gross margin
totaled 49% for the year ended December 31, 1999, and is comparable to 1998.

     Cost of goods sold as a percentage of revenues from the urinalysis segment
totaled 50% in 1999, as compared to 68% in the prior year. This decrease results
from increased urinalysis supplies and services revenues along with lower
associated expenses, partially offset by lower margins on system sales and the
write-off of The White IRIS inventory. Cost of goods for small instrument
devices as a percentage of revenues totaled 52% in 1999 and is comparable to
prior year. If the nonrecurring royalty fee is excluded, cost of goods sold for
this segment declined 3% in 1999.

     Marketing and selling expenses totaled $3.3 million in 1999, compared to
$3.2 million in 1998, an increase of $72,000, or 2%, due to increased
promotional activities associated with our urinalysis workstation. Marketing and
selling expenses as a percentage of net revenues declined to 13% in 1999 as
compared to 15% the prior year.


                                       13
<PAGE>   16
     General and administrative expenses increased to $3.5 million from $2.7
million, an increase of $744,000 or 27% from the prior year. This increase is
primarily due to higher liability insurance, management incentives and increased
expenses associated with the Office of the Chief Executive and the Board of
Directors. General and administrative expenses as a percentage of net revenues
totaled 13% for 1999, and is comparable to 1998.

     Net research and development expenses decreased to $1.1 million for the
year ended December 31, 1999, as compared to $1.9 million in 1998. Net research
and development expenses decreased as a percentage of revenues from 9% to 4%.
Reimbursements under joint development programs decreased by $386,000 from the
prior year. Total product technology expenditures, including capitalized
software development costs and reimbursed costs under research and development
grants and contracts, decreased to $1.9 million from $3.0 million, a decrease of
$1.1 million or 36% as compared to the prior year. The decline in total product
technology expenditures is due to decreased spending on urinalysis workstations.

     Amortization of intangible assets reflects the amortization of deferred
expenses for warrants issued in connection with a joint development project,
intangible assets arising from an acquisition and patents. Amortization of
intangible assets for the year ended December 31, 1999 decreased to $231,000
from $278,000, a decrease of $47,000, or 17%, from the prior year. The decline
is the result of the write-off in the third quarter of 1999 of the deferred
warrant costs for technology rights.

     The results of operations for the year ended December 31, 1999 include
other unusual expenses of $4.2 million as compared to $193,000 in the prior
year. The increase primarily relates to the write-off of deferred warrant costs
($807,000), write-off of the deferred software development costs associated with
The White IRIS ($797,000), a settlement with Poly U/A Systems ($1.7 million),
legal and other expenses relating to a completed arbitration proceeding
($392,000) net of recovery of $132,000 and expenses in connection with a
retirement agreement ($444,000). The prior year's expenses related to the
arbitration proceeding.

     Operating income for the year ended December 31, 1999 was $390,000 as
compared to operating income of $2.2 million in the prior year. Excluding the
litigation settlement and other unusual charges and the write-off of The White
IRIS, operating income totaled $4.5 million for 1999 as compared to $2.4 million
for 1998.

     Interest expense decreased to $966,000 in 1999 from $1.2 million in 1998
due to reduced indebtedness, partially offset by the effect of increased
interest rates on the credit facility.

     For the year ended December 31, 1999, urinalysis segment profits increased
to $3.7 million as compared to $2.9 million in the prior year. Excluding the
write-off of The White IRIS inventory and software development costs ($926,000)
and the deferred warrant costs ($807,000), the urinalysis segment profits would
have totaled $5.4 million. This increase is attributable to higher revenues
described above and lower operating expenses. Segment profits from the small
laboratory devices segment totaled $1.4 million in 1999, as compared to $1.1
million in the prior year. If the nonrecurring license fee earned in 1998 were
excluded, this segment's profit totaled $844,000 in 1998 as compared to $1.4
million in 1999. The increase results from increased product sales and gross
profits. Unallocated corporate expenses totaled $5.6 million in 1999 as compared
to $2.9 million in 1998. The increase is due primarily to a completed
arbitration proceeding, the settlement with Poly U/A Systems and expenses
associated with the Office of the Chief Executive and Board of Directors and a
retirement agreement.

     The income tax provision for the year ended December 31, 1999 totaled
$531,000, as compared to a provision of $420,000 for 1998. The provision for
1999 includes $649,000 relating to an increase in the deferred tax valuation
allowance as a result of management's assessment of operating results, net
operating losses expected to expire in the near term and other factors.

     Loss from continuing operations totaled $1,088,000, or $0.15 per diluted
share, for the year ended December 31, 1999, as compared to income from
continuing operations of $667,000, or $0.09 per diluted share, for the prior
year.

LIQUIDITY AND CAPITAL RESOURCES

     Cash and cash equivalents increased to $3.7 million at December 31, 2000
from $2.0 million at December 31,


                                       14
<PAGE>   17
1999. The increase is due to the cash provided by operations in excess of
amounts used by investing and financing activities. Cash provided by operations
for the year ended December 31, 2000 decreased slightly to $3.5 million from
$3.8 million for the comparable period last year.

     Cash used by investing activities totaled $938,000 for the year ended
December 31, 2000, as compared to $681,000 in the prior year. The increase is
primarily due to the increase in expenditures for property and equipment as part
of the Company's efforts to upgrade its facilities.

     We have a credit facility with Foothill Capital Corporation, a Wells Fargo
company, that consists of a $3.6 million term loan and a $4.0 million revolving
line of credit. Borrowings under the revolving line of credit are limited to a
percentage of eligible accounts receivable. The term loan bears interest at the
lender's prime rate (9.5% on December 31, 2000) plus 3.0%, and is payable in 36
equal monthly installments. The revolving line of credit bears interest at the
lender's prime rate plus 1.0%. The credit facility is subject to minimum
interest charges, prepayment penalties and customary fees, is collateralized by
a first priority lien on all the assets of the Company. The credit facility was
scheduled to terminate in May 2001, but has been renewed as discussed below. It
also contains financial covenants based primarily on tangible net worth and cash
flow and imposes restrictions on acquisitions, capital expenditures and cash
dividends. We were not in compliance with one of these financial covenants at
year end, and the credit facility has been amended to waive the non-compliance
and modify the financial covenants for future periods.

     We began a major project in 1999 to improve our urinalysis workstation
product line. As a result, we expect significant increases in our research and
development expenditures in 2001. We plan to fund this project with cash from
operations.

     Net cash used by financing activities totaled $970,000 and consisted
primarily of principal payments made on the term loan described above, partially
offset by funds received from the exercise of stock options. As of December 31,
2000, we owed $500,000 on the term loan and $649,000 on the revolving line of
credit and were eligible to borrow an additional $1.5 million under the
revolving credit line. The current balance of the term loan will be paid off by
May 2001, but (as discussed below) we are borrowing an additional $3.0 million
under the term loan portion of the credit facility to refinance a subordinated
note.

     In March 2001, we refinanced a $7.0 million subordinated note due July 31,
2001. We refinanced the subordinated note with the combination of (1) a new $3.0
million term loan from Foothill Capital, (2) a new $3.5 million subordinated
note issued to the existing note holder and (3) $500,000 from our cash reserves.
The new term loan and new subordinated note will both amortize over three years.
In connection with the refinancing, we issued a new 3-year warrant to the note
holder to purchase 853,040 shares of common stock at $1.90 per share, the
closing price of the common stock on the date of the refinancing. The new
warrant replaces an old warrant expiring July 2001 for the same number of
shares.

     We reduced our outstanding debt by $1.2 million in 2000 and, after
considering the effect of the refinancing discussed above, we have scheduled
principal payments totaling $2.0 million during the next twelve months. These
payments include the effects of the funding of the new term loan in May and the
subsequent payment of those funds against the old subordinated note under the
terms of the refinancing. We believe that our current cash on hand, together
with cash generated from operations and cash available under the credit
facility, will be sufficient to fund normal operations and pay principal and
interest on outstanding debt obligations for at least a year.

DISCONTINUED BUSINESS OPERATIONS

     We sold Perceptive Scientific Instruments, our genetic analysis business,
in July 2000. Its principal product was the PowerGene family of genetic
analyzers -- IVD imaging systems for karyotyping, DNA probe analysis and
comparative genomic hybridization. We sold the assets of the U.S. operations to
Applied Imaging Corporation (Nasdaq: AICX) for 385,371 shares of Applied Imaging
common stock, the assumption of certain liabilities and contingent cash payments
tied to the future performance of Applied Imaging's business. We retained the
Houston-based research group, including its federally funded research grants,
and changed the name of the group to Advanced Digital Imaging Research. We were
unable to sell the international operations and placed Perceptive Scientific
International Limited (a wholly-owned subsidiary of Perceptive Scientific
Instruments) into a voluntary liquidation under United Kingdom law. We have
classified Perceptive Scientific Instruments as a


                                       15
<PAGE>   18
discontinued operation for accounting purposes and have removed it from most of
the discussion and financial information in this Annual Report and our other
reports filed with the Securities and Exchange Commission after July 2000.

SHAREHOLDER RIGHTS PLAN

     We have a shareholders rights plan. The rights are not presently
exercisable. They become exercisable only if a person or group acquires 20% or
more of our common stock, or announces a tender offer for 20% or more of our
common stock, without board approval. If the rights are triggered, all common
stockholders (except the hostile party) will be entitled to purchase shares of
common stock (or the economic equivalent in preferred stock) at a price based on
a substantial discount from the market price of the common stock. The Board of
Directors may terminate the plan at any time or redeem the rights prior to their
becoming exercisable. The rights expire on December 22, 2009.

MARKET RISK

     Our business is exposed to various market risks, including changes in
interest rates and foreign currency exchange rates. Market risk is the potential
loss arising from adverse changes in market rates and prices, such as interest
rates and foreign currency exchange rates. We do not enter into derivatives or
other financial instruments for trading or speculative purposes.

     Interest Rates

     We rely significantly on long- and short-term fixed and variable rate debt
in our capital structure. We do not use interest rate swaps to manage any of our
floating-rate debt obligations. As of December 31, 2000, our debt obligations
consisted of (1) $7.0 million outstanding under an 8.5% fixed rate subordinated
note, (2) $500,000 outstanding under a variable rate term loan and (3) $649,000
outstanding under a variable rate revolving line of credit. The variable rate
obligations are based upon the lender's prime rate. See "-- Liquidity and
Capital Resources." Assuming an increase of one-half of a percentage point in
the lender's prime rate on January 1, 2001 and no principal payments for the
remainder of the year, our total interest expense would increase by less than
$100,000 for 2001 as compared to 2000.

     Foreign Currencies

     We are subject to some currency risk on a portion of our licensing
revenues. This portion is calculated quarterly based on sales results in
Japanese Yen and subsequently converted into United States dollars at the then
current exchange rate.

INFLATION

     We do not foresee any material impact on our operations from inflation.


                                       16
<PAGE>   19
HEALTHCARE REFORM POLICIES

     In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the healthcare system, nationally, at the state level or
both. Future legislation, regulation or payment policies of Medicare, Medicaid,
private health insurance plans, health maintenance organizations and other
third-party payors could adversely affect the demand for our current or future
products and our ability to sell our products on a profitable basis. Moreover,
healthcare legislation is an area of extensive and dynamic change, and we cannot
predict future legislative changes in the healthcare field or their impact on
our business.

FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 10-K contains forward-looking statements which
reflect our current views about future events and financial results. We have
made these statements in reliance on the safe harbor created by that Private
Securities Litigation Reform Act of 1995. Forward-looking statements include our
views on future financial results, financing sources, product development,
capital requirements, market growth and the like, and are generally identified
by phrases such as "anticipates," "believes," "estimates," "expects," "intends,"
"plans" and similar words. Forward-looking statements are merely predictions and
therefore inherently subject to uncertainties and other factors which could
cause the actual results to differ materially from the forward-looking
statement. These uncertainties and other factors include, among other things,

     -    unexpected technical and marketing difficulties inherent in major
          product development efforts such as the new platform for our
          urinalysis workstation,

     -    the potential need for changes in our long-term strategy in response
          to future developments,

     -    future advances in diagnostic testing methods and procedures, as well
          as potential changes in government regulations and healthcare
          policies, both of which could adversely affect the economics of the
          diagnostic testing procedures automated by our products,

     -    rapid technological change in the microelectronics and software
          industries, and

     -    increasing competition from imaging and non-imaging based in-vitro
          diagnostic products.

     We have attempted to identify additional significant uncertainties and
other factors affecting forward-looking statements in Exhibit 99 to this Annual
Report. Stockholders should understand that the uncertainties and other factors
identified in this Annual Report and in Exhibit 99 are not a comprehensive list
of all the uncertainties and other factors which may affect forward-looking
statements. We do not undertake any obligation to update or revise any
forward-looking statements or the list of uncertainties and other factors which
could affect those statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Market Risk."

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements are listed in the Index to Financial Statements in
Part IV, Item 14(a)1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Incorporated by reference from "Directors and Executive Officers" in the
Proxy Statement to be filed with the Securities and Exchange Commission for the
2001 Annual Meeting of IRIS Stockholders.


                                       17
<PAGE>   20
ITEM 11. EXECUTIVE COMPENSATION

     Incorporated by reference from "Executive Compensation" in the Proxy
Statement to be filed with the Securities and Exchange Commission for the 2001
Annual Meeting of IRIS Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Incorporated by reference from "Security Ownership of Certain Beneficial
Owners and Management" in the Proxy Statement to be filed with the Securities
and Exchange Commission for the 2001 Annual Meeting of IRIS Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Incorporated by reference from "Certain Relationships and Related
Transactions" in the Proxy Statement to be filed with the Securities and
Exchange Commission for the 2001 Annual Meeting of IRIS Stockholders.

                                        PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this report:

<TABLE>
<CAPTION>
                                                                                      Page
                                                                                      ----
<S>    <C>    <C>                                                                    <C>
       1.     Index To Financial Statements

              Report of Independent Accountants ..................................     F-1
              Consolidated Balance Sheets at December 31, 2000 and 1999 ..........     F-2
              Consolidated Statements of Operations for the Years
                  Ended December 31, 2000, 1999 and 1998 .........................     F-3
              Consolidated Statements of Shareholders' Equity for the
                  Years Ended December 31, 2000, 1999 and 1998 ...................     F-5
              Consolidated Statements of Cash Flows for the Years
                  Ended December 31, 2000, 1999 and 1998 .........................     F-8
              Consolidated Statements of Comprehensive Income for the
                  Years Ended December 31, 2000, 1999 and 1998 ...................     F-9
              Notes to Consolidated Financial Statements .........................    F-10

       2.     Financial Statement Schedules Covered by the Foregoing Report of
              Independent Accountants

              Schedule II -- Valuation and Qualifying Accounts ...................    F-28
</TABLE>

     Other financial statement schedules have been omitted since they are not
required, are not applicable, or the required information is shown in the
Financial Statements or Related Notes.

       3.     Exhibits

<TABLE>
<CAPTION>
Exhibit                                                                                              Reference
Number          Description                                                                           Document
------          -----------                                                                          ---------
<S>             <C>                                                                                  <C>
 3.1(a)         Certificate of Incorporation, as amended                                                 (1)
 3.1(b)         Certificate of Designations of Series A Convertible Preferred Stock                      (2)
 3.1(c)         Certificate of Designations of Series B Callable Preferred Stock                         (3)
 3.1(d)         Certificate of Designations, Preferences and Rights of Series C Preferred Stock          (4)
 3.2            Restated Bylaws                                                                          (5)
 4.1            Specimen of Common Stock Certificate                                                     (6)
</TABLE>


                                       18
<PAGE>   21

<TABLE>
<S>             <C>                                                                                  <C>
 4.2            Certificate of Designations of Series A Convertible Preferred Stock                      (2)
 4.3            Certificate of Designations of Series B Callable Preferred Stock                         (3)
 4.4            Certificate of Designations, Preferences and Rights of Series C Preferred Stock          (4)
10.1            Lease of the Company's headquarters facility, as amended                                 (7)
10.2(d)         1994 Stock Option Plan and forms of Stock Option Agreements                              (8)
10.2(e)         Certificate of Officer With Respect to Amendment of 1994 Stock Option Plan               (9)
10.2(f)         Employee Stock Purchase Plan                                                             (20)
10.2(g)         1997 Stock Option Plan and form of Stock Option Agreement                                (10)
10.2(h)         1998 Stock Option Plan and form of Stock Option Agreement                                (11)
10.3(a)         Various Agreements with Sysmex Corporation,   formerly TOA Medical Electronics           (12)
                Company, Ltd.
10.3(b)         Patent License Agreement dated April 1, 1997 between the Company and Sysmex              (13)
                Corporation, formerly TOA Medical Electronics Company, Ltd.
10.3(c)         Amendment No. 1 to Patent License Agreement dated February 29, 2000                      (20)
10.3(d)         Termination, Release and Reassignment of Security Interest dated October 30,             (13)
                1997 executed by Sysmex Corporation, formerly TOA Medical Electronics Company,
                Ltd. in favor of the Company
10.4(a)         Agreement for a Strategic Alliance in Urinalysis dated January 7, 1994 between           (14)
                the Company and Boehringer Mannheim Corporation
10.4(b)         Amendment to Distribution Agreements                                                     (15)
10.5(a)         Technology License Agreement dated as of September 29, 1995 between the Company          (16)
                and Poly U/A Systems, Inc.
10.5(b)         Research and Development Agreement dated as of September 29, 1995 between the            (16)
                Company and Poly U/A Systems, Inc.
10.5(c)         $100 Class "A" Note dated September 29, 1995 issued by Poly U/A Systems, Inc. in         (16)
                favor of the Company
10.5(d)         Form of Series D Warrant                                                                 (13)
10.5(g)         Form of Series E Warrant                                                                 (13)
10.6(a)         Registration Rights and Standstill Agreement dated July 31, 1996 between the             (9)
                Company and Digital Imaging Technologies, Inc.
10.6(b)         Restated Warrant Certificates dated July 31, 1996 issued to Digital Imaging              (20)
                Technologies, Inc. to purchase 875,000 shares of Common Stock of the Company
10.6(c)         Technology License Agreement dated July 31, 1996 between Perceptive Scientific           (9)
                Imaging Systems, Inc. and PSII Acquisition Corp., a wholly-owned subsidiary of
                the Company (now known as Perceptive Scientific Instruments, Inc.)
10.6(d)         Warrant Certificate dated March 14, 2001 issued to Digital Imaging Technologies,          --
                Inc. to purchase 853,040 shares of Common Stock of the Company
10.7            $7,000,000 Subordinated Note dated July 29, 1996 issued by the Company in favor          (9)
                of Digital Imaging Technologies, Inc.
10.7(a)         $7,000,000 Subordinated Note dated March 14, 2001 issued by the Company in favor          --
                of Digital Imaging Technologies, Inc.
10.8(a)         Loan and Security Agreement dated as of May 5, 1998 among the Company,                   (17)
                Perceptive Scientific Instruments, Inc., and StatSpin, Inc., on the one hand,
                and Foothill Capital Corporation, on the other hand.
10.8(b)         Intellectual Property Security Agreement dated as of May 5, 1998 between the             (17)
                Company and Foothill Capital Corporation
10.8(c)         Copyright Security Agreement dated as of May 5, 1998 between the Company and             (17)
                Foothill Capital Corporation
10.8(d)         Intellectual Property Security Agreement dated as of May 5, 1998 between                 (17)
                Perceptive Scientific Instruments, Inc. and Foothill Capital Corporation
10.8(e)         Copyright Security Agreement dated as of May 5, 1998 between
</TABLE>



                                       19
<PAGE>   22

<TABLE>
<S>             <C>                                                                                  <C>
10.8(f)         Perceptive Scientific Instruments, Inc. and Foothill Capital Corporation                 (17)
                Security Agreement -- Stock Pledge dated as of May 5, 1998 between Perceptive            (17)
                Scientific Instruments, Inc. and Foothill Capital Corporation
10.8(g)         Intellectual Property Security Agreement dated as of May 5, 1998 between                 (17)
                StatSpin, Inc. and Foothill Capital Corporation
10.8(h)         Amendment Number One to Loan and Security Agreement dated as of March 23, 1999           (18)
                among the Company, Perceptive Scientific Instruments, LLC, and StatSpin, Inc.,
                on the one hand, and Foothill Capital Corporation, on the other hand
10.8(i)         Amendment Number One to Security Agreement -- Stock Pledge dated as of March 23,         (18)
                1999 among the Company and Perceptive Scientific Instruments, LLC, on the one
                hand, and Foothill Capital Corporation, on the other hand
10.8(j)         Amendment to Copyright Security Agreement dated as of March 23, 1999 among the           (18)
                Company and Perceptive Scientific Instruments, LLC, on the one hand, and
                Foothill Capital Corporation, on the other hand
10.8(k)         Amendment to Intellectual Property Security Agreement dated as of March 23, 1999         (18)
                among the Company and Perceptive Scientific Instruments, LLC, on the one hand,
                and Foothill Capital Corporation, on the other hand
10.8(l)         Amendment Number Two to Loan and Security Agreement dated as of March 19, 1999           (18)
                among the Company, Perceptive Scientific Instruments, LLC, and StatSpin, Inc.,
                on the one hand, and Foothill Capital Corporation, on the other hand.
10.8(m)         Amendment Number Three to the Loan and Security Agreement dated as of April 16,          (20)
                1999 among the Company, Perceptive Scientific Instruments, LLC, and StatSpin,
                Inc., on the one hand, and Foothill Capital Corporation, on the other hand.
10.8(n)         Amendment Number Six to the Loan and Security Agreement dated as of March 14,             --
                2001 among the Company, Advanced Digital Imaging Research, LLC and StatSpin,
                Inc., on the one hand, and Foothill Capital Corporation, on the other hand.
10.8(o)         Warrant to Purchase Common Stock dated June 1, 1997 issued to City National Bank         (13)
10.8(p)         Warrant to Purchase Common Stock dated July 1, 1997 issued to City National Bank         (13)
10.8(q)         Subordination Agreement dated as of March 14, 2001 among the Company, Foothill            --
                Capital Corporation and Digital Imaging Technologies, Inc.
10.9(a)         Common Stock Purchase Warrant dated December 31, 1996 issued to Thermo Amex              (2)
                Convertible Growth Fund I, L.P.
10.9(b)         Registration Rights Agreement dated December 31, 1996 by and between the Company         (2)
                and Thermo Amex Convertible Growth Fund I, L.P.
10.10(a)        Asset Purchase Agreement dated as of July 6, 2000 among the company, Perceptive          (19)
                Scientific Instruments, LLC and Applied Imaging Corporation
24              Consent of PricewaterhouseCoopers LLP                                                     --
99              Disclosure Regarding Risk Factors And Forward-Looking Statements                          --
</TABLE>

     Exhibits followed by a number in parenthesis are incorporated by reference
to the similarly numbered Company document cited below:

(1)  Current Report on Form 8-K dated August 13, 1987 and Quarterly Report on
     Form 10-Q for the quarter ended September 30, 1993.

(2)  Current Report on Form 8-K dated January 15, 1997.

(3)  Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.

(4)  Current Report on Form 8-K dated January 26, 2000.

(5)  Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.


                                       20
<PAGE>   23
(6)  Registration Statement on Form S-3, as filed with the Securities and
     Exchange Commission on March 27, 1996 (File No. 333-002001).

(7)  Annual Report on Form 10-K for the year ended December 31, 1989, Quarterly
     Report on Form 10-Q for the quarter ended September 30, 1993 and Annual
     Report on Form 10-K for the year ended December 31, 1994.

(8)  Registration Statement on Form S-8, as filed with the Securities and
     Exchange Commission on August 8, 1994 (File No. 33-82560).

(9)  Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.

(10) Registration Statement on Form S-8, as filed with the Securities and
     Exchange Commission on July 16, 1997 (File No. 333-31393).

(11) Registration Statement on Form S-8, as filed with the Securities and
     Exchange Commission on October 9, 1998 (File No. 333-65547).

(12) Current Report on Form 8-K dated July 15, 1988 and Quarterly Report on Form
     10-Q for the quarter ended June 30, 1995.

(13) Annual Report on Form 10-K for the year ended December 31, 1997.

(14) Annual Report on Form 10-K for the year ended December 31, 1994.

(15) Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.

(16) Quarterly Report on Form 10-Q for the quarter ended September 31, 1995.

(17) Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

(18) Annual Report on Form 10-K for the year ended December 31, 1998.

(19) Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

(20) Annual Report on Form 10-K for the year ended December 31, 1999.

(b)  Reports on Form 8-K.

          We did not file any reports on Form 8-K during the quarter ended
     December 31, 2000.

(c)  See (a)(3) above.

(d)  See (a)(1) and (2) above.


                                       21
<PAGE>   24

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
of International Remote Imaging Systems, Inc.

     In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)1 present fairly, in all material respects, the
financial position of International Remote Imaging Systems, Inc., and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a)2 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America which 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, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Los Angeles, California
March 16, 2001


                                      F-1
<PAGE>   25
                           INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                                   CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                            ASSETS

                                                                          At December 31,
                                                                    -----------------------------
                                                                        1999             2000
                                                                    ------------     ------------
<S>                                                                 <C>              <C>
Current assets:
Cash and cash equivalents .......................................   $  2,034,593     $  3,661,310
Accounts receivable, net of allowance for doubtful
  accounts of $516,047 in 1999 and $334,696 in 2000 .............      6,444,865        5,446,466
Inventories .....................................................      3,360,468        5,184,272
Prepaid expenses and other current assets .......................        355,935          507,604
Investments available for sale ..................................             --        1,396,970
Deferred tax asset ..............................................      1,005,908          983,812
                                                                    ------------     ------------
     Total current assets .......................................     13,201,769       17,180,434

Property and equipment, at cost, net of accumulated
  depreciation ..................................................      1,553,942        1,344,418
Purchased intangibles ...........................................        258,295          223,603
Software development costs, net of accumulated amortization of
  $1,782,410 in 1999 and $1,375,569 in 2000 .....................        474,616          435,517
Deferred tax asset ..............................................     10,351,336        8,348,179
Other assets ....................................................        821,167          755,388
                                                                    ------------     ------------
     Total assets ...............................................   $ 26,661,125     $ 28,287,539
                                                                    ============     ============

                                LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Short-term borrowings ...........................................   $    655,036     $    648,972
Current portion of long-term debt ...............................      1,200,000        1,972,333
Accounts payable ................................................      2,466,389        2,676,398
Accrued expenses ................................................      2,647,975        2,683,274
Deferred income - service contracts and other ...................      1,140,737          727,158
                                                                    ------------     ------------
     Total current liabilities ..................................      8,110,137        8,708,135

Long term debt ..................................................      7,500,000        5,527,667
Deferred income - service contracts and other ...................        829,281          432,459
                                                                    ------------     ------------
     Total liabilities ..........................................     16,439,418       14,668,261

Commitments and contingencies (Note 12)

Shareholders' equity:
Preferred stock, $.01 par value; Authorized:
 3,000,000 shares:
  Callable Series B shares issued and outstanding:
  1999 - 198,000 ($594,000 liquidation preference)
  2000 - 204,000 ($612,000 liquidation preference) ..............          1,980            2,040
Common stock, $.01 par value
  Authorized: 15,600,000 shares
  Shares issued and outstanding: 1999 - 9,347,325;
    2000 - 9,868,855 ............................................         93,473           98,687
Additional paid-in capital ......................................     39,529,777       40,444,269
Unearned compensation ...........................................       (153,108)        (205,091)
Unrealized gains on investments .................................             --          289,028
Foreign currency translation adjustment .........................         67,207               --
Accumulated deficit .............................................    (29,317,622)     (27,009,655)
                                                                    ------------     ------------
     Total shareholders' equity .................................     10,221,707       13,619,278
                                                                    ------------     ------------
Total liabilities and shareholders' equity ......................   $ 26,661,125     $ 28,287,539
                                                                    ============     ============
</TABLE>

----------

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


                                      F-2
<PAGE>   26
                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                   For the Year Ended December 31,
                                                           ----------------------------------------------
                                                               1998             1999             2000
                                                           ------------     ------------     ------------
<S>                                                        <C>              <C>              <C>
Sales of IVD imaging systems ..........................    $  4,985,718     $  6,505,821     $  6,981,886
Sales of IVD imaging system supplies and service ......      11,785,184       13,611,676       14,849,392
Sales of small instruments and supplies ...............       4,345,304        5,297,385        6,209,967
Royalty and license revenues ..........................         464,972          310,587          601,511
                                                           ------------     ------------     ------------
Net revenues ..........................................      21,581,178       25,725,469       28,642,756
                                                           ------------     ------------     ------------
Cost of goods - IVD imaging systems ...................       3,265,761        4,310,069        4,356,133
Cost of goods - IVD imaging system
  supplies and service ................................       5,436,253        5,982,376        5,466,194
Cost of goods - small instruments
  and supplies ........................................       2,378,206        2,765,261        3,216,269
                                                           ------------     ------------     ------------
Cost of goods sold ....................................      11,080,220       13,057,706       13,038,596
                                                           ------------     ------------     ------------
Gross margin ..........................................      10,500,958       12,667,763       15,604,160
Marketing and selling .................................       3,228,827        3,300,576        3,555,622
General and administrative ............................       2,719,517        3,463,345        4,227,851
Research and development, net .........................       1,879,226        1,124,240        2,526,465
Amortization of intangibles ...........................         278,015          230,784          142,604
Unusual charges .......................................         193,186        4,158,894               --
                                                           ------------     ------------     ------------
Total operating expenses ..............................       8,298,771       12,277,839       10,452,542
Operating income ......................................       2,202,187          389,924        5,151,618
Other income (expense):
   Interest income ....................................          33,935           35,310          197,012
   Interest expense ...................................      (1,162,634)        (966,001)        (979,269)
   Other income (expense) .............................          13,462          (16,255)          19,049
                                                           ------------     ------------     ------------
Income (loss) from continuing
  operations before
  provision for income taxes ..........................       1,086,950         (557,022)       4,388,410

Provision for income taxes ............................        (420,136)        (530,902)      (1,594,899)
                                                           ------------     ------------     ------------
Income (loss) from continuing operations ..............         666,814       (1,087,924)       2,793,511

Loss from discontinued operations:
   Loss from operations of discontinued segment
   prior to March 31, 2000, net of tax benefit of
   $539,876 in 1998, $2,958,566 in 1999 and
   $61,015 in 2000 ....................................      (1,051,587)      (5,187,221)        (286,385)

   Loss on disposal of discontinued segment,
   including tax provision of $29,374 .................              --               --         (199,159)
                                                           ------------     ------------     ------------
Loss from discontinued operations: ....................      (1,051,587)      (5,187,221)        (485,544)
                                                           ------------     ------------     ------------
Net income (loss) .....................................    $   (384,773)    $ (6,275,145)    $  2,307,967
                                                           ============     ============     ============
</TABLE>


                                      F-3
<PAGE>   27
                                               F-4

<TABLE>
<CAPTION>
                                                              For the Year Ended December 31,
                                                         ----------------------------------------
                                                            1998           1999           2000
                                                         ----------     ----------     ----------
<S>                                                      <C>            <C>            <C>
Income (loss) per share - basic:
  Income (loss) from continuing operations ..........    $     0.11     $    (0.15)    $     0.29
  Loss from discontinued operations .................         (0.17)         (0.71)         (0.05)
                                                         ----------     ----------     ----------
Income (loss) per share attributable to common
  shareholders - basic ..............................    $    (0.06)    $    (0.86)    $     0.24
                                                         ==========     ==========     ==========
Income (loss) per share- diluted:
  Income (loss) from continuing operations ..........    $     0.09     $    (0.15)    $     0.27
  Loss from discontinued operations .................         (0.14)         (0.71)         (0.05)
                                                         ----------     ----------     ----------
Income (loss) per share attributable to common
  shareholders --diluted ............................    $     (.05)    $     (.86)    $     0.22
                                                         ==========     ==========     ==========
Weighted average number of
   common shares outstanding - basic ................     6,310,312      7,260,390      9,654,272
                                                         ==========     ==========     ==========
Weighted average number of
  common shares outstanding - diluted ...............     7,688,202      7,260,390     10,404,797
                                                         ==========     ==========     ==========
</TABLE>

---------------

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


                                      F-4
<PAGE>   28
                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                             Convertible
                                               Series A
                                            Preferred Stock         Common Stock           Additional
                                           -----------------   ----------------------        Paid-In       Treasury
                                            Shares   Amount     Shares        Amount         Capital         Stock
                                           --------  -------  ----------     --------     ------------     ---------
<S>                                        <C>      <C>      <C>           <C>            <C>              <C>
Balance December 31, 1997 ...............    3,000    $ 30     6,259,728     $ 62,597     $ 37,788,536     $(103,500)

Common stock issued
  on exercise of stock options ..........       --      --        37,732          377          113,952       (25,932)

Common stock issued under
Employee Stock Purchase Plan:
  for Cash ..............................       --      --        48,400          484           76,345            --
  for Services ..........................       --      --       108,775        1,088          174,187            --

Issuance of stock options for
  services ..............................       --      --            --           --           12,000            --

Common stock and warrants to
  purchase common stock issued
  for cash on exercise of warrants
  and issuance of warrants, net of
  expenses...............................       --      --        12,778          128           39,905            --

Retire treasury stock ...................       --      --       (34,538)        (346)        (129,086)      129,432

Charge for repricing options
  held by non-employees .................       --      --            --           --           58,451            --

Amortization of unearned
  compensation ..........................       --      --            --           --               --            --

Foreign currency translation
  adjustment ............................       --      --            --           --               --            --

Net loss ................................       --      --            --           --               --            --
                                             -----    ----    ----------     --------     ------------     ---------
Balance, December 31, 1998 ..............    3,000    $ 30     6,432,875     $ 64,328     $ 38,134,290            --
                                             =====    ====    ==========     ========     ============     =========
</TABLE>

<TABLE>
<CAPTION>
                                                             Foreign
                                                             Currency
                                               Unearned     Translation     Accumulated
                                             Compensation    Adjustment        Deficit           Total
                                             -------------  -----------     -------------    ------------
<S>                                          <C>            <C>             <C>              <C>
Balance December 31, 1997 ...............      $(333,495)      $35,877      $(22,657,704)     $14,792,341

Common stock issued
  on exercise of stock options ..........             --            --                --           88,397

Common stock issued under
Employee Stock Purchase Plan:
  for Cash ..............................                                                          76,829
  for Services ..........................       (126,049)           --                --           49,226

Issuance of stock options for
  services ..............................        (12,000)           --                --               --

Common stock and warrants to
  purchase common stock issued
  for cash on exercise of warrants
  and issuance of warrants, net of
  expenses...............................             --            --                --           40,033

Retire treasury stock ...................             --            --                --               --

Charge for repricing options
  held by non-employees .................             --            --                --           58,451

Amortization of unearned
  compensation ..........................        267,250            --                --          267,250

Foreign currency translation
  adjustment ............................             --        11,633                --           11,633

Net loss ................................             --            --          (384,773)        (384,773)
                                               ---------       -------      ------------     ------------
Balance, December 31, 1998 ..............      $(204,294)      $47,510      $(23,042,477)    $ 14,999,387
                                               =========       =======      ============     ============
</TABLE>

---------------

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


                                      F-5
<PAGE>   29
                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                       Convertible Series A     Callable Series B
                                          Preferred Stock        Preferred Stock         Common Stock
                                       --------------------    ------------------    ---------------------
                                         Shares     Amount      Shares     Amount      Shares      Amount
                                       --------    --------    -------     ------    ---------     -------
<S>                                    <C>         <C>         <C>         <C>       <C>           <C>
Balance, December 31, 1998...........     3,000        $ 30       --       $   --    6,432,875     $64,328

Common Stock issued under
Employee Stock Purchase Plan:
 for Cash ...........................                                                  300,050       3,001
 for Services........................                                                   20,400         204

Issuance of stock options for
  services ..........................        --          --                                 --

Issuance of Series B Convertible
  Preferred Stock and common stock
  in connection with litigation
  settlement ........................                          198,000     $1,980      594,000       5,940

Conversion of Series A
  Preferred Stock ...................    (3,000)        (30)                         2,000,000      20,000

Amortization of unearned
Compensation.........................

Foreign currency translation
  adjustment ........................

Net Loss.............................
                                        -------        ----    -------     ------    ---------     -------
Balance, December 31, 1999 ..........   $    --        $ --    198,000     $1,980    9,347,325     $93,473
                                        =======        ====    =======     ======    =========     =======
</TABLE>

<TABLE>
<CAPTION>
                                                                        Foreign
                                       Additional                       Currency
                                         Paid-in        Unearned       Translation   Accumulated
                                         Capital      Compensation     Adjustment       Deficit          Total
                                       -----------      ---------      -----------   ------------     -----------
<S>                                    <C>             <C>             <C>           <C>              <C>
Balance, December 31, 1998...........   38,134,290      $(204,294)        $47,510    $(23,042,477)    $14,999,387

Common Stock issued under
Employee Stock Purchase Plan:
 for Cash                                  220,161       (111,582)                                        111,580
 for Services........................       15,096         (7,650)                                          7,650

Issuance of stock options for
  services ..........................       12,000        (12,000)                                             --

Issuance of Series B Convertible
  Preferred Stock and common stock
  in connection with litigation
  settlement ........................    1,168,200                                                      1,176,120

Conversion of Series A
  Preferred Stock ...................      (19,970)                                                            --

Amortization of unearned
  Compensation.......................                     182,418                                         182,418

Foreign currency translation                                               19,697                          19,697
  adjustment ........................

Net Loss.............................                                                  (6,275,145)    $(6,275,145)
                                       -----------      ---------         -------    ------------     -----------
Balance, December 31, 1999 ..........  $39,529,777      $(153,108)        $67,207    $(29,317,622)    $10,221,707
                                       ===========      =========         =======    ============     ===========
</TABLE>

---------------

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


                                      F-6
<PAGE>   30
                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                        Callable Series B            Common
                                         Preferred Stock             Stock           Additional
                                        ------------------     -----------------       Paid-in       Unearned
                                        Shares     Amount      Shares      Amount      Capital      Compensation
                                        ------     ------      ------      ------    ----------     -------------
<S>                                     <C>        <C>         <C>         <C>         <C>          <C>
Balance, December 31, 1999............. 198,000    $1,980      9,347,325   $93,473     39,529,777   $(153,108)

Common stock issued on exercise                                  179,148     1,791        229,833
  of stock options and warrants........

Common Stock issued under Employee
Stock Purchase Plan:
 for Cash..............................                          32,826        328         47,672     (24,000)

Issuance of stock options and
warrants for services..................                                                   133,000    (133,000)

Issuance of Series B Convertible
Preferred Stock and common stock
in connection with litigation             6,000        60        309,556     3,095        360,484
settlement.............................

Charge for extension of warrants.......                                                    63,815     (63,815)

Charge for grant of employee
stock options having a variable                                                            79,688     (79,688)
element................................

Amortization of unearned
compensation...........................                                                              248,520

Unrealized gains on investments, net
of taxes...............................

Foreign currency translation
adjustment.............................

Net income.............................
                                        -------    ------      ---------   -------    -----------   ---------

Balance, December 31, 2000............. 204,000    $2,040      9,868,855   $98,687    $40,444,269   $(205,091)
                                        =======    ======      =========   =======    ===========   =========
</TABLE>



<TABLE>
<CAPTION>
                                                             Foreign
                                             Unrealized      Currency
                                               Gains       Translation        Accumulated
                                           on Investments   Adjustment          Deficit            Total
                                           --------------   ----------        ------------      -----------
<S>                                        <C>             <C>               <C>                <C>
Balance, December 31, 1999.............                       $ 67,207       $(29,317,622)      $10,221,707

Common stock issued on exercise                                                                     231,624
  of stock options and warrants........

Common Stock issued under Employee
Stock Purchase Plan:
 for Cash..............................                                                              24,000

Issuance of stock options and warrants
for services...........................                                                                  --


Issuance of Series B Convertible
Preferred Stock and common stock
in connection with litigation                                                                       363,639
settlement ............................

Charge for extension of warrants ......                                                                  --

Charge for grant of employee                                                                             --
stock options having a variable
element ...............................

Amortization of unearned                                                                            248,520
compensation...........................

Unrealized gains on investments,
net of taxes ..........................       289,028                                               289,028


Foreign currency translation                                   (67,207)                             (67,207)
adjustment ............................

Net income.............................                                         2,307,967         2,307,967
                                             --------         --------       ------------       -----------

Balance, December 31, 2000 ............      $289,028         $     --       $(27,009,655)      $13,619,278
                                             ========         =========      ============       ===========
</TABLE>


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



                                      F-7
<PAGE>   31
                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                     For the Year Ended December 31,
                                                                             ------------------------------------------------
                                                                                 1998              1999               2000
                                                                             -----------       -----------       ------------
<S>                                                                          <C>               <C>               <C>
Cash flows from operating activities:
     Net income (loss) ................................................      $  (384,773)      $(6,275,145)      $  2,307,967
   Adjustments to reconcile net income (loss) to net cash
     provided by operations:
     Loss from discontinued operations ................................               --                --            485,544
     Deferred taxes ...................................................         (212,418)       (2,500,526)         1,832,567
     Depreciation and amortization ....................................        2,475,169         2,006,332            881,743
     Provision for impairment of certain assets .......................               --         8,160,978                 --
     Common stock and stock option compensation .......................          325,701           182,417            240,661
     Litigation settlement payable in equity securities ...............               --         1,520,371                 --
     Gain on disposal of property and equipment .......................               --           (87,158)            (1,677)
     Allowance for doubtful accounts ..................................          119,296           534,653                 --
   Changes in assets and liabilities:
     Accounts receivable - trade and other ............................         (466,176)         (931,541)             7,803
     Service contracts, net ...........................................           29,300           405,695           (415,906)
     Inventories ......................................................         (880,254)          850,661         (2,106,813)
     Prepaid expenses and other current assets ........................          (15,010)         (105,939)          (224,695)
     Other assets .....................................................         (235,926)          (14,382)           (88,022)
     Accounts payable .................................................          260,790          (399,525)           573,432
     Accrued expenses .................................................          (27,557)          419,087            901,111
     Deferred income - other ..........................................          (28,550)               --                 --
                                                                             -----------       -----------       ------------
   Net cash provided by continuing operations .........................          959,592         3,765,978          4,393,715
   Net cash used by discontinued operations ...........................               --                --           (858,988)
                                                                             -----------       -----------       ------------
   Net cash provided by operating activities ..........................          959,592         3,765,978          3,534,727
                                                                             -----------       -----------       ------------

Cash flows from investing activities:
     Acquisition of property and equipment ............................       (1,026,475)         (438,069)          (522,643)
     Sales of property and equipment ..................................               --           125,000                 --
     Acquisition of business and product line, net of cash
       acquired or adjustments to cost of business ....................          167,790                --                 --
     Software development costs .......................................         (352,797)         (367,502)          (278,543)
     Maturities of securities .........................................           25,000                --                 --
     Investing activities of discontinued operations ..................               --                --           (136,694)
                                                                             -----------       -----------       ------------
   Net cash used by investing activities ..............................       (1,186,482)         (680,571)          (937,880)
                                                                             -----------       -----------       ------------

Cash flows from financing activities:
     Issuance of common and preferred stock and warrants for cash .....          205,259           111,580            255,623
     Borrowings on credit facility ....................................        8,558,550         8,903,395         21,255,000
     Repayments on credit facility ....................................       (7,843,781)       (8,713,128)       (21,261,064)
     Repayments of notes payable and capital lease ....................       (1,611,509)       (1,753,390)        (1,219,689)
     Deferred stock or debt issuance costs ............................         (188,937)               --                 --
                                                                             -----------       -----------       ------------
   Net cash used in financing activities ..............................         (880,418)       (1,451,543)          (970,130)
                                                                             -----------       -----------       ------------

     Effect of foreign currency rate fluctuation on cash
       and cash equivalents ...........................................           25,942            11,234                 --
                                                                             -----------       -----------       ------------

     Net increase (decrease) in cash and cash equivalents .............       (1,081,366)        1,645,098          1,626,717
     Cash and cash equivalents at beginning of year ...................        1,470,861           389,495          2,034,593
                                                                             -----------       -----------       ------------
     Cash and cash equivalents at end of year .........................      $   389,495       $ 2,034,593       $  3,661,310
                                                                             ===========       ===========       ============

Supplemental schedule of non-cash financing activities:
     Non cash issuance of common stock and common stock warrants ......      $   234,755       $   138,881       $    157,000
     Equipment acquired through issuance of capital lease .............           70,000                --            103,977
Supplemental disclosure of cash flow information:
     Cash paid for income taxes .......................................          213,407            57,468             25,536
     Cash paid for interest ...........................................        1,093,253           838,122            865,153
</TABLE>



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



                                      F-8
<PAGE>   32
                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


<TABLE>
<CAPTION>
                                                           For the Year ended December 31,
                                                     --------------------------------------------
                                                       1998              1999             2000
                                                     ---------       -----------       ----------
<S>                                                  <C>             <C>               <C>
Net income (loss) .............................      $(384,773)      $(6,275,145)      $2,307,967

  Unrealized gains on investments, net of taxes             --                --          289,028

  Foreign currency translation adjustment .....         11,633            19,697          (67,207)
                                                     ---------       -----------       ----------

Comprehensive income (loss) ...................      $(373,140)      $(6,255,448)      $2,529,788
                                                     =========       ===========       ==========
</TABLE>

-------------------

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



                                      F-9
<PAGE>   33
                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  FORMATION AND BUSINESS OF THE COMPANY.

     International Remote Imaging Systems, Inc. (collectively "IRIS" or the
"Company"), was incorporated in California in 1979 and reincorporated during
1987 in Delaware. The Company designs, develops, manufactures and markets in
vitro diagnostic ("IVD") equipment, including IVD imaging systems based on
patented and proprietary automated intelligent microscopy ("AIM") technology, as
well as special purpose centrifuges and other small instruments for automating
microscopic procedures performed in clinical laboratories.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles 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 value
of accounts receivables, inventories, purchased intangibles, estimated
provisions for warranty costs and deferred tax assets. Actual results could
differ from those estimates.

Principles of Consolidation

     The financial statements include the accounts of International Remote
Imaging Systems, Inc. and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.

Foreign Currency

     The financial statements of the Company's foreign subsidiary are translated
into U.S. dollars using the exchange rate prevailing at each balance sheet date
for assets and liabilities and average exchange rates for each reporting period
for revenues and expenses. Translation adjustments are recorded directly to a
separate component of shareholders' equity. Gains and losses resulting from
foreign currency transactions are included in operations.

Cash Equivalents and Short-Term Investments

     Short-term investments principally include certificates of deposit and debt
instruments of the United States Government with maturities greater than three
months and less than one year. For purposes of the statement of cash flows, IRIS
considers all highly liquid debt instruments purchased with a remaining maturity
of three months or less when purchased to be cash equivalents. IRIS places its
cash and investments with high credit quality financial institutions. At times,
these deposits may be in excess of the federally insured limit.

Accounts Receivable

     IRIS sells predominantly to entities in the healthcare industry. IRIS
grants uncollateralized credit to its customers, primarily hospitals, clinical
and research laboratories, and distributors. IRIS performs ongoing credit
evaluations of its customers before granting uncollateralized credit. The
Company does not have any single customer which accounts for 10% or more of its
consolidated revenues or 10% or more of its accounts receivable at the balance
sheet date.



                                      F-10
<PAGE>   34
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.

Investments available for sale

     Management classifies the investment in the 385,371 common shares of
Applied Imaging Corporation (Nasdaq: AICX) that were received as consideration
for the sale of its wholly owned subsidiary, Perceptive Scientific Instruments,
LLC ("PSI"), as available for sale. Investments in available for sale securities
are reported at fair value with unrealized holding gains and losses, net of tax,
reported as a separate component of shareholders' equity until realized.
Realized gains and losses are included in earnings and derived using the
specific identification method for determining the cost of the security sold.
There were no realized gains and losses for the year ended December 31, 2000.

     The cost, gross unrealized holding gains and fair value as of December 31,
2000 are as follows:

<TABLE>
<CAPTION>
                                                         Gross unrealized
                                           Cost            holding gains         Fair Value
                                         -------         ----------------        -----------
<S>                                      <C>             <C>                     <C>
Available for sale securities .......    $915,256            $481,714            $1,396,970
</TABLE>



Property and Equipment and Depreciation

     Property and equipment are recorded at cost, less accumulated depreciation
and amortization. Depreciation is generally computed using the straight-line
method over three to five 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.

     Costs of maintenance and repairs are charged to expense when incurred;
costs of renewals and betterments are capitalized. Upon sale or retirement, the
cost and related accumulated depreciation are eliminated from the respective
accounts, and the resulting gain or loss is included in current income.

Purchased Intangibles

     Purchased intangibles are recorded at cost and consist of goodwill, which
is being amortized on a straight-line basis over ten years. The realizability of
purchased intangibles is evaluated periodically as events or circumstances
indicate a possible inability to recover the carrying amount. Such evaluation is
based on various analysis, including cash flow and profitability projections.
The analysis necessarily involves significant management judgement to evaluate
the capacity of an acquired business to perform within projections. In the event
the projected undiscounted cash flows are less than net book value of the
assets, the carrying value of the assets will be written down to their fair
value.

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 its
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 (a) the ratio of current revenues for a
product to the total of current and anticipated future revenues or (b) the
straight-line method over the remaining estimated economic life of the product.



                                      F-11
<PAGE>   35

Generally, an original estimated economic life of one and one half years to
three years is assigned to capitalized software development costs. Amortization
expense of software development costs, excluding the write off of costs relating
to the White IRIS of $796,887 in 1999 was $334,996, $223,813, and $90,975 for
1998, 1999 and 2000 respectively.

Long-Lived Assets

     The Company identifies and records for long-lived assets whenever events or
changes in circumstances result in the carrying amount of the assets exceeding
the sum of the expected future undiscounted cash flows associated with such
assets. The measurement of the impairment losses recognized is based on the
difference between the fair values and the carrying amounts of the assets.

Stock Based Compensation

     The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 defines a fair value
based method of accounting for an employee stock option. Fair value of the stock
option is determined considering factors such as the exercise price, the
expected life of the option, the current price of the underlying stock and its
volatility, expected dividends on the stock, and the risk-free interest rate for
the expected term of the option. Under the fair value based method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period. Pro forma disclosures for entities that
elect to continue to measure compensation cost under the intrinsic method
provided by Accounting Principles Board Opinion No. 25 must include the effects
of all awards granted in fiscal years that begin after December 15, 1994. The
Company accounts for stock-based awards to non-employees in accordance with SFAS
No. 123 and EITF 96-18. An expense is recognized for common stock, warrants or
options issued or repriced, for services rendered by non-employees based on the
estimated fair value of the security exchanged.

Revenue Recognition

     IRIS derives revenue from the sale of IVD imaging systems, sales of
supplies and service for its IVD imaging systems and sales of small laboratory
instruments and related supplies. For sales of supplies and small instruments,
IRIS generally recognizes product revenues once all of the following conditions
have been met: a) an authorized purchase order has been received in writing, b)
customer credit worthiness has been established, and c) delivery of the product
based on shipping terms has occurred.

     Certain of IRIS's domestic IVD system sales generally require installation
and training to be performed. Management believes that installation and training
is not essential to the functionality of the product and accordingly, the
Company recognizes revenue on delivery based on shipping terms, provided title
has transferred, collectability of the resulting receivable is probable, the
Company has received an authorized purchase order and the price is fixed and
determinable. The estimated fair value of installation and training is deferred
and recognized as these services are performed. Sales of IVD systems
internationally are recognized on delivery based on shipping terms, provided
collectability of the resulting receivable is probable, the Company has received
an authorized purchase order and the price is fixed and determinable.

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

Warranties

     IRIS recognizes the full estimated cost of warranty expense at the time of
product delivery.

Research and Development Expenditures

     Except for certain software development costs required to be capitalized as
described above (see Software Development Costs), research and development
expenditures are charged to operations as incurred. Net



                                      F-12
<PAGE>   36

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.

Income Taxes

     IRIS 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.

Marketing Costs

     All costs related to marketing and advertising the Company's products are
expensed at the time the advertising takes place.

Fair Value of Financial Instruments

     The amount recorded for financial instruments in the Company's consolidated
financial statements approximates fair value as defined in SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments," except for the
subordinated note described in Note 9 of which the fair value is not readily
determinable.

Earnings Per Share

     Basic earnings per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding. Diluted earnings per share
is computed by dividing net income (loss) by the weighted average number of
common shares and common stock equivalents outstanding, calculated on the
treasury stock method for options and warrants or the as converted method for
convertible preferred stock. Common stock equivalents are excluded from the
computation when their effect is antidilutive.

Segment Reporting

     The Company determines and discloses its 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 the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information. See Note 17 --
"Segment and Geographic Information".

Reclassifications

     Certain reclassifications have been made to the 1998 and 1999 financial
statements to conform with the 2000 presentation.

Certain Risks and Uncertainties

     Dependence on Instrument Sales: The Company derives most of its revenues
from the sale of the urinalysis workstations, and related supplies and services.
These instruments have list prices ranging from $100,000 to $195,000 depending
on model and configuration, and relatively modest declines in unit sales or
gross margins could have a material adverse effect on the Company's revenues and
profits.



                                      F-13
<PAGE>   37

     Reliance on Single Source Suppliers: Certain key components of the
Company's instruments are manufactured according to the Company's specifications
or are available only from single suppliers. For example, Roche Diagnostics is
the sole supplier for the Company's proprietary CHEMSTRIP/IRIStrip urine test
strips and related test reader used in The Yellow IRIS Models 300 and 500. From
time to time, single source suppliers have discontinued production of key
components or encountered production problems which potentially could have a
material adverse effect on instrument sales. Although, in the past, the Company
has successfully transitioned to new components to replace discontinued
components, there can be no assurance that the Company can always successfully
transition to satisfactory replacement components or that the Company will
always have access to adequate supplies of discontinued components on
satisfactory terms during the transition period. The Company's inability to
transition successfully to replacement components or to secure adequate supplies
of discontinued components on satisfactory terms could have a material adverse
effect on the Company.

3.   COMPREHENSIVE INCOME.

     In January 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) in financial statements. SFAS No. 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.

     The Company's components of comprehensive income (loss) are net income
(loss), unrealized gains on investments and foreign currency translation
adjustments. No tax effect has been allocated to the foreign currency
translation adjustment for the periods presented. Income tax effect allocated to
the unrealized gains on available for sale securities for the year ended
December 31, 2000 was $192,686.

     The following is a reconciliation of accumulated other comprehensive income
balance for the three years ended December 31, 2000:


<TABLE>
<CAPTION>
                                        For the Years Ended December 31,
                                 ----------------------------------------------
                                  1998               1999                2000
                                 -------            -------            --------
<S>                              <C>                <C>                <C>
Beginning balance ............   $35,877            $47,510            $ 67,207
Current period change ........    11,633             19,697             221,821
                                 -------            -------            --------
Ending balance ...............   $47,510            $67,207            $289,028
                                 =======            =======            ========
</TABLE>

4.   INVENTORIES.

         Inventories consist of the following:

<TABLE>
<CAPTION>
                                                            At December 31,
                                                    --------------------------------
                                                       1999                  2000
                                                    ----------            ----------
<S>                                                 <C>                   <C>
Finished goods ..............................       $  842,952            $1,715,881
Work-in-process .............................          350,424               216,050
Raw materials, parts and  sub-assemblies ....        2,167,092             3,252,341
                                                    ----------            ----------
                                                    $3,360,468            $5,184,272
                                                    ==========            ==========
</TABLE>

5.   PROPERTY AND EQUIPMENT.

     Property and equipment consist of the following:



                                      F-14
<PAGE>   38

<TABLE>
<CAPTION>
                                                         At December 31,
                                              -----------------------------------
                                                  1999                    2000
                                              -----------             -----------
<S>                                           <C>                     <C>
Leasehold improvements ...................    $   448,231             $   606,959
Furniture and fixtures ...................        377,797                 231,953
Machinery and equipment ..................      4,583,126               2,654,866
Tooling, dies and molds ..................        995,560                 927,158
Rental units .............................      1,019,898                 985,343
                                              -----------             -----------
                                                7,424,612               5,406,279
Less accumulated depreciation ............     (5,870,670)             (4,061,861)
                                              -----------             -----------
                                              $ 1,553,942             $ 1,344,418
                                              ===========             ===========
</TABLE>


     Property and equipment includes $3,463,223 and $2,399,053 respectively, at
December 31, 1999 and 2000, of fully depreciated assets which remain in service.
Depreciation expense was $679,132, $653,901 and $601,186 for 1998, 1999 and
2000, respectively.

6.   EQUIPMENT LEASING

     For sales-type leases, the components of net investment in sales-type
leases recorded in other assets are as follows at December 31, 1999 and 2000.


<TABLE>
<CAPTION>
                                                  1999                  2000
                                               ---------             ---------
<S>                                            <C>                   <C>
Total minimum lease payments ...............   $ 467,820             $ 513,601
Less:  Estimated executory costs
          Including profit thereon .........    (145,572)             (177,418)
                                               ---------             ---------
Net minimum lease payments .................     322,248               336,183
Less:  Unearned income .....................    (101,193)              (96,367)
                                               ---------             ---------
Net investment in sales-type leases ........     221,055               239,816
Less:  Current portion .....................     (56,424)              (77,412)
                                               ---------             ---------
                                               $ 164,631             $ 162,404
                                               =========             =========
</TABLE>


     Any lease that does not meet the criteria for a sales-type or a financing
lease is accounted for as an operating lease. Under these leases the Company
also provides supplies and services. Generally operating leases are for periods
less than one year and contain provisions for renewal and early termination
penalties. The cost of leased systems is depreciated to a zero value on a
straight-line basis over five years. Accumulated depreciation on leased systems
was $606,087 and $769,334 at December 31, 1999 and 2000, respectively.

     Future minimum lease payments due from customers under sales-type leases
and noncancellable operating leases as of December 31, 2000 are as follows:

<TABLE>
<CAPTION>
                                            Sales-Type Leases          Operating Leases
                                            -----------------          ----------------
<S>                                         <C>                        <C>
                   2001 .................       $165,144                    $348,112
                   2002 .................        165,144                      14,898
                   2003 .................        132,888                          --
                   2004 .................         50,425                          --
                   2005 .................             --                          --
                                                --------                    --------
                                                $513,601                    $363,010
                                                ========                    ========
</TABLE>



                                      F-15
<PAGE>   39

7.   PURCHASED INTANGIBLES.

     Purchased intangibles, at cost, consist of the following:


<TABLE>
<CAPTION>
                                                       At December 31,
                                               -------------------------------
                                                 1999                  2000
                                               ---------             ---------
<S>                                            <C>                   <C>
Goodwill ..........................            $ 383,108             $ 383,108
Less accumulated amortization .....             (124,813)             (159,505)
                                               ---------             ---------
Total .............................            $ 258,295             $ 223,603
                                               =========             =========
</TABLE>

8.   ACCRUED EXPENSES.

     Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                    At December 31,
                                            --------------------------------
                                               1999                  2000
                                            ----------            ----------
<S>                                         <C>                   <C>
Accrued bonuses ................            $  382,223            $  942,642
Accrued commissions ............               285,748               170,250
Accrued payroll ................                43,186                41,655
Accrued vacation ...............               282,075               262,818
Accrued professional fees ......               243,838               133,896
Accrued warranty expense .......               394,874               379,546
Accrued interest ...............               122,824               134,562
Accrued - other ................               893,207               617,905
                                            ----------            ----------
                                            $2,647,975            $2,683,274
                                            ==========            ==========
</TABLE>


9.   SHORT-TERM BORROWINGS AND NOTES PAYABLE.

     At December 31, 2000, the outstanding amounts under the Company's credit
facility consists of $500,000 outstanding under a $3.6 million term loan and
$648,972 outstanding under a $4.0 million revolving line of credit. Borrowings
under the line of credit are limited to a percentage of eligible accounts
receivable. The Company had approximately $1.5 million available under the line
of credit at December 31, 2000. The term loan bears interest at the lender's
prime rate (9.5% on December 31, 2000) plus 3.0% and is payable in monthly
installments of $100,000. The revolving credit line bears interest at the
lender's prime rate plus 1.0%. The credit facility is subject to minimum
interest charges, prepayment penalties and customary fees, is collateralized by
a first priority lien on all assets of the Company and matures in 2001. It also
contains financial covenants based primarily on tangible net worth and cash
flows and imposes restrictions on acquisition, capital expenditures and cash
dividends.

     The outstanding principal balance on the Subordinated Note was $7.0 million
on December 31, 2000. The Subordinated Note bears interest at a fixed rate of
8.5% per annum, payable in quarterly installments. The entire principal is due
on or before July 31, 2001. The Company may prepay the Subordinated Note at any
time without premium or penalty. Upon the issuance by the Company of equity
securities generating net proceeds in excess of $14.5 million, the Company must
apply fifty percent of the excess to the prepayment of the Subordinated Note.
The payment of principal and interest on the Subordinated Note is subordinated
in right of payment, to the extent and in the manner provided therein, to the
prior payment in full of the credit facility. On March 15, 2001, the Company
completed the refinancing of the $7.0 million note payable with $3.5 million
payable on or before June 29, 2001 and the remainder payable in 36 monthly
installments of approximately $97,000 commencing in September 2001. The Company
also renewed its existing credit facility with Foothill Capital that was due to
mature in May 2001. Under the revised credit facility, Foothill will loan the
Company $3.0 million in May 2001. The loan is repayable in 36 monthly
installments of approximately $83,000 commencing June 2001. After considering
the effects of the $3.0 million proceeds from Foothill and the repayment of
$3.5 million of the subordinate note in June 2001, the maturity of the
Company's long term debt obligations are $1,972,000 in 2001, $2,167,000 in
2002, $2,167,000 in 2003 and $1,194,000 in 2004.

10.  INCOME TAXES.

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



                                      F-16
<PAGE>   40

<TABLE>
<CAPTION>
                                        For the Year Ended December 31,
                            -------------------------------------------------------
Current: .......              1998                   1999                    2000
                            --------            -----------             -----------
<S>                         <C>                 <C>                     <C>
  Federal ......            $     --            $     4,000             $   139,000
  State ........              70,000                 32,000                (376,000)
  Foreign ......              23,000                 36,000                      --
                            --------            -----------             -----------
                              93,000                 72,000                (237,000)
                            --------            -----------             -----------

Deferred:
  Federal ......             300,000                422,000               1,120,000
  State ........              27,000                 37,000                 712,000
                            --------            -----------             -----------
                             327,000                459,000               1,832,000
                            --------            -----------             -----------
                            $420,000            $   531,000             $ 1,595,000
                            ========            ===========             ===========
</TABLE>

     The provision for income taxes from continuing operations differs from the
amount obtained by applying the federal statutory income tax rate to income from
continuing operations before provision for income taxes for the years ended
December 31, 1998, 1999 and 2000 as follows:

<TABLE>
<CAPTION>
                                                                   For the Year Ended December 31,
                                                      ---------------------------------------------------------
                                                        1998                    1999                    2000
                                                      ---------             -----------             -----------
<S>                                                   <C>                   <C>                     <C>
Tax provision (benefit) computed at
  Federal statutory rate .................            $ 370,000             $  (189,000)            $ 1,492,000
Increase (decrease) in taxes due to:
  Change in valuation allowance ..........                   --                 649,000              (1,655,000)
  Expiration of federal NOL ..............                   --                      --               1,655,000
  State taxes, net of federal benefit ....               22,000                 (11,000)                201,000
  Nondeductible expenses .................               38,000                  38,000                  23,000
  Other ..................................              (10,000)                 44,000                (121,000)
                                                      ---------             -----------             -----------
                                                      $ 420,000             $   531,000             $ 1,595,000
                                                      =========             ===========             ===========
</TABLE>

     At December 31, 2000, the Company had federal net operating loss
carryforwards of approximately $25.3 million and state net operating loss
carryforwards of approximately $2.3 million which expire in fiscal years ending
in 2001 through 2013.

     The primary components of temporary differences which give rise to the
Company's net deferred tax asset at December 31, 1998, 1999 and 2000 are as
follows:


<TABLE>
<CAPTION>
                                                                           At December 31,
                                                     ----------------------------------------------------
                                                          1998                1999                 2000
                                                      ------------        ------------        -----------
<S>                                                   <C>                 <C>                 <C>
Depreciation and amortization ............            $  1,163,000        $  4,519,000        $   588,000
Allowance for doubtful accounts ..........                 100,000             115,000            130,000
Accrued liabilities ......................                 332,000             683,000            357,000
Deferred revenue-service contracts .......                 232,000             193,000            219,000
Deferred research and development ........               2,276,000           2,064,000                 --
Net operating loss carryforwards .........               6,337,000           5,969,000          8,752,000
Other ....................................                 417,000             463,000            280,000
Valuation allowance ......................              (2,000,000)         (2,649,000)          (994,000)
                                                      ------------        ------------        -----------
                                                      $  8,857,000        $ 11,357,000        $ 9,332,000
                                                      ============        ============        ===========
</TABLE>


     Realization of deferred tax assets associated with net operating losses
("NOL") and tax credit carryforwards is dependent upon generating sufficient
taxable income prior to their expiration. Management believes that there is a
risk that certain of these NOL and tax credit carryforwards may expire unused
and accordingly, has established a valuation reserve against them. Although
realization is not assured for the remaining deferred tax assets, management
believes it is more likely than not that they 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



                                      F-17
<PAGE>   41

management's estimates of taxable income during the carryforward period are
significantly reduced or alternative tax strategies are not available. The
Company will continue to review its valuation allowances and make adjustments,
if necessary. Also, although a valuation allowance has been provided against a
portion of its NOL's, should the Company undergo an ownership change as defined
in Section 382 of the Internal Revenue Code, the Company's NOL generated prior
to the ownership change would be subject to an annual limitation. If this
occurs, a further adjustment of the valuation allowance may be necessary.

11.  CAPITAL STOCK.

Issuance of Common and Preferred Stock

     On December 31, 1996, the Company sold (i) 3,000 shares of a new Series A
Convertible Preferred Stock ("Preferred Stock") with a liquidation value of
$1,000 per share. Each share of Preferred Stock was convertible into a number of
shares of common stock equal to the liquidation value of a share of Preferred
Stock divided by a conversion price (discussed below). The Conversion Price was
equal to the lower of (i) 85% of the average closing bid price of the common
stock for the five consecutive trading days immediately preceding the conversion
date (but in no event less than $1.50) or (ii) $3.56. On October 1, 1999, the
Series A Preferred stockholder converted its investment into two million shares
of common stock.

         During the year ended December 31, 1999, the Company successfully
completed a tender offer for the common stock of Poly UA Systems, Inc., a
Company-sponsored research and development entity. In exchange for the tendered
shares and a release of claims, the Company issued to the tendering stockholders
a total of 594,000 shares of common stock, 198,000 shares of a new Series B
Callable Preferred Stock and Series G Warrants to purchase an additional 594,000
shares of the common stock. During the year ended December 31, 2000, the Company
issued 309,556 shares of common stock, 6,000 shares of preferred stock and
warrants to purchase an additional 18,000 shares of common stock in exchange for
57,000 shares of the common stock of Poly U/A Systems that had not been acquired
through the tender offer. The Series B shares have a liquidation preference of
$3 per share (or an aggregate liquidation preference of $612,000). The
"callable" feature entitles the Company to convert the preferred stock at any
time into a number of shares of common stock equal to the liquidation value
divided by the market price of the common stock at the time of conversion
(subject to a minimum value of $2 per share of common stock). The preferred
stock will automatically convert under the same formula on August 3, 2002, if
not converted sooner by the Company. The Series B Callable Preferred Stock is
non-voting, is not entitled to any preferred dividends and is not subject to any
mandatory or optional redemption provisions. The Company may not pay cash
dividends on the common stock or repurchase any shares of the common stock
without the written consent of the holders of a majority of the Series B
Callable Preferred Stock.

Shareholders' Rights Plan

     The Company has a shareholders' rights plan under which each holder of a
share of common stock also has one right to purchase one one-thousandth of a
preferred Series C share at $9 per one one-thousandth of a share. The rights are
not presently exercisable. Upon the occurrence of certain "flip-in" events, each
right becomes exercisable and then entitles its holder to receive the number of
common shares having an aggregate per share market price equal to two times the
purchase price. Upon certain "flip-over" events, each right when exercised
entitles its holder to receive common share of the acquiring company having a
value equal to two times the purchase price. One flip-in event is when a person
or group (an "acquiring person") acquires 20 percent or more of the company's
common stock. Rights held by an acquiring person are void. The Company may
redeem the rights for one cent per share. The rights expire on December 22,
2009.

Stock Issuances

     During 1990, the IRIS Board of Directors adopted an Employee Stock Purchase
Plan designed to allow employees of the Company to buy its shares at 50% of the
then current market price, provided that the employee agrees to hold the shares
purchased for a minimum of two years. The employee's 50% portion of stock
purchases under the plan may not exceed 15% of the employee's salary during any
year. The remaining 50% portion is recorded as deferred compensation and
amortized over the vesting period. The shares purchased pursuant to this plan
may not be transferred, except following the death of the employee or a change
in control, for a period of



                                      F-18
<PAGE>   42

two years following the date of purchase. During the period of the limitation on
transfer, the Company has the option to repurchase the shares at the employee's
purchase price if the employee terminates employment with the Company either
voluntarily or as a result of termination for cause. During 1998, 1999 and 2000
IRIS issued 157,175, 320,450 and 32,826 shares of common stock, respectively, in
exchange for $252,104, $238,462 and $48,000 in cash and services, respectively,
under this plan

Stock Option Plans and Employee Benefit Plans

     As of December 31, 2000, the Company had three stock option plans under
which it may grant non-qualified stock options, incentive stock options and
stock appreciation rights. No stock appreciation rights or incentive stock
options have been granted under these plans.

     The following schedule sets forth options authorized, exercised,
outstanding and available for grant under the Company's three stock option plans
as of December 31, 2000.

<TABLE>
<CAPTION>
                           Number of Option Shares
            -----------------------------------------------------------
                                                              Available
Plan        Authorized        Exercised       Outstanding     for Grant
----        ----------        ---------       -----------     ---------
<S>         <C>               <C>              <C>            <C>
1994 .....    700,000          111,433          534,900         53,667
1997 .....    600,000           67,091          498,434         34,475
1998 .....  1,200,000           15,448          969,550        215,002
            ---------        ---------        ---------        -------
            2,500,000          193,972        2,002,884        303,144
            =========        =========        =========        =======
</TABLE>

     The exercise price of options is determined by the Compensation Committee.
Payment of the exercise price may be made in cash or with shares of common
stock. The options generally vest over three years and expire either five or ten
years from the date of grant.

     IRIS has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation." If
compensation expense for the stock options had been determined using "fair
value" at the grant date for awards in 1998, 1999 and 2000, consistent with the
provisions of Statement of Financial Accounting Standards No. 123, the Company's
net income (loss) and income (loss) per share would have been reduced to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                        For the year ended December 31,
                                                         ---------------------------------------------------------
                                                              1998                  1999                  2000
                                                         -------------         -------------         -------------
<S>                                                      <C>                   <C>                   <C>
Income (loss) attributable to
   Common stockholders as reported ..............        $    (384,773)        $  (6,275,145)        $   2,307,967
Income (loss) attributable to
   Common stockholders  pro forma ...............             (584,374)        $  (6,665,244)        $   2,071,305
Income (loss) per diluted share as reported .....        $        (.05)        $        (.86)        $         .22
Income (loss) per diluted share pro forma .......                 (.08)                 (.92)                  .20
</TABLE>

     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 used for grants in 1998, 1999 and 2000.

<TABLE>
<CAPTION>
                                    For the year ended December 31,
                                    ------------------------------
                                     1998       1999       2000
                                     ----       ----       ----
<S>                                  <C>        <C>        <C>
Risk free interest rate .....        4.98%      5.82%      6.43%
Expected lives (years) ......         5          5          5
Expected volatility .........        59%        74%        81%
Expected dividend yield .....        --         --         --
</TABLE>



                                      F-19
<PAGE>   43

     The pro forma calculations above are for informational purposes only.
Future calculations of the pro forma effects of stock options may vary
significantly due to changes in the assumptions described above as well as
future grants, and for forfeitures of stock options.

     The following table sets forth certain information relative to stock
options during the years ended December 31, 1998, 1999 and 2000.



<TABLE>
<CAPTION>
                                                                            Option Price
                                                                   -----------------------------  Fair Value at
                                                                                                    Grant Date
                                                                                         Weighted    Weighted
                                                  Shares               Range             Average      Average
                                                ----------         --------------        --------   ----------
<S>                                             <C>                <C>                   <C>        <C>
Outstanding at December 31, 1997 .......         1,266,300         $3.03 to $4.50        $   3.21           --
  Granted ..............................           368,800         $0.81 to $4.25        $   2.36     $   2.36
  Exercised ............................           (37,732)                 $3.03        $   3.03
  Canceled or expired ..................           (96,367)        $3.03 to $4.00        $   3.11           --
                                                ----------         --------------        --------     --------
Outstanding at December 31, 1998 .......         1,501,001         $0.81 to $4.50        $   1.46
  Granted ..............................           488,250         $0.69 to $1.38        $   1.11     $   1.11
  Exercised ............................                --                     --              --           --
  Canceled or expired ..................          (122,800)        $0.88 to $4.50        $   2.35           --
                                                ----------         --------------        --------     --------
Outstanding at December 31, 1999 .......         1,866,451         $0.69 to $4.38        $   1.31
  Granted ..............................           542,050         $0.88 to $2.38        $   1.35     $   1.35
  Exercised ............................          (170,148)        $1.25 to $1.31        $   1.31           --
  Canceled or expired ..................          (235,469)        $0.88 to $3.69        $   1.41           --
                                                ----------         --------------        --------     --------
Outstanding at December 31, 2000 .......         2,002,884         $0.69 to $4.38        $   1.30           --


Outstanding at December 31, 2000
  Weighted average life - 87 months ....         2,002,884                               $   1.30


Outstanding at December 31, 1999
  Weighted average life - 90 months ....         1,866,451                               $   1.31


Outstanding at December 31, 1998
  Weighted average life - 82 months ....         1,501,001                               $   1.46


Exercisable at December 31, 2000
  Weighted average life - 47 months ....         1,398,327                               $   1.30


Exercisable at December 31, 1999
  Weighted average life - 58 months ....         1,200,066                               $   1.31


Exercisable at December 31, 1998
  Weighted average life - 42 months ....           762,579                               $   1.46
</TABLE>

     In 1996, the Company adopted a 401(k) Plan. All employees are eligible to
participate in the plan. Contributions by the Company are discretionary.
Employees vest in amounts contributed by the Company immediately. The Company
contributed $45,352 and $48,948 to the plan for 1999 and 2000, respectively.





                                      F-20
<PAGE>   44

Warrants

     At December 31, 2000, the following warrants to purchase common stock were
outstanding and exercisable:

<TABLE>
<CAPTION>
                   Number of Shares           Per Share Price          Expiration Date
                   ----------------           ---------------          ---------------
<S>                                           <C>                    <C>
                       298,633                      4.00             April 3, 2001
                       875,000                      3.56             July 31, 2001
                        84,270                      3.56             December 31, 2001
                       100,000                      1.50             February 10, 2002
                        10,000                      4.31             May 15, 2002
                       306,000                      2.00             August 6, 2002
                       297,000                      1.00             August 6, 2002
                        50,000                      2.13             October 31, 2005
</TABLE>


12.  COMMITMENTS AND CONTINGENCIES.

Leases

     The Company leases real property under agreements which expire at various
times over the next five years. Certain leases contain renewal options and
generally require the Company to pay utilities, insurance, taxes and other
operating expenses.

     Future minimum rental payments required under capital and operating leases
that have an initial term in excess of one year as of December 31, 2000, are as
follows:

<TABLE>
<CAPTION>
                  Year Ended December 31                  Capital Leases               Operating Leases
                  ----------------------                  --------------               ----------------
<S>                                                       <C>                          <C>
                  2001 ..............................         $39,489                       $336,340
                  2002 ..............................          39,489                        268,452
                  2003 ..............................          39,489                        195,357
                  2004 ..............................          39,489                         93,024
                  2005 ..............................          18,051                         23,256
                  Years thereafter ..................              --                             --
                                                             --------                       --------
                                                             $176,007                       $916,429
                                                             ========                       ========
</TABLE>

     Rent expense under all operating leases during 1998, 1999 and 2000 was
$514,555, $530,000 and $512,842 respectively.

Other

     IRIS has a licensing agreement with Cytocolor, Inc. relating to the use of
its patented leukocyte stain. Under the terms of the agreement, IRIS is subject
to the following future minimum royalty payments:

<TABLE>
<CAPTION>
                  Year Ended December 31,                       Amount
                  -----------------------                       ------
<S>                                                             <C>
                  2001 ......................................    20,000
                  2002 ......................................    20,000
                  2003 ......................................    20,000
                  2004 ......................................    20,000
                  2005 ......................................    20,000
                  Years thereafter ..........................   160,000
                                                              ---------
                                                               $260,000
                                                               ========
</TABLE>

     To date, actual payments to Cytocolor have not exceeded the annual $20,000
minimum royalty payment.

                                      F-21
<PAGE>   45

Litigation

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

13.  EARNINGS PER SHARE.

     The computation of per share amounts for 1998, 1999 and 2000 is based on
the average number of common shares outstanding for the period. Options and
warrants to purchase 3,951,354 shares of common stock and 297,000 shares on
conversion of preferred stock were not considered in the computation of diluted
EPS for 1999 because their inclusion would have been antidilutive.

     The following is a reconciliation of shares used in computing basic and
diluted earnings per share for 1998 and 2000:

<TABLE>
<CAPTION>
                                                           1998              2000
                                                        ---------        ----------
<S>                                                     <C>               <C>
Weighted average number of shares - basic ......        6,310,312         9,654,272

Effect of dilutive securities:
     Options ...................................          325,258           300,041
     Warrants ..................................               --           145,294
     Preferred stock ...........................        1,052,632           305,190
                                                        ---------        ----------

Weighted average number of shares - diluted ....        7,688,202        10,404,797
                                                        =========        ==========
</TABLE>

14.  LICENSE.

     Sysmex Corporation, formerly known as TOA Medical Electronics Co., Ltd.,
has developed several urine sediment analyzers under license from IRIS using
pre-1989 IRIS technology. IRIS received royalties under this license of
$230,000, $310,587 and $601,511 in 1998, 1999 and 2000, respectively.

15.  DISCONTINUED OPERATIONS.

     In March 2000, the Board of Directors approved a plan of disposal for its
wholly-owned subsidiary, Perceptive Scientific Instruments, LLC ("PSI"), the
Company's genetic analysis business segment. The Company completed the sale of
substantially all of PSI's U.S. operations to Applied Imaging Corporation
(Nasdaq: AICX) on July 6, 2000. The purchase price consisted of 385,371 shares
of Applied Imaging common stock, the assumption of certain liabilities and
potential cash payments based on future performance of Applied Imaging's
business. The Company was unable to sell PSI's international operations and
placed Perceptive Scientific International Limited (a wholly-owned subsidiary of
PSI) into a voluntary liquidation under United Kingdom law on June 6, 2000.



                                      F-22
<PAGE>   46

     The results of discontinued operations through the date of disposal
consisted of the following:

<TABLE>
<S>                                                             <C>
Operating losses, net of tax through March 31, 2000 ....        $(286,385)
                                                                ---------

Loss on Disposal:
  Operating losses, net of tax from March 31, 2000
    to July 6, 2000 ....................................        $(340,827)

  Gain on disposal of net assets .......................          141,668
                                                                ---------
                                                                 (199,159)
                                                                ---------
Total loss from discontinued operations ................        $(485,544)
                                                                =========
</TABLE>


     Revenues from discontinued operations for the year ended December 31, 2000
were $1,227,400.

     The operating results of the discontinued operations for the years ended
December 31, 1998 and 1999 are summarized as follows:

<TABLE>
<CAPTION>
                                                   1998                1999
                                               -----------         -----------
<S>                                            <C>                 <C>
Revenues ..............................        $ 5,936,301         $ 4,218,647
Loss from discontinued operations .....         (1,051,587)         (5,187,221)
</TABLE>


     The cash flow data of the discontinued operations for the year ended
December 31, 1998 and 1999 were not separately detailed in the statement of cash
flows, but are summarized below:

<TABLE>
<CAPTION>
                                                        1998              1999
                                                     ---------         ---------
<S>                                                  <C>               <C>
  Cash provided by (used in) operations .....        $(137,169)        $ 279,321
  Cash used by investing activities .........         (377,948)         (230,166)
  Effect of foreign currency fluctuations
     on cash equivalents ....................           25,942            11,234
                                                     ---------         ---------
  Cash provided (used) by
     discontinued operations ................        $(489,175)        $  60,389
                                                     =========         =========
</TABLE>

16.  UNUSUAL CHARGES.

     The results of operations for the year ended December 31, 1998 include
certain unusual charges to earnings of $193,186 primarily related to legal costs
incurred for the arbitration against Digital Imaging Technologies, Inc.
("DITI"), relating to the acquisition of PSI.

     The results of operations for year ended December 31, 1999 include
litigation settlement and other unusual charges totaling $4,158,894. These
charges primarily consist of (1) the settlement expense recorded in connection
with the tender offer for Poly U/A Systems, Inc. ($1,670,127), (2) the cost of
the arbitration with DITI ($391,831), (3) the write-off of deferred warrant
costs for technology rights from Poly U/A Systems ($807,244), (4) the write-off
of deferred costs related to The White IRIS leukocyte differential analyzer
program ($796,887), and (5) expenses in connection with the prior CEO's
retirement agreement ($443,805).

     There were no unusual charges to earnings for the year ended December 31,
2000.

17.  SEGMENT AND GEOGRAPHIC INFORMATION.

     The Company's continuing operations are organized on the basis of products
and related services and under SFAS No. 131 operates in two segments: (1)
urinalysis and (2) small laboratory devices.

     The urinalysis segment designs, develops, manufactures and markets IVD
systems based on patented and proprietary AIM technology for automating
microscopic procedures for urinalysis. In December 1997, this segment



                                      F-23
<PAGE>   47

also began distributing the UF-100 urine cell analyzer in the United States
under an existing agreement with its manufacturer. The segment also provides
ongoing sales of supplies and service necessary for the operation of installed
urinalysis workstations. In the United States, these products are sold through a
direct sales force. Internationally, these products are sold through
distributors.

     The small laboratory devices 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 and urinalysis. 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" included in this annual report
for the year ended December 31, 2000. The Company evaluates the performance of
its segments and allocates resources to them based on earnings before income
taxes, excluding corporate charges ("Segment Profit").



                                      F-24
<PAGE>   48



     The tables below present information about reported segments for the three
years ended December 31, 2000:

<TABLE>
<CAPTION>
                                                                        Small          Unallocated
                                                                     Laboratory         Corporate
                                                 Urinalysis            Devices           Expenses              Total
                                                ------------         ----------        -----------         -------------
<S>                                             <C>                   <C>              <C>                 <C>
For the Year Ended December 31, 1998:

Revenues .................................      $ 17,000,874          $ 4,580,304                 --       $ 21,581,178

Interest income ..........................      $     20,123          $    13,812                 --       $     33,935

Interest expense .........................      $      5,147                   --       $  1,157,487       $  1,162,634

Depreciation and amortization ............      $  1,069,208          $   163,074       $    114,818       $  1,347,100

Other noncash items ......................      $     71,058          $    48,238                 --       $    119,296

Unusual items ............................                --                   --       $    193,186       $    193,186

Segment profit (loss) ....................      $  2,867,240          $ 1,079,027       $ (2,859,317)      $  1,086,950

Segment assets ...........................      $ 10,880,771          $ 1,746,774       $  8,856,692       $ 21,484,237

Investment in long-lived assets ..........      $    950,260          $    51,064                 --       $  1,001,324

For the Year Ended December 31, 1999:

Revenues .................................      $ 20,428,084          $ 5,297,385                 --       $ 25,725,469

Interest income ..........................      $     32,546          $     2,764                 --       $     35,310

Interest expense .........................      $      5,155                   --       $    960,846       $    966,001

Depreciation and amortization ............      $  2,552,196(1)       $   131,700       $     47,572       $  2,731,468

Other noncash items ......................      $    472,011          $   (82,225)                --       $    389,786

Unusual items ............................      $  1,732,746                   --       $  2,426,148       $  4,158,894

Segment profit (loss) ....................      $  3,676,900          $ 1,414,313       $ (5,648,235)      $   (557,022)

Segment assets ...........................      $ 11,068,096          $ 2,189,013       $ 11,357,238       $ 24,614,347

Investment in long-lived assets ..........      $    517,854          $    57,551                 --       $    575,405

For the Year Ended December 31, 2000:

Revenues .................................      $ 22,432,789          $ 6,209,967                 --       $ 28,642,756

Interest income ..........................      $    197,012                   --                 --       $    197,012

Interest expense .........................      $      3,794                   --       $    975,475       $    979,269

Depreciation and amortization ............      $    815,765          $   118,062       $    188,577       $  1,122,404

Other noncash items ......................      $     (1,677)                  --                 --       $     (1,677)

Segment profit (loss) ....................      $  5,792,100          $ 1,579,554       $ (2,983,244)      $  4,388,410

Segment assets ...........................      $ 16,921,799          $ 2,033,749       $  9,331,991       $ 28,287,539

Investment in long-lived assets ..........      $    742,770          $    58,416                 --       $    801,186
</TABLE>

(1)  Includes writeoff totaling $1,604,131 relating to deferred warrant cost for
     technology costs and deferred software costs.

     For continuing operations, the Company ships products from two locations in
the United States.

     Long-lived assets for continuing operations were all located in the United
States and totaled $2,646,393 and $2,758,926 as of December 31, 1999 and 2000,
respectively.



                                      F-25
<PAGE>   49

18.  SUBSEQUENT EVENT.

     On March 15, 2001, the Company renewed its existing credit facility with
Foothill Capital Corporation and concurrently refinanced the $7.0 million
subordinated note due July 31, 2001.

     The Company refinanced the $7.0 million subordinated note with a new $3.0
million term loan from Foothill Capital, the issuance of a new $3.5 million
subordinated note to the existing note holder and $500,000 from the Company's
cash reserves. The term loan and the new subordinated note both amortize over
three years. In connection with the refinancing, the Company issued a new 3 year
warrant to purchase 853,040 shares of common stock at $1.90 per share. The new
warrant replaces an old warrant expiring July 31, 2001 for the same number of
shares.

19.  SELECTED QUARTERLY DATA (UNAUDITED).

     The following table summarizes certain financial information by quarter for
1999 and 2000:


<TABLE>
<CAPTION>
                                                                                1999 Quarter Ended
                                                  -------------------------------------------------------------------------
                                                     March 31            June 30          September 30        December 31
                                                  -------------       -------------       -------------       -------------
<S>                                               <C>                 <C>                 <C>                 <C>
Net revenues ...............................      $   5,488,790       $   6,117,847       $   6,660,251       $   7,458,581
Gross margin ...............................      $   2,797,279       $   2,944,051       $   2,932,178       $   3,994,255
Income (loss) from continuing
 operations ................................      $    (929,725)      $     116,158       $  (1,387,971)      $   1,113,614
Loss from discontinued
 operations ................................      $    (389,344)      $    (235,902)      $  (4,521,104)      $     (40,871)
Net income (loss) ..........................      $  (1,319,069)      $    (119,744)      $  (5,909,075)      $   1,072,743
Income (loss) per share -- basic:
Income (loss) from continuing
 operations ................................      $       (0.15)      $        0.02       $       (0.20)      $        0.12
Loss from discontinued
 operations ................................      $       (0.06)      $       (0.04)      $       (0.65)      $       (0.01)
                                                  -------------       -------------       -------------       -------------
Income (loss) per share attributable to
 common shareholders -- basic: .............      $       (0.21)      $       (0.02)      $       (0.85)      $        0.11
                                                  =============       =============       =============       =============
Income (loss) per share -- diluted:
Income (loss) from continuing
 operations ................................      $       (0.15)      $        0.01       $       (0.20)      $        0.12
Loss from discontinued
 operations ................................      $       (0.06)      $       (0.02)      $       (0.65)      $       (0.01)
                                                  -------------       -------------       -------------       -------------
Income (loss) per share attributable to
 common shareholders -- diluted: ...........      $       (0.21)      $       (0.01)      $       (0.85)      $        0.11
                                                  =============       =============       =============       =============
</TABLE>



                                      F-26
<PAGE>   50

<TABLE>
<CAPTION>
                                                                            2000 Quarter Ended
                                                  ------------------------------------------------------------------------
                                                     March 31           June 30           September 30       December 31
                                                  -------------       -------------       -------------      -------------
<S>                                               <C>                 <C>                 <C>                <C>
Net revenues ...............................      $   6,753,138       $   7,476,481       $   7,142,775      $   7,270,362
Gross margin ...............................      $   3,536,932       $   3,838,670       $   3,934,044      $   4,294,514
Income (loss) from continuing
 operations ................................      $     637,310       $     674,132       $     719,185      $     762,884
Loss from discontinued
 operations ................................      $    (286,385)      $    (199,159)                 --                 --
Net income (loss) ..........................      $     350,925       $     474,973       $     719,185      $     762,884
Income (loss) per share -- basic:
Income (loss) from continuing
 operations ................................      $        0.07       $        0.07       $        0.07      $        0.08
Loss from discontinued
 operations ................................      $       (0.03)      $       (0.02)                 --                 --
                                                  -------------       -------------       -------------      -------------
Income (loss) per share attributable to
 common shareholders -- basic: .............      $        0.04       $        0.05       $        0.07      $        0.08
                                                  =============       =============       =============      =============
Income (loss) per share -- diluted:
Income (loss) from continuing
 operations ................................      $        0.06       $        0.07       $        0.07      $        0.07
Loss from discontinued
 operations ................................      $       (0.03)      $       (0.02)                 --                 --
                                                  -------------       -------------       -------------      -------------
Income (loss) per share attributable to
 common shareholders -- diluted: ...........      $        0.03       $        0.05       $        0.07      $        0.07
                                                  =============       =============       =============      =============
</TABLE>



                                      F-27
<PAGE>   51
                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                                                      Additions
                                                               --------------------------------
                                                 Beginning     Charged to cost     Charged to                             Ending
                                                  Balance       and expenses      other accounts      Deductions          Balance
                                                ----------     ---------------   ---------------     ------------        ----------
<S>                                             <C>            <C>                <C>                <C>                 <C>
Year Ended December 31, 2000

Allowance for Doubtful Accounts ...........      $  516,047                                         $  (181,351)(1)      $  334,696

Reserve for Inventory Obsolescence ........      $  995,253      $   343,983                        $  (361,605)(1)      $  977,631

Deferred Tax Asset Valuation Allowance ....      $2,649,000                                         $(1,655,000)(2)      $  994,000

Year Ended December 31, 1999

Allowance for Doubtful Accounts ...........      $  271,544      $   254,503              --          $ (10,000)(1)      $  516,047

Reserve for Inventory Obsolescence ........      $  705,103      $   372,375              --          $ (82,225)(1)      $  995,253

Deferred Tax Asset Valuation Allowance ....      $2,000,000      $   649,000              --                 --          $2,649,000

Year Ended December 31, 1998

Allowance for Doubtful Accounts ...........      $  267,579      $     3,965              --                 --          $  271,544

Reserve for Inventory Obsolescence ........      $  589,772      $   266,838              --          $(151,507)(1)      $  705,103

Deferred Tax Asset Valuation Allowance ....      $2,000,000               --              --                 --          $2,000,000
</TABLE>


(1)  Relates to the write-off of accounts receivable or disposal of obsolete
     inventory.

(2)  Relates to the decrease in deferred tax assets due to the expiration of
     certain NOL tax credit carryforwards.


         This schedule contains summary financial information extracted from the
consolidated balance sheet at December 31, 2000 and the consolidated statement
of operation for the year then ended and is qualified in its entirety by
reference to such financial statement.


                                      F-28
<PAGE>   52
                                   SIGNATURES

         Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, in
Chatsworth, California, on March 31, 2001.

                                      INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

                                      /s/  John A O'Malley
                                      ------------------------------------------
                                      John A. O'Malley
                                      Chairman of the Board, President,
                                      Chief Executive Officer and
                                      Chief Financial Officer

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


<TABLE>
<CAPTION>
         Signature                              Title                            Date
         ---------                              -----                            ----
<S>                               <C>                                       <C>
/s/ John A. O'Malley              Chairman of the Board, President,         March 31, 2001
-----------------------------     Chief Executive Officer
John A. O'Malley                  (Principal Executive Officer)
                                  and Chief Financial Officer
                                  (Principal Financial)

/s/ Donald E. Horacek              Secretary and Controller                  March 31, 2001
-----------------------------      (Principal Accounting Officer)
Donald E. Horacek

/s/ Steven M. Besbeck              Director                                  March 31, 2001
-----------------------------
Steven M. Besbeck

/s/ Thomas F. Kelley               Director                                  March 31, 2001
-----------------------------
Thomas F. Kelley

/s/ Richard G. Nadeau              Director                                  March 31, 2001
-----------------------------
Richard G. Nadeau
</TABLE>

<PAGE>   53
                                  EXHIBIT INDEX

EXHIBIT


<TABLE>
<CAPTION>
Exhibit                                                                                            Reference
Number          Description                                                                        Document
------          -----------                                                                        --------
<S>             <C>                                                                                 <C>
3.1(a)          Certificate of Incorporation, as amended                                                 (1)

3.1(b)          Certificate of Designations of Series A Convertible Preferred Stock                      (2)

3.1(c)          Certificate of Designations of Series B Callable Preferred Stock                         (3)

3.1(d)          Certificate of Designations, Preferences and Rights of Series C Preferred Stock          (4)

3.2             Restated Bylaws                                                                          (5)

4.1             Specimen of Common Stock Certificate                                                     (6)

4.2             Certificate of Designations of Series A Convertible Preferred Stock                      (2)

4.3             Certificate of Designations of Series B Callable Preferred Stock                         (3)

4.4             Certificate of Designations, Preferences and Rights of Series C Preferred Stock          (4)

10.1            Lease of the Company's headquarters facility, as amended                                 (7)

10.2(d)         1994 Stock Option Plan and forms of Stock Option Agreements                              (8)

10.2(e)         Certificate of Officer With Respect to Amendment of 1994 Stock Option Plan               (9)

10.2(f)         Employee Stock Purchase Plan                                                             (20)

10.2(g)         1997 Stock Option Plan and form of Stock Option Agreement                                (10)

10.2(h)         1998 Stock Option Plan and form of Stock Option Agreement                                (11)

10.3(a)         Various Agreements with Sysmex Corporation,   formerly TOA Medical Electronics           (12)
                Company, Ltd.

10.3(b)         Patent License Agreement dated April 1, 1997 between the Company and Sysmex              (13)
                Corporation, formerly TOA Medical Electronics Company, Ltd.

10.3(c)         Amendment No. 1 to Patent License Agreement dated February 29, 2000                      (20)

10.3(d)         Termination, Release and Reassignment of Security Interest dated October 30,             (13)
                1997 executed by Sysmex Corporation, formerly TOA Medical Electronics Company,
                Ltd. in favor of the Company

10.4(a)         Agreement for a Strategic Alliance in Urinalysis dated January 7, 1994 between           (14)
                the Company and Boehringer Mannheim Corporation

10.4(b)         Amendment to Distribution Agreements                                                     (15)

10.5(a)         Technology License Agreement dated as of September 29, 1995 between the Company          (16)
                and Poly U/A Systems, Inc.

10.5(b)         Research and Development Agreement dated as of September 29, 1995 between the            (16)
                Company and Poly U/A Systems, Inc.

10.5(c)         $100 Class "A" Note dated September 29, 1995 issued by Poly U/A Systems, Inc. in         (16)
                favor of the Company

10.5(d)         Form of Series D Warrant                                                                 (13)

10.5(g)         Form of Series E Warrant                                                                 (13)

10.6(a)         Registration Rights and Standstill Agreement dated July 31, 1996 between the             (9)
                Company and Digital Imaging Technologies, Inc.

10.6(b)         Restated Warrant Certificates dated July 31, 1996 issued to Digital Imaging              (20)
                Technologies, Inc. to purchase 875,000 shares of Common Stock of the Company

10.6(c)         Technology License Agreement dated July 31, 1996 between Perceptive Scientific           (9)
                Imaging Systems, Inc. and PSII Acquisition Corp., a wholly-owned subsidiary of
                the Company (now known as Perceptive Scientific Instruments, Inc.)

10.6(d)         Warrant Certificate dated March 14, 2001 issued to Digital Imaging Technologies,          --
                Inc. to purchase 853,040 shares of Common Stock of the
</TABLE>

<PAGE>   54
<TABLE>
<S>             <C>                                                                                      <C>
                Company

10.7            $7,000,000 Subordinated Note dated July 29, 1996 issued by the Company in favor          (9)
                of Digital Imaging Technologies, Inc.

10.7(a)         $7,000,000 Subordinated Note dated March 14, 2001 issued by the Company in favor          --
                of Digital Imaging Technologies, Inc.

10.8(a)         Loan and Security Agreement dated as of May 5, 1998 among the Company,                   (17)
                Perceptive Scientific Instruments, Inc., and StatSpin, Inc., on the one hand,
                and Foothill Capital Corporation, on the other hand.

10.8(b)         Intellectual Property Security Agreement dated as of May 5, 1998 between the             (17)
                Company and Foothill Capital Corporation

10.8(c)         Copyright Security Agreement dated as of May 5, 1998 between the Company and             (17)
                Foothill Capital Corporation

10.8(d)         Intellectual Property Security Agreement dated as of May 5, 1998 between                 (17)
                Perceptive Scientific Instruments, Inc. and Foothill Capital Corporation

10.8(e)         Copyright Security Agreement dated as of May 5, 1998 between Perceptive                  (17)
                Scientific Instruments, Inc. and Foothill Capital Corporation

10.8(f)         Security Agreement -- Stock Pledge dated as of May 5, 1998 between Perceptive            (17)
                Scientific Instruments, Inc. and Foothill Capital Corporation

10.8(g)         Intellectual Property Security Agreement dated as of May 5, 1998 between                 (17)
                StatSpin, Inc. and Foothill Capital Corporation

10.8(h)         Amendment Number One to Loan and Security Agreement dated as of March 23, 1999           (18)
                among the Company, Perceptive Scientific Instruments, LLC, and StatSpin, Inc.,
                on the one hand, and Foothill Capital Corporation, on the other hand

10.8(i)         Amendment Number One to Security Agreement -- Stock Pledge dated as of March 23,         (18)
                1999 among the Company and Perceptive Scientific Instruments, LLC, on the one
                hand, and Foothill Capital Corporation, on the other hand

10.8(j)         Amendment to Copyright Security Agreement dated as of March 23, 1999 among the           (18)
                Company and Perceptive Scientific Instruments, LLC, on the one hand, and
                Foothill Capital Corporation, on the other hand

10.8(k)         Amendment to Intellectual Property Security Agreement dated as of March 23, 1999         (18)
                among the Company and Perceptive Scientific Instruments, LLC, on the one hand,
                and Foothill Capital Corporation, on the other hand

10.8(l)         Amendment Number Two to Loan and Security Agreement dated as of March 19, 1999           (18)
                among the Company, Perceptive Scientific Instruments, LLC, and StatSpin, Inc.,
                on the one hand, and Foothill Capital Corporation, on the other hand.

10.8(m)         Amendment Number Three to the Loan and Security Agreement dated as of April 16,          (20)
                1999 among the Company, Perceptive Scientific Instruments, LLC, and StatSpin,
                Inc., on the one hand, and Foothill Capital Corporation, on the other hand.

10.8(n)         Amendment Number Six to the Loan and Security Agreement dated as of March 14,             --
                2001 among the Company, Advanced Digital Imaging Research, LLC and StatSpin,
                Inc., on the one hand, and Foothill Capital Corporation, on the other hand.

10.8(o)         Warrant to Purchase Common Stock dated June 1, 1997 issued to City National Bank         (13)

10.8(p)         Warrant to Purchase Common Stock dated July 1, 1997 issued to City National Bank         (13)

10.8(q)         Subordination Agreement dated as of March 14, 2001 among the Company, Foothill            --
                Capital Corporation and Digital Imaging Technologies, Inc.

10.9(a)         Common Stock Purchase Warrant dated December 31, 1996 issued to Thermo Amex              (2)
                Convertible Growth Fund I, L.P.

10.9(b)         Registration Rights Agreement dated December 31, 1996 by and between
</TABLE>

<PAGE>   55
<TABLE>
<S>             <C>                                                                                      <C>
                                                                                                         (2)
                the Company and Thermo Amex Convertible Growth Fund I, L.P.

10.10(a)        Asset Purchase Agreement dated as of July 6, 2000 among the company, Perceptive          (19)
                Scientific Instruments, LLC and Applied Imaging Corporation

24              Consent of PricewaterhouseCoopers LLP                                                     --

99              Disclosure Regarding Risk Factors And Forward-Looking Statements                          --
</TABLE>

     Exhibits followed by a number in parenthesis are incorporated by reference
to the similarly numbered Company document cited below:

(1)     Current Report on Form 8-K dated August 13, 1987 and Quarterly Report on
        Form 10-Q for the quarter ended September 30, 1993.

(2)     Current Report on Form 8-K dated January 15, 1997.

(3)     Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.

(4)     Current Report on Form 8-K dated January 26, 2000.

(5)     Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.

(6)     Registration Statement on Form S-3, as filed with the Securities and
        Exchange Commission on March 27, 1996 (File No. 333-002001).

(7)     Annual Report on Form 10-K for the year ended December 31, 1989,
        Quarterly Report on Form 10-Q for the quarter ended September 30, 1993
        and Annual Report on Form 10-K for the year ended December 31, 1994.

(8)     Registration Statement on Form S-8, as filed with the Securities and
        Exchange Commission on August 8, 1994 (File No. 33-82560).

(9)     Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.

(10)    Registration Statement on Form S-8, as filed with the Securities and
        Exchange Commission on July 16, 1997 (File No. 333-31393).

(11)    Registration Statement on Form S-8, as filed with the Securities and
        Exchange Commission on October 9, 1998 (File No. 333-65547).

(12)    Current Report on Form 8-K dated July 15, 1988 and Quarterly Report on
        Form 10-Q for the quarter ended June 30, 1995.

(13)    Annual Report on Form 10-K for the year ended December 31, 1997.

(14)    Annual Report on Form 10-K for the year ended December 31, 1994.

(15)    Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.

(16)    Quarterly Report on Form 10-Q for the quarter ended September 31, 1995.

(17)    Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

(18)    Annual Report on Form 10-K for the year ended December 31, 1998.

(19)    Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

(20)    Annual Report on Form 10-K for the year ended December 31, 1999.