##### 









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,
2001

Commission File No. 1-9767

International Remote Imaging Systems,
Inc.


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

9172 Eton Avenue, Chatsworth, California
91311

(Address of principal executive offices) (Zip
Code)


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 þ          No o

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.     þ

On March 12, 2002, the aggregate market
value of the shares of Common Stock held by non-affiliates of
the Registrant was approximately $18.3 million based upon
the closing price of $2.30 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 10,374,359 shares of Common
Stock outstanding on March 12, 2002.

Part III incorporates information by reference
from the Proxy Statement for the Registrants 2002 Annual
Meeting of Stockholders.



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INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.

FORM 10-K ANNUAL REPORT

Fiscal Year Ended December 31,
2001


|         |  |                                                                                        |  |  |    | 
|-------- |  | -------------------------------------------------------------------------------------- |  |  | -- | 
|PART I  
|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                                                                |  |  | 10 | 
|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                                                                 |  |  | 17 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  |  | 17 | 
|Item 13. |  | Certain Relationships and Related Transactions                                         |  |  | 17 | 
|PART IV 
|Item 14. |  | Exhibits, Financial Statements Schedules, and
	Reports on Form 8-K                     |  |  | 18 | 

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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 slide-less
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 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. We 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 our Iris
Diagnostics division is the only supplier of laboratory systems
that 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. During 2001, we
also became the exclusive U.S. distributor for the ARKRAY Model
AX-4280 Automated Urine Strip Analyzer. We recently received
510(k) clearance from the Food and Drug Administration to market
this product in the United States and expect to begin offering
it for sale in the second quarter of this year.

Through our StatSpin subsidiary, 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. The
urinalysis products appeal to laboratories and physician offices
performing too few tests to justify the cost of an automated IVD
imaging system.

Our research and development subsidiary, Advanced
Digital Imaging Research, LLC, assists in the advancement of
proprietary imaging technology while conducting
government-sponsored research and development in medical imaging
and software, as well as contract research for corporate clients.

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.

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 examined 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, potentially
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.

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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, 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 the development of new product enhancements that will
	lead to our next generation urinalysis workstation. Our goal is
	to provide a higher performance, lower-cost platform for our
	urinalysis workstations that will enable us to maintain a
	competitive advantage and penetrate the market for those
	laboratories and hospitals who are in need of cost-effective
	urinalysis technology.
|
| |  | Expanding into New Geographic
	Markets.We traditionally focused on
	domestic sales for our urinalysis workstations and in 1999 began
	to selectively market our product internationally. With
	international markets consolidating and focusing on increased
	productivity, we are continuing to introduce 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.                                                                                                                                                                   

AIM Technology

An effective system for most automated microscopy
applications requires technology for fast, consistent and easily
discernible 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 slide-less 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, manipulation and scanning. The slide-less
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 that 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

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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 more than 80% of all U.S.
medical schools. Diagnostic automated systems are designed for
workloads ranging from the largest hospitals to smaller
laboratories and process anywhere from a few specimens to
hundreds per day.

We have two basic models: The Model 500 Urine/
Fluids Workstation which 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, walk away system designed for laboratories
testing medium to high numbers of urine specimens. The Model
939UDx can transmit final test results directly to the
laboratory computer without operator intervention. The key
advantage of the 939UDx models over the Model 500 is that they
are fully automated and walk away. Our urinalysis workstations
currently have prices ranging from $100,000 to $195,000.

We also are the exclusive U.S. distributor of the
ARKRAY Aution MaxTM AX-4280 Automated Urine Strip
Analyzer. The AX-4280 is the worlds smallest, fully walk
away urine chemistry strip reader designed around a universal
sample transfer rack system that provides automatic, unattended
batch processing. The AX-4280 is manufactured by ARKRAY, Inc.,
of Kyoto, Japan.

We ceased distribution of the IRIS/Sysmex UF-100
urine cell analyzer in 2001 following a dispute with Sysmex
regarding our exclusive distribution rights. We were unable to
resolve our differences with Sysmex through negotiations and
decided not to pursue legal action. We based this decision on
our assessment that the products market potential was
insufficient to justify the legal expense of enforcing our
contractual rights to the product. This product did not account
for any sales in either 2001 or 2000.



| |                            
| | ---------------------------
| | 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 slide-less microscopy and
controls used in 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. Some of 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, physicians 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

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design and simple, quiet, and unobtrusive
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, 2001:

|                                         |  |            |            |            |  |       |           |  |  |   |            | 
|---------------------------------------- |  | ---------- | ---------- | ---------- |  | ----- | --------- |  |  | - | ---------- | 
|                                         |  |            |            | Small      |  |      
|                                         |  |            |            | Laboratory |  |      
|For the Year Ended December 31, 2001     |  | Urinalysis |            | Devices    |  | Total
|                                         |  |            |            |            |  |      
|Sales of IVD systems                     |  | $          | 5,824,832  |            |  | $     |          |  |  | $ | 5,824,832  | 
|Sales of IVD system supplies and service |  |            | 15,735,336 |            |  |       |          |  |  |   | 15,735,336 | 
|Sales of small instruments and supplies  |  |            |           |            |  |       | 6,694,145 |  |  |   | 6,694,145  | 
|Royalty and license revenues             |  |            | 393,356    |            |  |       |          |  |  |   | 393,356    | 
|                                         |  |            |            |            |  |       |           |  |  |   |            | 
|Total                                    |  | $          | 21,953,524 |            |  | $     | 6,694,145 |  |  | $ | 28,647,669 | 
|                                         |  |            |            |            |  |       |           |  |  |   |            | 

|                                         |  |            |            |            |  |       |           |  |  |   |            | 
|---------------------------------------- |  | ---------- | ---------- | ---------- |  | ----- | --------- |  |  | - | ---------- | 
|                                         |  |            |            | Small      |  |      
|                                         |  |            |            | Laboratory |  |      
|For the Year Ended December 31, 2000     |  | Urinalysis |            | Devices    |  | Total
|                                         |  |            |            |            |  |      
|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 | 
|                                         |  |            |            |            |  |       |           |  |  |   |            | 

|                                         |  |            |            |            |  |       |           |  |  |   |            | 
|---------------------------------------- |  | ---------- | ---------- | ---------- |  | ----- | --------- |  |  | - | ---------- | 
|                                         |  |            |            | Small      |  |      
|                                         |  |            |            | Laboratory |  |      
|For the Year Ended December 31, 1999     |  | Urinalysis |            | Devices    |  | Total
|                                         |  |            |            |            |  |      
|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 | 
|                                         |  |            |            |            |  |       |           |  |  |   |            | 

Backlog

We did not have a material amount of backlog at
December 31, 2001 or 2000. The Company believes that
backlog 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 $6.0 million in 2001,
$3.8 million in 2000 and $1.9 million in 1999.

During 1999, we began a major project to
completely redesign our family of urinalysis workstations and
develop the next generation operating platform. We have devoted
substantially all of our research and

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development efforts to this project over the past
year, increasing our net research and development in 2001 by
$1.4 million, to $3.9 million from the previous year.
By incorporating more than 20 years of experience and the
latest developments in computer technology, we expect to
(1) significantly improve the speed and image quality of
our workstations, (2) further reduce the time required to
operate the system and (3) reduce our cost of goods and our
historical dependence on single-source suppliers by
incorporating more off-the-shelf components.
Significant progress was made in 2001, and we plan to continue
this development effort in the current year.


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, LLC
(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 2002. ADIR also performs some of our
internal research and development work as well as contract
research for corporate clients.

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 the
remaining shares of Poly/ UA common stock in privately
negotiated transactions. We now own 100% 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, direct mail, and Company website. All
sales of our workstations include installation, customer
training and a one-year warranty. Our small instruments,
targeted primarily at smaller customers, are sold through
distributors.

Internationally, we sell and service our products
through distributors in selected markets around the world. The
global economic downturn in 2001 directly impacted our
distributors ability to purchase our high end capital equipment
and sell these new systems into their respective country
markets. By the end of 2001, in anticipation of a strengthening
international market, we expanded our international team to
include a Director of International Sales and Marketing and a
Director of Global Business Development, with an aim of
capitalizing on unfulfilled demand. Our StatSpin subsidiary, on
the other hand, entered into a new distribution agreement with
Science International Corp. of China covering our proprietary
CenSlide Urinalysis System. We believe there is significant
potential for long-term growth opportunities in China.

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 that, in turn, purchase the
systems from us.

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We market most of the supplies used in the
operation of our urinalysis workstations and maintain these
systems through our own national service organization
domestically, and through our distributor network
internationally. 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. 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.

Bayer Diagnostics and Roche Diagnostics sell
lines of urine test strips that are used in determining the
concentration of various chemical substances found in urine.
Despite the Company obtaining FDA clearance to claim improved
performance of our urinalysis workstations over urine test strip
measures in detecting microscopic abnormalities in urine, 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 and has resulted in significantly slower growth in the
demand for microscopic examinations at certain hospitals and
reference laboratories. As urine chemistry test strips remain a
large segment of the urinalysis market and a revenue source for
the Company, the exclusive US distribution agreement with ARKRAY
for the Aution Max AX-4280 Automated Urine Strip Analyzer offers
a competitive alternative in the form of a compact,
high-throughput analyzer with a complete test strip menu.

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 other suppliers 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.

Sysmex Corporation markets its automated urine
sediment analyzers globally, and remains the Companys
chief competitor in the urinalysis business segment. The Sysmex
systems, although automated and easy to use, do have several
limitations. The systems are not capable of direct integration
of both the chemistry and sediment analysis of urine.
Additionally, these systems are limited in terms of the number
of automatically reported analytes and cannot perform body fluid
analysis. When further examination is needed, Sysmex systems,
which do not use image analysis, require the technologist to
remove the sample, prepare a slide and conduct a manual
microscopic analysis.

We are also experiencing increased domestic
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, who can 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.

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 our 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

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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 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 testing
of 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. We cannot 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
(cGMP Standards). In 1997, the FDA expanded the
scope of the cGMP 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 cGMP Standards. We believe that
we are in substantial compliance with the expanded cGMP
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.

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.

7



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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 cGMP 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 certification is, 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
2001.

The Company is in the process of obtaining the
ISO 9001 certification and expects to obtain this certification
sometime in 2002.

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 16 to the Consolidated Financial
Statements, Segment and Geographic Information, for
financial information regarding our operating segments and
geographic areas.

Employees

We had 137 full-time employees at
December 31, 2001 and 123 full-time employees at
December 31, 2000. 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 9172 Eton Avenue, Chatsworth, California 91311.
The table below sets forth certain information regarding our
leaseholds as of March 12, 2002:

|                |  |                   |        |         |  |     |        |  |  |                                                                                           
|--------------- |  | ----------------- | ------ | ------- |  | --- | ------ |  |  | ------------------------------------------------------------------------------------------
|                |  | Approximate Floor |        | Monthly |  |    
|Location        |  | Space (Sq. Ft.)   |        | Rent    |  | Use
|                |  |                   |        |         |  |    
|Chatsworth, CA  |  |                   | 51,000 |         |  | $   | 32,300 |  |  | 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 |  |                   | 4,000  |         |  | $   | 6,300  |  |  | Research and Development                                                                  

We leased additional contiguous space at our
Chatsworth facility in January 2002 and believe our facilities
are now adequate to meet our current needs.

8



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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, 2001.

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 12, 2002 was $2.30 per share. The
table below sets forth high and low closing prices reported by
American Stock Exchange for the period January 1, 2000
through December 31, 2001:

|            |                |                 |   |      |  |  |   |      | 
|----------- | -------------- | --------------- | - | ---- |  |  | - | ---- | 
|            |                |                
|            |                | Price Per Share
|            |                |                
|            |                | High            |   | Low 
|            |                |                 |   |     
|Fiscal 2001 |                |                 |   |      |  |  |   |     
|            | First Quarter  |                 | $ | 2.20 |  |  | $ | 1.31 | 
|            | Second Quarter |                 |   | 2.25 |  |  |   | 1.50 | 
|            | Third Quarter  |                 |   | 3.11 |  |  |   | 2.15 | 
|            | Fourth Quarter |                 |   | 3.00 |  |  |   | 2.20 | 
|Fiscal 2000 |                |                 |   |      |  |  |   |     
|            | First Quarter  |                 | $ | 3.69 |  |  | $ | .69  | 
|            | Second Quarter |                 |   | 2.44 |  |  |   | 1.13 | 
|            | Third Quarter  |                 |   | 2.69 |  |  |   | 1.56 | 
|            | Fourth Quarter |                 |   | 2.00 |  |  |   | 1.06 | 

In October 2001, we issued a five-year stock
warrant to purchase 45,045 shares of common stock at $2.22
in connection with services provided by our investor relations
firm. The warrant is part of their overall compensation package
for one year of services. We believe the investor relations firm
is an accredited investor under Regulation D
and has acquired the warrant for its own account and not with a
view to resale or distribution. We did not engage in general
solicitation or advertising, and the securities issued in the
transaction bear appropriate 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 1033 based Section 4(2) of
the Securities Act of 1933.

As of March 12, 2002, 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, and the holders of a majority of the
outstanding shares of Series B Preferred Stock.

9



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Item 6.     Selected
Financial Data

This information as of December 31, 2001 and
2000 and for the years ended December 31, 2001, 2000 and
1999, is derived in part from, and should be read in conjunction
with, the our Financial Statements, including the Notes thereto,
included elsewhere in this Annual Report.

|                                                              |  |                                       |        |         |  |         |        |         |  |         |        |   |  |   |        |   |  |   |        |  
|------------------------------------------------------------- |  | ------------------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | ------- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                              |  |                                      
|                                                              |  | Year Ended December 31,              
|                                                              |  |                                      
|                                                              |  | 2001                                  |        | 2000(1) |  | 1999(1) |        | 1998(1) |  | 1997(1)
|                                                              |  |                                       |        |         |  |         |        |         |  |        
|                                                              |  |                                      
|                                                              |  | (In thousands, except per share data)
|Financial Statement Data                                      |  |                                       |        |         |  |         |        |         |  |         |        |   |  |   |        |   |  |   |        |  
|Net revenue                                                   |  | $                                     | 28,648 |         |  | $       | 28,643 |         |  | $       | 25,725 |   |  | $ | 21,581 |   |  | $ | 20,724 |  
|Operating income from continuing operations                   |  |                                       | 3,306  |         |  |         | 5,152  |         |  |         | 390    |   |  |   | 2,202  |   |  |   | 1,007  |  
|Interest and other expense, net                               |  |                                       | (740   | )       |  |         | (763   | )       |  |         | (947   | ) |  |   | (1,115 | ) |  |   | (1,099 | )
|Income (loss) from continuing operations                      |  |                                       | 1,539  |         |  |         | 2,794  |         |  |         | (1,088 | ) |  |   | 667    |   |  |   | (58    | )
|Income (loss) from continuing operations per
	share  basic   |  |                                       | .15    |         |  |         | .29    |         |  |         | (.15   | ) |  |   | .11    |   |  |   | (.01   | )
|Income (loss) from continuing operations per
	share  diluted |  |                                       | .14    |         |  |         | .27    |         |  |         | (.15   | ) |  |   | .09    |   |  |   | (.01   | )
|Working capital                                               |  |                                       | 8,636  |         |  |         | 8,472  |         |  |         | 5,092  |   |  |   | 3,570  |   |  |   | 1,650  |  
|Total assets                                                  |  |                                       | 26,503 |         |  |         | 28,288 |         |  |         | 26,661 |   |  |   | 32,107 |   |  |   | 32,735 |  
|Long term debt, including current portion                     |  |                                       | 5,249  |         |  |         | 7,500  |         |  |         | 8,700  |   |  |   | 10,442 |   |  |   | 10,942 |  
|Total liabilities                                             |  |                                       | 10,538 |         |  |         | 14,668 |         |  |         | 16,439 |   |  |   | 17,108 |   |  |   | 17,942 |  
|Shareholders equity                                          |  |                                       | 15,965 |         |  |         | 13,619 |         |  |         | 10,222 |   |  |   | 14,999 |   |  |   | 14,792 |  
|OTHER FINANCIAL DATA                                          |  |                                       |        |         |  |         |        |         |  |         |        |   |  |   |        |   |  |   |        |  
|Operating income from continuing operations as
	adjusted(2)   |  |                                       | 3,306  |         |  |         | 5,152  |         |  |         | 4,549  |   |  |   | 2,395  |   |  |   | 2,346  |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 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 from continuing operations as
	adjusted represents operating income from continuing operations
	before unusual charges of $1.3 million, $193,000 and
	$4.2 million in the years ended December 31, 1997,
	1998 and 1999, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

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.

We make significant investments in research and
development for new products and enhancements to existing
products. We fund our research and development programs
primarily with internal funds, but we also

10



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receive grants from the National Institutes of
Health and to a lesser extent, contracts from third parties. The
following table summarizes total product technology expenditures
for the periods indicated:


|                                                                    |                                       |                         |       |       |  |      |       |       |  |   |       |       | 
|------------------------------------------------------------------- | ------------------------------------- | ----------------------- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                                                                    |                                       |                        
|                                                                    |                                       | Year Ended December 31,
|                                                                    |                                       |                        
|                                                                    |                                       | 2001                    |       | 2000  |  | 1999
|                                                                    |                                       |                         |       |       |  |     
|                                                                    |                                       |                        
|                                                                    |                                       | (in thousands)         
|Research and development expense, net                               |                                       | $                       | 3,861 |       |  | $    | 2,526 |       |  | $ | 1,124 |      
|Capitalized software development costs                              |                                       |                         | 867   |       |  |      | 279   |       |  |   | 248   |      
|Reimbursed costs for research and development
	grants and contracts |                                       |                         | 1,233 |       |  |      | 972   |       |  |   | 535   |      
|                                                                    |                                       |                         |       |       |  |      |       |       |  |   |       |      
|                                                                    | Total product technology expenditures |                         | $     | 5,961 |  |      | $     | 3,777 |  |   | $     | 1,907 | 
|                                                                    |                                       |                         |       |       |  |      |       |       |  |   |       |      

Results of Operations



| |                                                                             
| | ----------------------------------------------------------------------------
| | Comparison of Year Ended December 31,
	2001 to Year Ended December 31, 2000.

Net revenues for the year ended December 31,
2001 were virtually unchanged from the prior year. Sales of IVD
imaging systems decreased to $5.8 million from
$7.0 million, a decrease of $1.2 million, or 17% from
the last year. The decrease is primarily due to decreased sales
to international distributors. IVD imaging system sales consist
of sales of our urinalysis workstations. Workstation sales have
been relatively stable from quarter to quarter. However, we plan
to introduce a significantly upgraded model later this year on a
new operating platform pending clearance from the Food and Drug
Administration. The failure to make a successful and timely
transition to the upgraded model would have a material and
adverse affect on IVD imaging system sales. This is an inherent
risk in any major upgrade to products in our industry.

Sales of IVD imaging system supplies and services
increased to $15.7 million from $14.9 million, an
increase of $886,000 or 6% over last year, primarily due to the
larger installed base of urinalysis workstations. Royalties and
licensing revenues decreased to $393,000 from $602,000 in the
prior year. The prior years revenue was higher because it
contained a $300,000 license fee related to expanded licensing
of several existing patents.

Revenues from the urinalysis segment totaled
$22.0 million in the current period, down slightly from
$22.4 million in the prior year. Revenues from the small
lab devices and supplies segment increased to $6.7 million
from $6.2 million, an increase of $484,000 or 8%. The
increase is due to the launch of new products into the
veterinary market and increased sales in the international
markets.

Cost of goods sold for IVD imaging systems as a
percentage of sales of IVD imaging systems totaled 78% in the
current period as compared to 62% last year. The increase is
primarily attributable to increased manufacturing overhead
associated with improved quality assurance and inventory control
processes and the effect of the amortization of certain
capitalized software, which began in June 2000. Cost of goods
sold for IVD imaging system supplies and services as a
percentage of sales of such products decreased to 34% for the
current period as compared to 37% for the same period last year.
This decrease is due primarily to efficiencies derived from
higher volumes and improved manufacturing processes. Cost of
goods sold for small instruments and supplies as a percentage of
sales of this segment totaled 47% for the current year as
compared to 52% in the prior year. This decrease is primarily
due to manufacturing efficiencies from increased production
volume as well as a change in product mix.

Cost of goods sold as a percentage of revenues
from the urinalysis segment totaled 46%, up slightly from 44% in
the prior year. The aggregate gross margin totaled 54% for the
year ended December 31, 2001, which is comparable with the
prior year.

Marketing and selling expenses totaled
$3.8 million, compared to $3.6 million last year, an
increase of $284,000 or 8%, due primarily to increased marketing
efforts in the urinalysis segment as well as upgraded sales
efforts in the small lab devices segment. Marketing and selling
expenses as a percentage of net revenues were 13% in 2001, up
slightly from 12% in 2000.

11



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General and administrative expenses increased
$189,000 to $4.4 million from $4.2 million in the
prior year. This increase is primarily due to additional charges
for legal fees and other professional services. General and
administrative expenses represented 15% of net revenue,
comparable to the prior year.

Net research and development expenses increased
to $3.9 million for the year ended December 31, 2001,
as compared to $2.5 million in 2000, an increase of
$1.4 million or 56%. Net research and development expenses
as a percentage of revenues increased to 13% in 2001 from 9% 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 $6.0 million from $3.8 million, an increase of
$2.2 million or 58% as compared to the prior year. The
increase in total product technology expenditures is due
primarily to increased spending under a major project begun in
1999 to improve our urinalysis workstation product line. We
believe 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. We expect
our net research and development expenses to remain
approximately the same or decrease slightly in 2002.

Amortization of intangible assets reflects the
amortization of acquired intangible assets and patents and is
essentially unchanged in 2001 from the prior year.

Interest expenses decreased to $859,000 in 2001
from $979,000 in the prior year due to reduced indebtedness and
lower interest rates corresponding to a drop in our
lenders prime rate.

For the year ended December 31, 2001,
urinalysis segment profits decreased to $3.7 million from
$5.8 million in the prior year. The decrease is
attributable to the higher operating expenses described above.
Segment profits for the small lab devices segment totaled
$1.9 million, as compared to $1.6 million in the prior
year. Increased product sales, along with improved profit
margins in the segment, contributed to this increase.
Unallocated corporate expenses were up slightly in 2001 as
compared to the prior year, primarily due to increased charges
for legal fees and other professional services.

The income tax provision for the year ended
December 31, 2001, totaled $1.0 million, as compared
to $1.6 million in 2000, due to the reduction in taxable
income. This tax provision is a non-cash item, since the Company
has significant deferred tax assets.

Income from continuing operations decreased to
$1.5 million, or $0.14 per diluted share, for the year
ended December 31, 2001 as compared to income from
continuing operations of $2.7 million, or $0.27 per diluted
share, for the prior year.



| |                                                                            
| | ---------------------------------------------------------------------------
| | 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 the prior year. Sales
of IVD imaging systems increased to $7.0 million from
$6.5 million, an increase of $476,000, or 7% from the prior
year. The increase was 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 the prior 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 was 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 2000 as compared to $20.4 million in
the prior year, an increase of $2.0 million or 10%. This
growth was 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 small laboratory
devices segment increased to $6.2 million in 2000, as
compared to $5.3 million in the prior year, an increase of
$913,000. This growth was due primarily to increased sales of
small instruments.

12



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Cost of goods for IVD systems as a percentage of
sales of IVD imaging systems totaled 62% in 2000 as compared to
66% in the prior year. The decrease was primarily attributable
to a relatively lower proportion of low margin international
sales in 2000. Cost of goods for IVD imaging system supplies and
services as a percentage of sales of such products decreased to
37% for 2000, as compared to 44% for the same period in the
prior year. This decrease was 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% in 2000, as compared to
50% in the prior year. This decrease was 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 2000, which was
comparable with the prior year.

Marketing and selling expenses totaled
$3.6 million, compared to $3.3 million in the prior
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 the prior year. This increase was 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 was due to
increased spending under a major project begun in 1999 to
improve our urinalysis workstation product line.

Amortization of intangible assets reflects the
amortization of acquired intangible assets and patents.
Amortization of intangible assets for 2000 decreased to $143,000
from $231,000, a decrease of $88,000 or 38% from the prior year.
The decline was 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.

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 was
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

13



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##### 



that segment. Unallocated corporate expenses
totaled $3.0 million in the current period as compared to
$5.6 million in the prior year. The decrease was 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.

Liquidity and Capital Resources

Cash and cash equivalents decreased to
$2.3 million at December 31, 2001 from
$3.7 million at December 31, 2000. Cash provided by
operations for the year ended December 31, 2001 decreased
to $2.7 million from $3.5 million in the prior year,
primarily due to the drop in net income, as described above. Our
primary source of liquidity is cash from operations which
depends heavily on sales of our urinalysis workstations.
Workstation sales have been relatively stable from quarter to
quarter. However, we plan to introduce a significantly upgraded
model on a new operating platform later this year pending 510(k)
clearance from the Food and Drug Administration. The failure to
make a successful and timely transition to the upgraded model
would have a material and adverse affect on workstation sales
and, consequently, our liquidity. This is an inherent risk in
any major upgrade to products in our industry.

Cash used in investing activities totaled
$1.8 million in 2001, as compared to $938,000 in the prior
year. The increase is primarily due to the increase in
expenditures for property and equipment as part of our efforts
to upgrade the facilities, as well as increased software
development costs under the Companys research and
development program.

Net cash used by financing activities totaled
$2.2 million and consisted primarily of net principal
payments under the credit facility and principal payments of our
subordinated note payable, partially offset by funds received
from the exercise of stock options and warrants.

In February 2002, we refinanced our Foothill
Capital Corporation credit facility and replaced it with a new
$8.0 million credit facility with California Bank and
Trust. The new facility consists of two term loans totaling
$1.5 million and a $6.5 million revolving line of
credit. The term loans mature in February 2007 while the line of
credit is renegotiated in June 2004. Borrowings under the line
of credit are limited to a percentage of eligible accounts
receivable and inventory. The entire credit facility bears
interest at the lenders prime rate, or the LIBOR rate plus
2.0%. We believe the new credit facility is a significant
improvement to the Companys liquidity position, as it
provides increased borrowing capacity at a much lower cost than
the previous credit arrangement.

We reduced our outstanding debt by
$2.2 million in 2001 and, after considering the effect of
the refinancing discussed above, we have scheduled principal
payments totaling $1.4 million during the next twelve
months. 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

14



---



##### 



the name of the group to Advanced Digital Imaging
Research, LLC. 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
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.


New Accounting Pronouncements

In September 2001, the Financial Accounting
Standards Board finalized FASB Statements No. 141,
Business Combinations (SFAS 141),and
No. 142, Goodwill and Other Intangible Assets
(SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business
combinations initiated after September 30, 2001.
SFAS 141 also requires that the Company recognize acquired
intangible assets apart from goodwill if the acquired intangible
assets meet certain criteria. SFAS 141 applies to all
business combinations initiated after September 30, 2001
and for purchase business combinations completed on or after
July 1, 2001. It also requires, upon adoption of
SFAS 142 that the Company reclassify the carrying amounts
of intangible assets and goodwill based on the criteria in
SFAS 141.

SFAS 142 requires, among other things, that
companies no longer amortize goodwill, but instead test goodwill
for impairment at least annually. In addition, SFAS 142
requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill,
reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangible assets
with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is
required to be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible
assets recognized at that date, regardless of when those assets
were initially recognized. SFAS 142 requires the Company to
complete a transitional goodwill impairment test nine months
from the date of adoption. The Company is also required to
reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.

The Companys previous business combinations
were accounted for using the purchase method. As of
December 31, 2001, the net carrying amount of goodwill is
$188,911. Amortization expense during the year ended
December 31, 2001 was $34,692. Currently, the Company is
assessing but has not yet determined how the adoption of
SFAS 141 and SFAS 142 will impact its financial
position and results of operations.

In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement Obligations. SFAS
No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it
is incurred if a reasonable estimate of fair value can be made.
The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. SFAS No. 143
is effective for fiscal years beginning after June 15,
2002. The Company believes the adoption of this Statement will
have no material impact on its financial statements.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFASB 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or
in discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include
amounts for operating losses that have not yet occurred.
SFASB 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001 and,
generally, are to be applied prospectively. The Company believes
the adoption of this Statement will have no material impact on
its financial statements.

Shareholders 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

15



---



##### 



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 invest in
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, 2001, our debt obligations
consisted of (1) $3.1 million subordinated loan
outstanding at a variable rate of prime plus 2.0% and
(2) $2.4 million term loan outstanding at a variable
rate. The variable rate obligation is 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.

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;                                                           

16



---



##### 





| |   |                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 that 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 that 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

See the Companys 8K filed on
September 20, 2001.

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 2002 Annual
Meeting of IRIS Stockholders.

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 2002 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 2002 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 2002 Annual Meeting of IRIS Stockholders.

17



---



##### 



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:

|                                                                                             |                                                                                                        |      |  |      | 
|-------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ---- |  | ---- | 
|                                                                                             |                                                                                                        | Page
|                                                                                             |                                                                                                        |     
|1. Index To Financial Statements                                                             |                                                                                                        |      |  |     
|                                                                                             | Report of Independent Accountants                                                                      |      |  | F-2  | 
|                                                                                             | Consolidated Balance Sheets at
	December 31, 2001 and 2000                                             |      |  | F-3  | 
|                                                                                             | Consolidated Statements of Operations for
	the Years Ended December 31, 2001, 2000 and 1999            |      |  | F-4  | 
|                                                                                             | Consolidated Statements of
	Shareholders Equity for the Years Ended December 31,
	2001, 2000 and 1999 |      |  | F-5  | 
|                                                                                             | Consolidated Statements of Cash Flows for
	the Years Ended December 31, 2001, 2000 and 1999            |      |  | F-8  | 
|                                                                                             | Consolidated Statements of Comprehensive
	Income for the Years Ended December 31, 2001, 2000 and 1999  |      |  | 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 | 

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

|        |         |             |  |                                                                                                                                                   |  |  |     |  
|------- | ------- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | --- | -
|Exhibit |         |             |  | Reference                                                                                                                                        
|Number  |         | Description |  | Document                                                                                                                                         
|        |         |             |  |                                                                                                                                                  
|        | 3.1(a)  |             |  | Certificate of Incorporation, as amended                                                                                                          |  |  | (1  | )
|        | 3.1(b)  |             |  | Certificate of Designations of Series B
	Callable Preferred Stock                                                                                 |  |  | (3  | )
|        | 3.1(c)  |             |  | Certificate of Designations, Preferences and
	Rights of Series C Preferred Stock                                                                  |  |  | (4  | )
|        | 3.2     |             |  | Restated Bylaws                                                                                                                                   |  |  | (5  | )
|        | 4.1     |             |  | Specimen of Common Stock Certificate                                                                                                              |  |  | (5  | )
|        | 4.2     |             |  | Certificate of Designations of Series B
	Callable Preferred Stock                                                                                 |  |  | (3  | )
|        | 4.3     |             |  | Certificate of Designations, Preferences and
	Rights of Series C Preferred Stock                                                                  |  |  | (4  | )
|        | 10.1(a) |             |  | Lease of the Companys headquarters
	facility, as amended                                                                                         |  |  |    |  
|        | 10.1(b) |             |  | Lease of the Companys adjacent headquarters
	facility                                                                                            |  |  |    |  
|        | 10.2(a) |             |  | 1994 Stock Option Plan and forms of Stock Option
	Agreements                                                                                      |  |  | (8  | )
|        | 10.2(b) |             |  | Certificate of Officer With Respect to Amendment
	of 1994 Stock Option Plan                                                                       |  |  | (9  | )
|        | 10.2(c) |             |  | Employee Stock Purchase Plan                                                                                                                      |  |  | (20 | )
|        | 10.2(d) |             |  | 1997 Stock Option Plan and form of Stock Option
	Agreement                                                                                        |  |  | (10 | )
|        | 10.2(e) |             |  | 1998 Stock Option Plan and form of Stock Option
	Agreement                                                                                        |  |  | (11 | )
|        | 10.3(a) |             |  | Patent License Agreement dated April 1, 1997
	between the Company and Sysmex Corporation, formerly TOA Medical
	Electronics Company, Ltd.         |  |  | (13 | )
|        | 10.3(b) |             |  | Amendment No. 1 to Patent License Agreement
	dated February 29, 2000                                                                              |  |  | (20 | )
|        | 10.4(a) |             |  | Agreement for a Strategic Alliance in Urinalysis
	dated January 7, 1994 between the Company and Boehringer
	Mannheim Corporation                  |  |  | (14 | )
|        | 10.4(b) |             |  | Amendment to Distribution Agreements                                                                                                              |  |  | (15 | )
|        | 10.5(a) |             |  | Registration Rights and Standstill Agreement
	dated July 31, 1996 between the Company and Digital Imaging
	Technologies, Inc.                     |  |  | (9  | )
|        | 10.5(b) |             |  | Warrant Certificate dated March 14, 2001
	issued to Digital Imaging Technologies, Inc. to purchase 853,040
	shares of Common Stock of the Company |  |  | (21 | )

18



---



##### 



|        |         |             |  |                                                                                                                                                                                  |  |  |     |  
|------- | ------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | --- | -
|Exhibit |         |             |  | Reference                                                                                                                                                                       
|Number  |         | Description |  | Document                                                                                                                                                                        
|        |         |             |  |                                                                                                                                                                                 
|        | 10.6    |             |  | Registration Rights Agreement dated
	December 31, 1996 by and between the Company and Thermo
	Amex Convertible Growth Fund I, L.P.                                               |  |  | (19 | )
|        | 10.7    |             |  | Asset Purchase Agreement dated as of July 6,
	2000 among the company, Perceptive Scientific Instruments, LLC
	and Applied Imaging Corporation                                    |  |  | (20 | )
|        | 11.1(a) |             |  | Business Loan Agreements dated February 7,
	2002 by and between the Company and California Bank & Trust                                                                          |  |  |    |  
|        | 11.1(b) |             |  | Promissory Notes dated February 7, 2002 by
	and between the Company and California Bank & Trust                                                                                  |  |  |    |  
|        | 11.1(c) |             |  | Commercial Security Agreements dated
	February 7, 2002 by and between the Company and California
	Bank & Trust                                                                   |  |  |    |  
|        | 11.1(d) |             |  | Landlords Consent dated February 7,
	2002 by and between the Company, the Companys Landlord and
	California Bank & Trust                                                       |  |  |    |  
|        | 11.1(e) |             |  | Subordination Agreement dated February 7,
	2002 by and between the Company, Digital Imaging Technologies,
	Inc. and California Bank & Trust                                      |  |  |    |  
|        | 11.1(f) |             |  | Commercial Guaranty Agreement dated
	February 7, 2002 by and between the Company, Statspin, Inc
	(the Companys affiliate) and California Bank & Trust                           |  |  |    |  
|        | 11.1(g) |             |  | Commercial Guaranty Agreement dated
	February 7, 2002 by and between the Company, Advanced
	Digital Imaging Research, LLP (the Companys affiliate) and
	California Bank & Trust |  |  |    |  
|        | 23      |             |  | Consent of BDO Seidman, LLP                                                                                                                                                      |  |  |    |  
|        | 24      |             |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                            |  |  |    |  
|        | 99      |             |  | Disclosure Regarding Risk Factors And
	Forward-Looking Statements                                                                                                                |  |  |    |  

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.                                                                  

19



---



##### 





|     |                                                                         
|---- | ------------------------------------------------------------------------
|(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.       
|    
|(21) | Annual Report on Form 10-K for the year
	ended December 31, 2000.       

(b) Reports on Form 8-K.

We did not file any reports on Form 8-K
during the quarter ended December 31, 2001.

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

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

20



---



##### 



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 29, 2002.



| |                                              
| | ---------------------------------------------
| | INTERNATIONAL REMOTE IMAGING                 
| | SYSTEMS, INC.                                
|
| | /s/ JOHN A. OMALLEY                         
| | John A. OMalley                             
| | Chairman of the Board,                       
| | President and Chief Executive
        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.

|                                       |  |                                                                                                                   |  |         
|-------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | --------
|Signature                              |  | Title                                                                                                             |  | Date    
|                                       |  |                                                                                                                   |  |         
|/s/ JOHN A. OMALLEYJohn A. OMalley   |  | Chairman of the Board, President,
        March and Chief Executive Officer
        (Principal Executive Officer) |  | 29, 2002
|                                      
|Vice /s/ JOHN CALOZJohn Caloz          |  | President, Finance, Chief March Financial
        Officer and Secretary (Principal Financial Officer)             |  | 29, 2002
|                                      
|/s/ DONALD E. HORACEKDonald E. Horacek |  | Controller
        March (Principal Accounting Officer)                                                           |  | 29, 2002
|                                      
|/s/ STEVEN M. BESBECKSteven M. Besbeck |  | Director March                                                                                                    |  | 29, 2002
|                                      
|/s/ THOMAS F. KELLEYThomas F. Kelley   |  | Director March                                                                                                    |  | 29, 2002
|                                      
|/s/ RICHARD G. NADEAURichard G. Nadeau |  | Director March                                                                                                    |  | 29, 2002

21



---



##### 



EXHIBIT INDEX

|        |         |             |  |                                                                                                                                                                                  |  |  |     |  
|------- | ------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | --- | -
|Exhibit |         |             |  | Reference                                                                                                                                                                       
|Number  |         | Description |  | Document                                                                                                                                                                        
|        |         |             |  |                                                                                                                                                                                 
|        | 3.1(a)  |             |  | Certificate of Incorporation, as amended                                                                                                                                         |  |  | (1  | )
|        | 3.1(b)  |             |  | Certificate of Designations of Series B
	Callable Preferred Stock                                                                                                                |  |  | (3  | )
|        | 3.1(c)  |             |  | Certificate of Designations, Preferences and
	Rights of Series C Preferred Stock                                                                                                 |  |  | (4  | )
|        | 3.2     |             |  | Restated Bylaws                                                                                                                                                                  |  |  | (5  | )
|        | 4.1     |             |  | Specimen of Common Stock Certificate                                                                                                                                             |  |  | (5  | )
|        | 4.2     |             |  | Certificate of Designations of Series B
	Callable Preferred Stock                                                                                                                |  |  | (3  | )
|        | 4.3     |             |  | Certificate of Designations, Preferences and
	Rights of Series C Preferred Stock                                                                                                 |  |  | (4  | )
|        | 10.1(a) |             |  | Lease of the Companys headquarters
	facility, as amended                                                                                                                        |  |  |    |  
|        | 10.1(b) |             |  | Lease of the Companys adjacent headquarters
	facility                                                                                                                           |  |  |    |  
|        | 10.2(a) |             |  | 1994 Stock Option Plan and forms of Stock Option
	Agreements                                                                                                                     |  |  | (8  | )
|        | 10.2(b) |             |  | Certificate of Officer With Respect to Amendment
	of 1994 Stock Option Plan                                                                                                      |  |  | (9  | )
|        | 10.2(c) |             |  | Employee Stock Purchase Plan                                                                                                                                                     |  |  | (20 | )
|        | 10.2(d) |             |  | 1997 Stock Option Plan and form of Stock Option
	Agreement                                                                                                                       |  |  | (10 | )
|        | 10.2(e) |             |  | 1998 Stock Option Plan and form of Stock Option
	Agreement                                                                                                                       |  |  | (11 | )
|        | 10.3(b) |             |  | Patent License Agreement dated April 1, 1997
	between the Company and Sysmex Corporation, formerly TOA Medical
	Electronics Company, Ltd.                                        |  |  | (13 | )
|        | 10.3(c) |             |  | Amendment No. 1 to Patent License Agreement
	dated February 29, 2000                                                                                                             |  |  | (20 | )
|        | 10.4(a) |             |  | Agreement for a Strategic Alliance in Urinalysis
	dated January 7, 1994 between the Company and Boehringer
	Mannheim Corporation                                                 |  |  | (14 | )
|        | 10.4(b) |             |  | Amendment to Distribution Agreements                                                                                                                                             |  |  | (15 | )
|        | 10.5(a) |             |  | Registration Rights and Standstill Agreement
	dated July 31, 1996 between the Company and Digital Imaging
	Technologies, Inc.                                                    |  |  | (9  | )
|        | 10.5    |             |  | Warrant Certificate dated March 14, 2001
	issued to Digital Imaging Technologies, Inc. to purchase 853,040
	shares of Common Stock of the Company                                |  |  | (21 | )
|        | 10.6    |             |  | Registration Rights Agreement dated
	December 31, 1996 by and between the Company and Thermo
	Amex Convertible Growth Fund I, L.P.                                               |  |  | (19 | )
|        | 10.7    |             |  | Asset Purchase Agreement dated as of July 6,
	2000 among the company, Perceptive Scientific Instruments, LLC
	and Applied Imaging Corporation                                    |  |  | (20 | )
|        | 11.1(a) |             |  | Business Loan Agreements dated February 7,
	2002 by and between the Company and California Bank & Trust                                                                          |  |  |    |  
|        | 11.1(b) |             |  | Promissory Notes dated February 7, 2002 by
	and between the Company and California Bank & Trust                                                                                  |  |  |    |  
|        | 11.1(c) |             |  | Commercial Security Agreements dated
	February 7, 2002 by and between the Company and California
	Bank & Trust                                                                   |  |  |    |  
|        | 11.1(d) |             |  | Landlords Consent dated February 7,
	2002 by and between the Company, the Companys Landlord and
	California Bank & Trust                                                       |  |  |    |  
|        | 11.1(e) |             |  | Subordination Agreement dated February 7,
	2002 by and between the Company, Digital Imaging Technologies,
	Inc. and California Bank & Trust                                      |  |  |    |  
|        | 11.1(f) |             |  | Commercial Guaranty Agreement dated
	February 7, 2002 by and between the Company, StatSpin, Inc
	(the Companys affiliate) and California Bank & Trust                           |  |  |    |  
|        | 11.1(g) |             |  | Commercial Guaranty Agreement dated
	February 7, 2002 by and between the Company, Advanced
	Digital Imaging Research, LLP (the Companys affiliate) and
	California Bank & Trust |  |  |    |  
|        | 23      |             |  | Consent of BDO Seidman, LLP                                                                                                                                                      |  |  |    |  



---



##### 



|        |    |             |  |                                                                   |  |  |   | 
|------- | -- | ----------- |  | ----------------------------------------------------------------- |  |  | - | 
|Exhibit |    |             |  | Reference                                                        
|Number  |    | Description |  | Document                                                         
|        |    |             |  |                                                                  
|        | 24 |             |  | Consent of PricewaterhouseCoopers LLP                             |  |  |  | 
|        | 99 |             |  | Disclosure Regarding Risk Factors And
	Forward-Looking Statements |  |  |  | 

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.                                                                  
|    
|(22) | Annual Report on Form 10-K for the year
	ended December 31, 2000.                                                                  



---



##### 



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders

of International Remote Imaging Systems, Inc.


We have audited the accompanying consolidated
balance sheet of International Remote Imaging Systems, Inc. as
of December 31, 2001, the related consolidated statements
of operations, stockholders equity, cash flows and
comprehensive income for the year then ended. We have also
audited the schedule listed in the accompanying index. These
financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audit.

We conducted our audit in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements and schedule. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of International Remote Imaging
Systems, Inc. at December 31, 2001, and the results of its
operations, cash flows and comprehensive income for the year
then ended in conformity with accounting principles generally
accepted in the United States of America.

Also, in our opinion, the schedule presents
fairly in all material respects, the information set forth
therein.



| |                
| | ---------------
| | BDO SEIDMAN LLP

Los Angeles, California

March 5, 2002


F-1



---



##### 



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders

of International Remote Imaging Systems, Inc.


In our opinion, the accompanying consolidated
balance sheet and the related consolidated statements of
operations, shareholders equity, cash flows and
comprehensive income present fairly, in all material respects,
the financial position of International Remote Imaging Systems,
Inc., and its subsidiaries at December 31, 2000, and the
results of their operations and their cash flows for each of the
two 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 for each of the two years in the
period ended December 31, 2000 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. We have not audited the consolidated
financial statements and financial statement schedule of
International Remote Imaging Systems, Inc. for any period
subsequent to December 31, 2000.



| |                               
| | ------------------------------
| | /s/ PRICEWATERHOUSECOOPERS LLP

Los Angeles, California

March 16, 2001


F-2



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.

CONSOLIDATED BALANCE SHEETS

|                                                                                                                       |                                                                      |                            |             |         |            |   |             |        |            | 
|---------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------- | ----------- | ------- | ---------- | - | ----------- | ------ | ---------- | 
|                                                                                                                       |                                                                      |                           
|                                                                                                                       |                                                                      | At December 31,           
|                                                                                                                       |                                                                      |                           
|                                                                                                                       |                                                                      | 2001                       |             | 2000   
|                                                                                                                       |                                                                      |                            |             |        
|ASSETS                                                                                                                
|Current assets:                                                                                                        |                                                                      |                            |             |         |            |   |             |       
|Cash and cash equivalents (note 2)                                                                                     |                                                                      | $                          | 2,312,451   |         |            | $ | 3,661,310   |       
|Accounts receivable, net of allowance for
	doubtful accounts of $286,127 in 2001 and $334,696 in 2000
	(notes 2 and 8) |                                                                      |                            | 4,838,252   |         |            |   | 5,446,466   |       
|Inventories (notes 2, 3 and 8)                                                                                         |                                                                      |                            | 5,578,139   |         |            |   | 5,184,272   |       
|Prepaid expenses and other current assets                                                                              |                                                                      |                            | 268,348     |         |            |   | 507,604     |       
|Investments available for sale (note 2)                                                                                |                                                                      |                            | 1,036,648   |         |            |   | 1,396,970   |       
|Deferred tax asset (note 9)                                                                                            |                                                                      |                            | 1,568,466   |         |            |   | 983,812     |       
|                                                                                                                       |                                                                      |                            |             |         |            |   |             |       
|                                                                                                                       |                                                                      | Total current assets       |             |         | 15,602,304 |   |             |        | 17,180,434 | 
|Property and equipment, at cost, net of
	accumulated depreciation (notes 2 and 4)                                      |                                                                      |                            | 1,666,226   |         |            |   | 1,344,418   |       
|Purchased intangibles (notes 2 and 6)                                                                                  |                                                                      |                            | 188,911     |         |            |   | 223,603     |       
|Software development costs, net of accumulated
	amortization of $1,532,011 in 2001 and $1,375,569 in 2000
	(note 2)    |                                                                      |                            | 1,146,204   |         |            |   | 435,517     |       
|Deferred tax asset (note 9)                                                                                            |                                                                      |                            | 7,280,718   |         |            |   | 8,348,179   |       
|Other assets                                                                                                           |                                                                      |                            | 618,677     |         |            |   | 755,388     |       
|                                                                                                                       |                                                                      |                            |             |         |            |   |             |       
|                                                                                                                       |                                                                      | Total assets               |             | $       | 26,503,040 |   |             | $      | 28,287,539 | 
|                                                                                                                       |                                                                      |                            |             |         |            |   |             |       
|LIABILITIES AND SHAREHOLDERS
	EQUITY                                                                                 
|Current liabilities:                                                                                                   |                                                                      |                            |             |         |            |   |             |       
|Short-term borrowings (note 8)                                                                                         |                                                                      | $                          |            |         |            | $ | 648,972     |       
|Current portion of long-term debt (note 8)                                                                             |                                                                      |                            | 1,993,783   |         |            |   | 1,972,333   |       
|Accounts payable                                                                                                       |                                                                      |                            | 2,295,637   |         |            |   | 2,676,398   |       
|Accrued expenses (note 7)                                                                                              |                                                                      |                            | 1,792,829   |         |            |   | 2,683,274   |       
|Deferred income  service contracts and
	other                                                                         |                                                                      |                            | 883,819     |         |            |   | 727,158     |       
|                                                                                                                       |                                                                      |                            |             |         |            |   |             |       
|                                                                                                                       |                                                                      | Total current liabilities  |             |         | 6,966,068  |   |             |        | 8,708,135  | 
|Long-term debt (note 8)                                                                                                |                                                                      |                            | 3,254,801   |         |            |   | 5,527,667   |       
|Deferred income  service contracts and
	other                                                                         |                                                                      |                            | 317,416     |         |            |   | 432,459     |       
|                                                                                                                       |                                                                      |                            |             |         |            |   |             |       
|                                                                                                                       |                                                                      | Total liabilities          |             |         | 10,538,285 |   |             |        | 14,668,261 | 
|Commitments and contingencies (note 11)                                                                                |                                                                      |                            |             |         |            |   |             |       
|Shareholders equity: (note 10)                                                                                        |                                                                      |                            |             |         |            |   |             |       
|Preferred stock, $.01 par value; Authorized:
	3,000,000 shares:                                                        |                                                                      |                            |             |         |            |   |             |       
|                                                                                                                       | Callable Series B shares issued and
	outstanding:                    |                            |             |         |            |   |             |        |           
|                                                                                                                       | 2000  204,000 ($612,000 liquidation
	preference)                    |                            |             | 2,050   |            |   |             | 2,040  |           
|                                                                                                                       | 2001  205,000 ($615,000 liquidation
	preference)                    |                            |             |         |            |   |             |        |           
|Common stock, $.01 par value                                                                                           |                                                                      |                            |             |         |            |   |             |       
|                                                                                                                       | Authorized: 50,000,000 shares                                        |                            |             |         |            |   |             |        |           
|                                                                                                                       | Shares issued and outstanding: 2001 
	10,264,926; 2000  9,868,855; |                            |             | 102,648 |            |   |             | 98,687 |           
|Additional paid-in capital                                                                                             |                                                                      |                            | 41,311,847  |         |            |   | 40,444,269  |       
|Unearned compensation                                                                                                  |                                                                      |                            | (54,343     | )       |            |   | (205,091    | )     
|Accumulated other comprehensive income                                                                                 |                                                                      |                            | 72,835      |         |            |   | 289,028     |       
|Accumulated deficit                                                                                                    |                                                                      |                            | (25,470,282 | )       |            |   | (27,009,655 | )     
|                                                                                                                       |                                                                      |                            |             |         |            |   |             |       
|                                                                                                                       |                                                                      | Total shareholders equity |             |         | 15,964,755 |   |             |        | 13,619,278 | 
|                                                                                                                       |                                                                      |                            |             |         |            |   |             |       
|Total liabilities and shareholders equity                                                                             |                                                                      | $                          | 26,503,040  |         |            | $ | 28,287,539  |       
|                                                                                                                       |                                                                      |                            |             |         |            |   |             |       

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

F-3



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |            |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------- | ---------- | -------- | - | ---- | ---------- | -------- | - | - | ---------- | ---------- | -
|                                                                            |                                                                                                                                                  |                                
|                                                                            |                                                                                                                                                  | For the Year Ended December 31,
|                                                                            |                                                                                                                                                  |                                
|                                                                            |                                                                                                                                                  | 2001                            |            | 2000     |   | 1999
|                                                                            |                                                                                                                                                  |                                 |            |          |   |     
|Sales of IVD imaging systems                                                |                                                                                                                                                  | $                               | 5,824,832  |          |   | $    | 6,981,886  |          |   | $ | 6,505,821  |           
|Sales IVD imaging system supplies and services                              |                                                                                                                                                  |                                 | 15,735,336 |          |   |      | 14,849,392 |          |   |   | 13,611,676 |           
|Sales of small instruments and supplies                                     |                                                                                                                                                  |                                 | 6,694,145  |          |   |      | 6,209,967  |          |   |   | 5,297,385  |           
|Royalty and license revenues                                                |                                                                                                                                                  |                                 | 393,356    |          |   |      | 601,511    |          |   |   | 310,587    |           
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|Net revenues                                                                |                                                                                                                                                  |                                 | 28,647,669 |          |   |      | 28,642,756 |          |   |   | 25,725,469 |           
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|Cost of goods  IVD imaging systems                                         |                                                                                                                                                  |                                 | 4,525,702  |          |   |      | 4,356,133  |          |   |   | 4,310,069  |           
|Cost of goods  IVD imaging system
	supplies and services                   |                                                                                                                                                  |                                 | 5,378,063  |          |   |      | 5,466,194  |          |   |   | 5,982,376  |           
|Cost of goods  small instruments and
	supplies                             |                                                                                                                                                  |                                 | 3,175,410  |          |   |      | 3,216,269  |          |   |   | 2,765,261  |           
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|Cost of goods sold                                                          |                                                                                                                                                  |                                 | 13,079,175 |          |   |      | 13,038,596 |          |   |   | 13,057,706 |           
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|Gross margin                                                                |                                                                                                                                                  |                                 | 15,568,494 |          |   |      | 15,604,160 |          |   |   | 12,667,763 |           
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|Marketing and selling                                                       |                                                                                                                                                  |                                 | 3,839,882  |          |   |      | 3,555,622  |          |   |   | 3,300,576  |           
|General and administrative                                                  |                                                                                                                                                  |                                 | 4,416,792  |          |   |      | 4,227,851  |          |   |   | 3,463,345  |           
|Research and development, net                                               |                                                                                                                                                  |                                 | 3,861,006  |          |   |      | 2,526,465  |          |   |   | 1,124,240  |           
|Amortization of intangibles                                                 |                                                                                                                                                  |                                 | 145,204    |          |   |      | 142,604    |          |   |   | 230,784    |           
|Unusual charges                                                             |                                                                                                                                                  |                                 |           |          |   |      |           |          |   |   | 4,158,894  |           
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|Total operating expenses                                                    |                                                                                                                                                  |                                 | 12,262,884 |          |   |      | 10,452,542 |          |   |   | 12,277,839 |           
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|Operating income                                                            |                                                                                                                                                  |                                 | 3,305,610  |          |   |      | 5,151,618  |          |   |   | 389,924    |           
|Other income (expense):                                                     |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|                                                                            | Interest income                                                                                                                                  |                                 |            | 118,771  |   |      |            | 197,012  |   |   |            | 35,310     |  
|                                                                            | Interest expense                                                                                                                                 |                                 |            | (858,760 | ) |      |            | (979,269 | ) |   |            | (966,001   | )
|                                                                            | Other income (expense)                                                                                                                           |                                 |            |         |   |      |            | 19,049   |   |   |            | (16,255    | )
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|Income (loss) from continuing operations before
	provision for income taxes |                                                                                                                                                  |                                 | 2,565,621  |          |   |      | 4,388,410  |          |   |   | (557,022   | )         
|Provision for income taxes                                                  |                                                                                                                                                  |                                 | (1,026,248 | )        |   |      | (1,594,899 | )        |   |   | (530,902   | )         
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|Income (loss) from continuing operations                                    |                                                                                                                                                  |                                 | 1,539,373  |          |   |      | 2,793,511  |          |   |   | (1,087,924 | )         
|Loss from discontinued operations:                                          |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|                                                                            | Loss from operations of discontinued segment
	prior to March 31, 2000, net of tax benefit of $2,958,566
	in 1999, $61,015 in 2000 and $0 in 2001 |                                 |            |         |   |      |            | (286,385 | ) |   |            | (5,187,221 | )
|                                                                            | Loss on disposal of discontinued segment,
	including tax provision of $29,374                                                                    |                                 |            |         |   |      |            | (199,159 | ) |   |            |           |  
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|Loss from discontinued operations                                           |                                                                                                                                                  |                                 |           |          |   |      | (485,544   | )        |   |   | (5,187,221 | )         
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|Net income (loss)                                                           |                                                                                                                                                  | $                               | 1,539,373  |          |   | $    | 2,307,967  |          |   | $ | (6,275,145 | )         
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|Income (loss) per share  basic:                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|                                                                            | Income (loss) from continuing operations                                                                                                         |                                 | $          | 0.15     |   |      | $          | 0.29     |   |   | $          | (0.15      | )
|                                                                            | Loss from discontinued operations                                                                                                                |                                 |            |         |   |      |            | (0.05    | ) |   |            | (0.71      | )
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|Income (loss) per share attributable to common
	shareholders  basic        |                                                                                                                                                  | $                               | 0.15       |          |   | $    | 0.24       |          |   | $ | (0.86      | )         
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|Income (loss) per share  diluted:                                          |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|                                                                            | Income (loss) from continuing operations                                                                                                         |                                 | $          | 0.14     |   |      | $          | 0.27     |   |   | $          | (0.15      | )
|                                                                            | Loss from discontinued operations                                                                                                                |                                 |            |         |   |      |            | (0.05    | ) |   |            | (0.71      | )
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|Income (loss) per share attributable to common
	shareholders  diluted      |                                                                                                                                                  | $                               | 0.14       |          |   | $    | 0.22       |          |   | $ | (0.86      | )         
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|Weighted average number of common shares
	outstanding  basic               |                                                                                                                                                  |                                 | 9,978,532  |          |   |      | 9,654,272  |          |   |   | 7,260,390  |           
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           
|Weighted average number of common shares
	outstanding  diluted             |                                                                                                                                                  |                                 | 11,002,586 |          |   |      | 10,404,797 |          |   |   | 7,260,390  |           
|                                                                            |                                                                                                                                                  |                                 |            |          |   |      |            |          |   |   |            |           

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

F-4



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                                                                                            |          |                      |        |                   |  |              |     |            |  |          |         |               |  |             |       |              |  |        |           |         |  |       |        |       |  |   |            |         |  |   |          |          |   |   |        |   |  |   |             |   |  |   |            |         | 
|----------------------------------------------------------------------------------------------------------- | -------- | -------------------- | ------ | ----------------- |  | ------------ | --- | ---------- |  | -------- | ------- | ------------- |  | ----------- | ----- | ------------ |  | ------ | --------- | ------- |  | ----- | ------ | ----- |  | - | ---------- | ------- |  | - | -------- | -------- | - | - | ------ | - |  | - | ----------- | - |  | - | ---------- | ------- | 
|                                                                                                            |          |                      |        |                   |  |              |     |            |  |          |         |               |  |             |       |              |  |       
|                                                                                                            |          | Convertible Series A |        | Callable Series B |  |              |     |            |  |          |         | Accumulated   |  |             |       |             
|                                                                                                            |          | Preferred Stock      |        | Preferred Stock   |  | Common Stock |     | Additional |  |          |         | Other         |  |             |       |             
|                                                                                                            |          |                      |        |                   |  |              |     | Paid-In    |  | Unearned |         | Comprehensive |  | Accumulated |       |             
|                                                                                                            |          | Shares               |        | Amount            |  | Shares       |     | Amount     |  | Shares   |         | Amount        |  | Capital     |       | Compensation |  | Income |           | Deficit |  | Total
|                                                                                                            |          |                      |        |                   |  |              |     |            |  |          |         |               |  |             |       |              |  |        |           |         |  |      
|Balance, at December 31, 1998                                                                               |          |                      | 3,000  |                   |  | $            | 30  |            |  |          |        |               |  | $           |      |              |  |        | 6,432,875 |         |  | $     | 64,328 |       |  | $ | 38,134,290 |         |  | $ | (204,294 | )        |   | $ | 47,510 |   |  | $ | (23,042,477 | ) |  | $ | 14,999,387 |        
|Common Stock issued under Employee Stock Purchase
	Plan for:                                                |          |                      |        |                   |  |              |     |            |  |          |         |               |  |             |       |              |  |        |           |         |  |       |        |       |  |   |            |         |  |   |          |          |   |   |        |   |  |   |             |   |  |   |            |        
|                                                                                                            | Cash     |                      |        |                  |  |              |     |           |  |          |         |              |  |             |       |             |  |        |           | 300,050 |  |       |        | 3,001 |  |   |            | 220,161 |  |   |          | (111,582 | ) |   |        |  |  |   |             |  |  |   |            | 111,580 | 
|                                                                                                            | Services |                      |        |                  |  |              |     |           |  |          |         |              |  |             |       |             |  |        |           | 20,400  |  |       |        | 204   |  |   |            | 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 |          |                      |       |                   |  |              |    |            |  |          | 198,000 |               |  |             | 1,980 |              |  |        | 594,000   |         |  |       | 5,940  |       |  |   | 1,168,200  |         |  |   |         |          |   |   |       |   |  |   |            |   |  |   | 1,176,120  |        
|Conversion of Series A Preferred stock                                                                      |          |                      | (3,000 | )                 |  |              | (30 | )          |  |          |        |               |  |             |      |              |  |        | 2,000,000 |         |  |       | 20,000 |       |  |   | (19,970    | )       |  |   |         |          |   |   |       |   |  |   |            |   |  |   |           |        
|Amortization of unearned Compensation                                                                       |          |                      |       |                   |  |              |    |            |  |          |        |               |  |             |      |              |  |        |          |         |  |       |       |       |  |   |           |         |  |   | 182,418  |          |   |   |       |   |  |   |            |   |  |   | 182,418    |        
|Foreign currency translation adjustment                                                                     |          |                      |       |                   |  |              |    |            |  |          |        |               |  |             |      |              |  |        |          |         |  |       |       |       |  |   |           |         |  |   |         |          |   |   | 19,697 |   |  |   |            |   |  |   | 19,697     |        
|Net loss                                                                                                    |          |                      |       |                   |  |              |    |            |  |          |        |               |  |             |      |              |  |        |          |         |  |       |       |       |  |   |           |         |  |   |         |          |   |   |       |   |  |   | (6,275,145  | ) |  |   | (6,275,145 | )      
|                                                                                                            |          |                      |        |                   |  |              |     |            |  |          |         |               |  |             |       |              |  |        |           |         |  |       |        |       |  |   |            |         |  |   |          |          |   |   |        |   |  |   |             |   |  |   |            |        
|Balance at December 31, 1999                                                                                |          |                      |       |                   |  | $            |    |            |  |          | 198,000 |               |  | $           | 1,980 |              |  |        | 9,347,325 |         |  | $     | 93,473 |       |  |   | 39,529,777 |         |  | $ | (153,108 | )        |   | $ | 67,207 |   |  | $ | (29,317,622 | ) |  | $ | 10,221,707 |        
|                                                                                                            |          |                      |        |                   |  |              |     |            |  |          |         |               |  |             |       |              |  |        |           |         |  |       |        |       |  |   |            |         |  |   |          |          |   |   |        |   |  |   |             |   |  |   |            |        

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

F-5



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                                                                                            |  |                   |         |              |  |            |       |          |  |               |           |              |  |        |        |         |  |       |            |  |  |   |          |   |  |   |         |   |  |   |             |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ------------ |  | ---------- | ----- | -------- |  | ------------- | --------- | ------------ |  | ------ | ------ | ------- |  | ----- | ---------- |  |  | - | -------- | - |  | - | ------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                                                                            |  |                   |         |              |  |            |       |          |  |               |           |              |  |        |        |        
|                                                                                                            |  | Callable Series B |         |              |  |            |       |          |  | Accumulated   |           |              |  |       
|                                                                                                            |  | Preferred Stock   |         | Common Stock |  | Additional |       |          |  | Other         |           |              |  |       
|                                                                                                            |  |                   |         |              |  | Paid-In    |       | Unearned |  | Comprehensive |           | Accumulated  |  |       
|                                                                                                            |  | Shares            |         | Amount       |  | Shares     |       | Amount   |  | Capital       |           | Compensation |  | Income |        | Deficit |  | Total
|                                                                                                            |  |                   |         |              |  |            |       |          |  |               |           |              |  |        |        |         |  |      
|Balance, December 31, 1999                                                                                  |  |                   | 198,000 |              |  | $          | 1,980 |          |  |               | 9,347,325 |              |  | $      | 93,473 |         |  | $     | 39,529,777 |  |  | $ | (153,108 | ) |  | $ | 67,207  |   |  | $ | (29,317,622 | ) |  | $ | 10,221,707 |  
|Common stock issued under Employee Stock Purchase
	Plan for Cash                                            |  |                   |        |              |  |            |      |          |  |               | 32,826    |              |  |        | 328    |         |  |       | 47,672     |  |  |   | (24,000  | ) |  |   |        |   |  |   |            |   |  |   | 24,000     |  
|Common stock issued on exercise stock options and
	warrants                                                 |  |                   |        |              |  |            |      |          |  |               | 179,148   |              |  |        | 1,791  |         |  |       | 229,833    |  |  |   |         |   |  |   |        |   |  |   |            |   |  |   | 231,624    |  
|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 settlement |  |                   | 6,000   |              |  |            | 60    |          |  |               | 309,556   |              |  |        | 3,095  |         |  |       | 360,484    |  |  |   |         |   |  |   |        |   |  |   |            |   |  |   | 363,639    |  
|Charge for extension of warrants                                                                            |  |                   |        |              |  |            |      |          |  |               |          |              |  |        |       |         |  |       | 63,815     |  |  |   | (63,815  | ) |  |   |        |   |  |   |            |   |  |   |           |  
|Charge for grant of employee stock options at
	less than market value                                       |  |                   |        |              |  |            |      |          |  |               |          |              |  |        |       |         |  |       | 79,688     |  |  |   | (79,688  | ) |  |   |        |   |  |   |            |   |  |   |           |  
|Amortization of unearned compensation                                                                       |  |                   |        |              |  |            |      |          |  |               |          |              |  |        |       |         |  |       |           |  |  |   | 248,520  |   |  |   |        |   |  |   |            |   |  |   | 248,520    |  
|Unrealized gains on investments, net of taxes                                                               |  |                   |        |              |  |            |      |          |  |               |          |              |  |        |       |         |  |       |           |  |  |   |         |   |  |   | 289,028 |   |  |   |            |   |  |   | 289,028    |  
|Foreign currency translation adjustment                                                                     |  |                   |        |              |  |            |      |          |  |               |          |              |  |        |       |         |  |       |           |  |  |   |         |   |  |   | (67,207 | ) |  |   |            |   |  |   | (67,207    | )
|Net income                                                                                                  |  |                   |        |              |  |            |      |          |  |               |          |              |  |        |       |         |  |       |           |  |  |   |         |   |  |   |        |   |  |   | 2,307,967   |   |  |   | 2,307,967  |  
|                                                                                                            |  |                   |         |              |  |            |       |          |  |               |           |              |  |        |        |         |  |       |            |  |  |   |          |   |  |   |         |   |  |   |             |   |  |   |            |  
|Balance, December 31, 2000                                                                                  |  |                   | 204,000 |              |  | $          | 2,040 |          |  |               | 9,868,855 |              |  | $      | 98,687 |         |  | $     | 40,444,269 |  |  | $ | (205,091 | ) |  | $ | 289,028 |   |  | $ | (27,009,655 | ) |  | $ | 13,619,278 |  
|                                                                                                            |  |                   |         |              |  |            |       |          |  |               |           |              |  |        |        |         |  |       |            |  |  |   |          |   |  |   |         |   |  |   |             |   |  |   |            |  

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

F-6



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                                                                                            |  |                   |         |              |  |            |       |          |  |               |            |              |  |        |         |         |  |       |            |   |  |   |          |   |  |   |          |   |  |   |             |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ------------ |  | ---------- | ----- | -------- |  | ------------- | ---------- | ------------ |  | ------ | ------- | ------- |  | ----- | ---------- | - |  | - | -------- | - |  | - | -------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                                                                            |  |                   |         |              |  |            |       |          |  |               |            |              |  |        |         |        
|                                                                                                            |  | Callable Series B |         |              |  |            |       |          |  | Accumulated   |            |              |  |       
|                                                                                                            |  | Preferred Stock   |         | Common Stock |  | Additional |       |          |  | Other         |            |              |  |       
|                                                                                                            |  |                   |         |              |  | Paid-In    |       | Unearned |  | Comprehensive |            | Accumulated  |  |       
|                                                                                                            |  | Shares            |         | Amount       |  | Shares     |       | Amount   |  | Capital       |            | Compensation |  | Income |         | Deficit |  | Total
|                                                                                                            |  |                   |         |              |  |            |       |          |  |               |            |              |  |        |         |         |  |      
|Balance, December 31, 2000                                                                                  |  |                   | 204,000 |              |  | $          | 2,040 |          |  |               | 9,868,855  |              |  | $      | 98,687  |         |  | $     | 40,444,269 |   |  | $ | (205,091 | ) |  | $ | 289,028  |   |  | $ | (27,009,655 | ) |  | $ | 13,619,278 |  
|Common stock issued on exercise stock options and
	warrants                                                 |  |                   |        |              |  |            |      |          |  |               | 382,201    |              |  |        | 3,822   |         |  |       | 428,248    |   |  |   |         |   |  |   |         |   |  |   |            |   |  |   | 432,070    |  
|Common stock issued under employee stock purchase
	plan for cash                                            |  |                   |        |              |  |            |      |          |  |               | 10,870     |              |  |        | 109     |         |  |       | 19,891     |   |  |   | (10,000  | ) |  |   |         |   |  |   |            |   |  |   | 10,000     |  
|Issuance of stock options and warrants for
	services                                                        |  |                   |        |              |  |            |      |          |  |               |           |              |  |        |        |         |  |       | 35,000     |   |  |   | (35,000  | ) |  |   |         |   |  |   |            |   |  |   |           |  
|Issuance of Series B Convertible Preferred
	Stock and common stock in connection with litigation settlement |  |                   | 1,000   |              |  |            | 10    |          |  |               | 3,000      |              |  |        | 30      |         |  |       | 14,261     |   |  |   |         |   |  |   |         |   |  |   |            |   |  |   | 14,301     |  
|Issuance of warrants in connection with debt
	financing                                                     |  |                   |        |              |  |            |      |          |  |               |           |              |  |        |        |         |  |       | 374,768    |   |  |   |         |   |  |   |         |   |  |   |            |   |  |   | 374,768    |  
|Redemption of warrants                                                                                      |  |                   |        |              |  |            |      |          |  |               |           |              |  |        |        |         |  |       | (4,590     | ) |  |   |         |   |  |   |         |   |  |   |            |   |  |   | (4,590     | )
|Amortization of unearned compensation                                                                       |  |                   |        |              |  |            |      |          |  |               |           |              |  |        |        |         |  |       |           |   |  |   | 195,748  |   |  |   |         |   |  |   |            |   |  |   | 195,748    |  
|Unrealized gains on investments, net of taxes                                                               |  |                   |        |              |  |            |      |          |  |               |           |              |  |        |        |         |  |       |           |   |  |   |         |   |  |   | (216,193 | ) |  |   |            |   |  |   | (216,193   | )
|Net income                                                                                                  |  |                   |        |              |  |            |      |          |  |               |           |              |  |        |        |         |  |       |           |   |  |   |         |   |  |   |         |   |  |   | 1,539,373   |   |  |   | 1,539,373  |  
|                                                                                                            |  |                   |         |              |  |            |       |          |  |               |            |              |  |        |         |         |  |       |            |   |  |   |          |   |  |   |          |   |  |   |             |   |  |   |            |  
|Balance, December 31, 2001                                                                                  |  |                   | 205,000 |              |  | $          | 2,050 |          |  |               | 10,264,926 |              |  | $      | 102,648 |         |  | $     | 41,311,847 |   |  | $ | (54,343  | ) |  | $ | 72,835   |   |  | $ | (25,470,282 | ) |  | $ | 15,964,755 |  
|                                                                                                            |  |                   |         |              |  |            |       |          |  |               |            |              |  |        |         |         |  |       |            |   |  |   |          |   |  |   |          |   |  |   |             |   |  |   |            |  

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

F-7



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                          |                                                                                                             |                                                    |            |             |           |      |           |             |            |   |            |            |            |  
|------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ---------- | ----------- | --------- | ---- | --------- | ----------- | ---------- | - | ---------- | ---------- | ---------- | -
|                                                                          |                                                                                                             |                                                   
|                                                                          |                                                                                                             | For the Year Ended December 31,                   
|                                                                          |                                                                                                             |                                                   
|                                                                          |                                                                                                             | 2001                                               |            | 2000        |           | 1999
|                                                                          |                                                                                                             |                                                    |            |             |           |     
|Cash flows from operating activities:                                     |                                                                                                             |                                                    |            |             |           |      |           |             |            |   |            |           
|                                                                          | Net income (loss)                                                                                           |                                                    | $          | 1,539,373   |           |      | $         | 2,307,967   |            |   | $          | (6,275,145 | )         
|                                                                          | Adjustments to reconcile net income
	(loss) to net cash provided by operations:                             |                                                    |            |             |           |      |           |             |            |   |            |            |           
|                                                                          |                                                                                                             | Loss from discontinued operations                  |            |             |          |      |           |             | 485,544    |   |            |            |           |  
|                                                                          |                                                                                                             | Deferred taxes                                     |            |             | 933,912   |      |           |             | 1,832,567  |   |            |            | (2,500,526 | )
|                                                                          |                                                                                                             | Depreciation and amortization                      |            |             | 1,034,498 |      |           |             | 881,743    |   |            |            | 2,006,332  |  
|                                                                          |                                                                                                             | Provision for impairment of certain assets         |            |             |          |      |           |             |           |   |            |            | 8,160,978  |  
|                                                                          |                                                                                                             | Common stock and stock option compensation         |            |             | 195,748   |      |           |             | 240,661    |   |            |            | 182,417    |  
|                                                                          |                                                                                                             | Litigation settlement payable in equity securities |            |             | 14,301    |      |           |             |           |   |            |            | 1,520,371  |  
|                                                                          |                                                                                                             | Gain on disposal of property and equipment         |            |             |          |      |           |             | (1,677     | ) |            |            | (87,158    | )
|                                                                          |                                                                                                             | Allowance for doubtful accounts                    |            |             | 48,569    |      |           |             |           |   |            |            | 534,653    |  
|                                                                          |                                                                                                             | Changes in assets and liabilities:                 |            |             |           |      |           |             |            |   |            |            |            |  
|                                                                          |                                                                                                             | Accounts receivable  trade and other              |            |             | 652,320   |      |           |             | 7,803      |   |            |            | (931,541   | )
|                                                                          |                                                                                                             | Service contracts, net                             |            |             | (2,488    | )    |           |             | (415,906   | ) |            |            | 405,695    |  
|                                                                          |                                                                                                             | Inventories                                        |            |             | (393,867  | )    |           |             | (2,106,813 | ) |            |            | 850,661    |  
|                                                                          |                                                                                                             | Prepaid expenses and other current assets          |            |             | (119,101  | )    |           |             | (224,695   | ) |            |            | (105,939   | )
|                                                                          |                                                                                                             | Other assets                                       |            |             | 5,441     |      |           |             | (88,022    | ) |            |            | (14,382    | )
|                                                                          |                                                                                                             | Accounts payable                                   |            |             | (382,361  | )    |           |             | 573,432    |   |            |            | (399,525   | )
|                                                                          |                                                                                                             | Accrued expenses                                   |            |             | (853,791  | )    |           |             | 901,111    |   |            |            | 419,087    |  
|                                                                          |                                                                                                             |                                                    |            |             |           |      |           |             |            |   |            |           
|Net cash provided by continuing operations                                |                                                                                                             |                                                    | 2,672,554  |             |           |      | 4,393,715 |             |            |   | 3,765,978  |           
|Net cash used by discontinued operations                                  |                                                                                                             |                                                    |           |             |           |      | (858,988  | )           |            |   |           |           
|                                                                          |                                                                                                             |                                                    |            |             |           |      |           |             |            |   |            |           
|Net cash provided by operating activities                                 |                                                                                                             |                                                    | 2,672,554  |             |           |      | 3,534,727 |             |            |   | 3,765,978  |           
|                                                                          |                                                                                                             |                                                    |            |             |           |      |           |             |            |   |            |           
|Cash flows from investing activities:                                     |                                                                                                             |                                                    |            |             |           |      |           |             |            |   |            |           
|                                                                          | Acquisition of property and equipment                                                                       |                                                    |            | (938,708    | )         |      |           | (522,643    | )          |   |            | (438,069   | )         
|                                                                          | Sale of property and equipment                                                                              |                                                    |            |            |           |      |           |            |            |   |            | 125,000    |           
|                                                                          | Software development costs                                                                                  |                                                    |            | (866,639    | )         |      |           | (278,543    | )          |   |            | (367,502   | )         
|                                                                          |                                                                                                             | Investing activities of discontinued operations    |            |             |          |      |           |             | (136,694   | ) |            |            |           |  
|                                                                          |                                                                                                             |                                                    |            |             |           |      |           |             |            |   |            |           
|Net cash used by investing activities                                     |                                                                                                             |                                                    | (1,805,347 | )           |           |      | (937,880  | )           |            |   | (680,571   | )         
|                                                                          |                                                                                                             |                                                    |            |             |           |      |           |             |            |   |            |           
|Cash flows from financing activities:                                     |                                                                                                             |                                                    |            |             |           |      |           |             |            |   |            |           
|                                                                          | Issuance of common and preferred stock and
	warrants for cash                                               |                                                    |            | 442,070     |           |      |           | 255,623     |            |   |            | 111,580    |           
|                                                                          | Borrowings under line of credit                                                                             |                                                    |            | 15,369,068  |           |      |           | 21,255,000  |            |   |            | 8,903,395  |           
|                                                                          | Redemption of warrants                                                                                      |                                                    |            | (4,540      | )         |      |           |            |            |   |            |           |           
|                                                                          | Repayments of line of credit                                                                                |                                                    |            | (16,018,091 | )         |      |           | (21,261,064 | )          |   |            | (8,713,128 | )         
|                                                                          | Borrowings under term loan                                                                                  |                                                    |            | 3,000,000   |           |      |           |            |            |   |            |           |           
|                                                                          | Repayments of term loan                                                                                     |                                                    |            | (1,083,331  | )         |      |           | (1,200,000  | )          |   |            | (1,200,000 | )         
|                                                                          | Repayments of notes payable                                                                                 |                                                    |            | (3,889,000  | )         |      |           |            |            |   |            | (542,027   | )         
|                                                                          | Payments of capital lease obligations                                                                       |                                                    |            | (32,242     | )         |      |           | (19,689     | )          |   |            | (11,363    | )         
|                                                                          |                                                                                                             |                                                    |            |             |           |      |           |             |            |   |            |           
|Net cash used in financing activities                                     |                                                                                                             |                                                    | (2,216,066 | )           |           |      | (970,130  | )           |            |   | (1,451,543 | )         
|                                                                          |                                                                                                             |                                                    |            |             |           |      |           |             |            |   |            |           
|Effect of foreign currency rate fluctuation on
	cash and cash equivalents |                                                                                                             |                                                    |           |             |           |      |          |             |            |   | 11,234     |           
|                                                                          |                                                                                                             |                                                    |            |             |           |      |           |             |            |   |            |           
|Net increase (decrease) in cash and cash
	equivalents                     |                                                                                                             |                                                    | (1,348,859 | )           |           |      | 1,626,717 |             |            |   | 1,645,098  |           
|Cash and cash equivalents at beginning of year                            |                                                                                                             |                                                    | 3,661,310  |             |           |      | 2,034,593 |             |            |   | 389,495    |           
|                                                                          |                                                                                                             |                                                    |            |             |           |      |           |             |            |   |            |           
|Cash and cash equivalents at end of year                                  |                                                                                                             | $                                                  | 2,312,451  |             |           | $    | 3,661,310 |             |            | $ | 2,034,593  |           
|                                                                          |                                                                                                             |                                                    |            |             |           |      |           |             |            |   |            |           
|Supplemental schedule of non-cash financing
	activities:                  |                                                                                                             |                                                    |            |             |           |      |           |             |            |   |            |           
|                                                                          | Non-cash issuance of common stock and common
	stock warrants                                                |                                                    | $          | 45,000      |           |      | $         | 157,000     |            |   | $          | 138,881    |           
|                                                                          | Issuance of series B convertible preferred stock
	and common stock in connection with litigation settlement |                                                    |            | 14,301      |           |      |           |            |            |   |            |           |           
|                                                                          | Equipment acquired through issuance of capital
	lease                                                       |                                                    |            |            |           |      |           | 103,977     |            |   |            |           |           
|                                                                          | Issuance of warrants in connection with debt
	financing                                                     |                                                    |            | 374,768     |           |      |           |            |            |   |            |           |           
|Supplemental disclosure of cash flow information:                         |                                                                                                             |                                                    |            |             |           |      |           |             |            |   |            |           
|                                                                          | Cash paid for income taxes                                                                                  |                                                    |            | 47,312      |           |      |           | 25,536      |            |   |            | 57,468     |           
|                                                                          | Cash paid for interest                                                                                      |                                                    |            | 778,028     |           |      |           | 865,153     |            |   |            | 838,122    |           

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

F-8



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME

|                                                        |  |                                 |           |      |  |      |           |   |  |   |            |  
|------------------------------------------------------- |  | ------------------------------- | --------- | ---- |  | ---- | --------- | - |  | - | ---------- | -
|                                                        |  |                                
|                                                        |  | For the Year Ended December 31,
|                                                        |  |                                
|                                                        |  | 2001                            |           | 2000 |  | 1999
|                                                        |  |                                 |           |      |  |     
|Net income (loss)                                       |  | $                               | 1,539,373 |      |  | $    | 2,307,967 |   |  | $ | (6,275,145 | )
|Unrealized gains (losses) on investments,
	net of taxes |  |                                 | (216,193  | )    |  |      | 289,028   |   |  |   |           |  
|Foreign currency translation adjustment                 |  |                                 |          |      |  |      | (67,207   | ) |  |   | 19,697     |  
|                                                        |  |                                 |           |      |  |      |           |   |  |   |            |  
|Comprehensive income (loss)                             |  | $                               | 1,323,180 |      |  | $    | 2,529,788 |   |  | $ | (6,255,448 | )
|                                                        |  |                                 |           |      |  |      |           |   |  |   |            |  

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

F-9



---



##### 



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 materially from those estimates.



| |                            
| | ---------------------------
| | Principles of Consolidation

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



| |                                             
| | --------------------------------------------
| | 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.



| |            
| | -----------
| | 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.

F-10



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                
| | -------------------------------
| | 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, 2001 and 2000.

The cost, gross unrealized holding gains and fair
value as of December 31, 2001 are as follows:

|                              |  |      |         |            |  |            |         |  |  |   |           | 
|----------------------------- |  | ---- | ------- | ---------- |  | ---------- | ------- |  |  | - | --------- | 
|                              |  |      |         | Gross      |  |           
|                              |  |      |         | Unrealized |  |           
|                              |  |      |         | Holding    |  | Fair      
|                              |  | Cost |         | Gains      |  | Fair Value
|                              |  |      |         |            |  |           
|Available for sale securities |  | $    | 915,256 |            |  | $          | 121,392 |  |  | $ | 1,036,648 | 
|                              |  |      |         |            |  |            |         |  |  |   |           | 

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

|                              |  |      |         |            |  |            |         |  |  |   |           | 
|----------------------------- |  | ---- | ------- | ---------- |  | ---------- | ------- |  |  | - | --------- | 
|                              |  |      |         | Gross      |  |           
|                              |  |      |         | Unrealized |  |           
|                              |  |      |         | Holding    |  | Fair      
|                              |  | Cost |         | Gains      |  | Fair Value
|                              |  |      |         |            |  |           
|Available for sale securities |  | $    | 915,256 |            |  | $          | 481,714 |  |  | $ | 1,396,970 | 
|                              |  |      |         |            |  |            |         |  |  |   |           | 



| |                                         
| | ----------------------------------------
| | 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 analyses, 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

F-11



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and anticipated future revenues or (b) the
straight-line method over the remaining estimated economic life
of the product. 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 $155,957,
$90,975 and $223,813 for 2001, 2000 and 1999, 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 services for its IVD imaging
systems and sales of small 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.

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, collectibility 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.

F-12



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |           
| | ----------
| | 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 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, the fair value of short term borrowings and
notes payable described in note 8 approximate their
carrying value due to the variable nature of the interest rates
in these instruments.



| |                   
| | ------------------
| | Earnings Per Share

Basic earnings per share are 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 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.

F-13



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                  
| | -----------------
| | Reclassifications

Certain reclassifications have been made to the
1999 and 2000 financial statements to conform to the 2001
presentation.

New
Accounting Pronouncements

In September 2001, the Financial Accounting
Standards Board finalized FASB Statements No. 141,
Business Combinations(SFAS 141), and No. 142,
Goodwill and Other Intangible Assets(SFAS 142).
SFAS 141 requires the use of the purchase method of
accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations initiated after
September 30, 2001. SFAS 141 also requires that the
Company recognize acquired intangible assets apart from goodwill
if the acquired intangible assets meet certain criteria.
SFAS 141 applies to all business combinations initiated
after September 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142 that the Company
reclassify the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS 141.

SFAS 142 requires, among other things, that
companies no longer amortize goodwill, but instead test goodwill
for impairment at least annually. In addition, SFAS 142
requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill,
reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangible assets
with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is
required to be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible
assets recognized at that date, regardless of when those assets
were initially recognized. SFAS 142 requires the Company to
complete a transitional goodwill impairment test nine months
from the date of adoption. The Company is also required to
reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.

The Companys previous business combinations
were accounted for using the purchase method. As of
December 31, 2001, the net carrying amount of goodwill is
$188,911. Amortization expense during the year ended
December 31, 2001 was $34,692. Currently, the Company is
assessing but has not yet determined how the adoption of
SFAS 141 and SFAS 142 will impact its financial
position and results of operations.

In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement Obligations.
SFAS 143 requires the fair value of a liability for an
asset retirement obligation to be recognized in the period in
which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized
as part of the carrying amount of the long-lived asset. SFAS
No. 143 is effective for fiscal years beginning after
June 15, 2002. The Company believes the adoption of this
Statement will have no material impact on its financial
statements.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFASB 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or
in discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include
amounts for operating losses that have not yet occurred. SFASB
144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and, generally, are
to be applied prospectively. The Company believes the adoption
of this Statement will have no material impact on its financial
statements.



| |                                 
| | --------------------------------
| | 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

F-14



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$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.

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.     Inventories.

Inventories consist of the following:

|                                        |  |                 |            |      |  |   |           |  
|--------------------------------------- |  | --------------- | ---------- | ---- |  | - | --------- | -
|                                        |  |                
|                                        |  | At December 31,
|                                        |  |                
|                                        |  | 2001            |            | 2000
|                                        |  |                 |            |     
|Finished goods                          |  | $               | 2,270,973  |      |  | $ | 1,715,881 |  
|Work-in-process                         |  |                 | 479,809    |      |  |   | 216,050   |  
|Raw materials, parts and sub-assemblies |  |                 | 4,042,659  |      |  |   | 4,229,972 |  
|                                        |  |                 |            |      |  |   |           |  
|                                        |  |                 | 6,793,441  |      |  |   | 6,161,903 |  
|Reserved for Obsolescence               |  |                 | (1,215,302 | )    |  |   | (977,631  | )
|                                        |  |                 |            |      |  |   |           |  
|Net inventories                         |  | $               | 5,578,139  |      |  | $ | 5,184,272 |  
|                                        |  |                 |            |      |  |   |           |  

4.     Property and
Equipment.

Property and equipment consist of the following:

|                              |  |                 |            |      |  |   |            |  
|----------------------------- |  | --------------- | ---------- | ---- |  | - | ---------- | -
|                              |  |                
|                              |  | At December 31,
|                              |  |                
|                              |  | 2001            |            | 2000
|                              |  |                 |            |     
|Leasehold improvements        |  | $               | 771,029    |      |  | $ | 606,959    |  
|Furniture and fixtures        |  |                 | 244,217    |      |  |   | 231,953    |  
|Machinery and equipment       |  |                 | 2,950,271  |      |  |   | 2,654,866  |  
|Construction in progress      |  |                 | 228,442    |      |  |   |           |  
|Tooling, dies and mold        |  |                 | 1,087,600  |      |  |   | 927,158    |  
|Rental units                  |  |                 | 1,023,343  |      |  |   | 985,343    |  
|                              |  |                 |            |      |  |   |            |  
|                              |  |                 | 6,304,902  |      |  |   | 5,406,279  |  
|Less accumulated depreciation |  |                 | (4,638,676 | )    |  |   | (4,061,861 | )
|                              |  |                 |            |      |  |   |            |  
|                              |  | $               | 1,666,226  |      |  | $ | 1,344,418  |  
|                              |  |                 |            |      |  |   |            |  

Property and equipment includes and $2,575,199
and $2,399,053, respectively, at December 31, 2001 and
2000, of fully depreciated assets which remain in service.
Depreciation expense was $616,900, $601,186 and $653,901 for
2001, 2000 and 1999, respectively.

F-15



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     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, 2001 and 2000.

|                                                          |  |                 |          |      |  |   |          |  
|--------------------------------------------------------- |  | --------------- | -------- | ---- |  | - | -------- | -
|                                                          |  |                
|                                                          |  | At December 31,
|                                                          |  |                
|                                                          |  | 2001            |          | 2000
|                                                          |  |                 |          |     
|Total minimum lease payments                              |  | $               | 348,457  |      |  | $ | 513,601  |  
|Less: Estimated executory costs including profit
	thereon |  |                 | (120,274 | )    |  |   | (177,418 | )
|                                                          |  |                 |          |      |  |   |          |  
|                                                          |  |                 | 228,183  |      |  |   | 336,183  |  
|                                                          |  |                 | (65,779  | )    |  |   | (96,367  | )
|                                                          |  |                 |          |      |  |   |          |  
|                                                          |  |                 | 162,404  |      |  |   | 239,816  |  
|Less accumulated depreciation                             |  |                 | (77,412  | )    |  |   | (77,412  | )
|                                                          |  |                 |          |      |  |   |          |  
|                                                          |  | $               | 84,992   |      |  | $ | 162,404  |  
|                                                          |  |                 |          |      |  |   |          |  

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 $970,793 and
$769,334 at December 31, 2001 and 2000, respectively.

Future minimum lease payments due from customers
under sales-type leases and noncancellable operating leases as
of December 31, 2001 are as follows:

|     |  |              |         |           |  |   |         | 
|---- |  | ------------ | ------- | --------- |  | - | ------- | 
|     |  | Sales - Type |         | Operating
|     |  | Leases       |         | Leases   
|     |  |              |         |          
|2002 |  | $            | 165,144 |           |  | $ | 178,645 | 
|2003 |  |              | 132,888 |           |  |   |        | 
|2004 |  |              | 50,425  |           |  |   |        | 
|     |  |              |         |           |  |   |         | 
|     |  | $            | 348,457 |           |  | $ | 178,645 | 
|     |  |              |         |           |  |   |         | 

6.     Purchased
Intangibles.

Purchased intangibles, at cost, consist of the
following:

|                              |  |                 |          |      |  |   |          |  
|----------------------------- |  | --------------- | -------- | ---- |  | - | -------- | -
|                              |  |                
|                              |  | At December 31,
|                              |  |                
|                              |  | 2001            |          | 2000
|                              |  |                 |          |     
|Goodwill                      |  | $               | 383,108  |      |  | $ | 383,108  |  
|Less accumulated amortization |  |                 | (194,197 | )    |  |   | (159,505 | )
|                              |  |                 |          |      |  |   |          |  
|Total                         |  | $               | 188,911  |      |  | $ | 223,603  |  
|                              |  |                 |          |      |  |   |          |  

F-16



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

7.     Accrued
Expenses.

Accrued expenses consist of the following:

|                          |  |                 |           |      |  |   |           | 
|------------------------- |  | --------------- | --------- | ---- |  | - | --------- | 
|                          |  |                
|                          |  | At December 31,
|                          |  |                
|                          |  | 2001            |           | 2000
|                          |  |                 |           |     
|Accrued bonuses           |  | $               | 339,026   |      |  | $ | 942,642   | 
|Accrued commissions       |  |                 | 100,943   |      |  |   | 170,250   | 
|Accrued payroll           |  |                 | 100,466   |      |  |   | 41,655    | 
|Accrued vacation          |  |                 | 363,587   |      |  |   | 262,818   | 
|Accrued professional fees |  |                 | 130,494   |      |  |   | 133,896   | 
|Accrued warranty expense  |  |                 | 281,683   |      |  |   | 379,546   | 
|Accrued interest          |  |                 | 40,527    |      |  |   | 134,562   | 
|Accrued  other           |  |                 | 436,103   |      |  |   | 617,905   | 
|                          |  |                 |           |      |  |   |           | 
|                          |  | $               | 1,792,829 |      |  | $ | 2,683,274 | 
|                          |  |                 |           |      |  |   |           | 

8.     Short-Term
Borrowings and Notes Payable.

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 replaced an old warrant expiring
July 31, 2001 for the same number of shares.

At December 31, 2001, the outstanding
amounts under the Companys credit facility consists of
$2.4 million outstanding under a $3 million term loan
and $0 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 $1.9 million available under the line of
credit at December 31, 2001. The term loan bears interest
at the lenders prime rate (4.75% on December 31,
2001) plus 3.0% and is payable in monthly installments of
approximately $83,000. The revolving credit line bears interest
at the lenders prime rate plus 1.0%, but has a minimum
interest rate of 7%. The credit facility is subject to minimum
interest charges, prepayment penalties and customary fees and is
collateralized by a first priority lien on all assets of the
Company. It also contains financial covenants based primarily on
tangible net worth and cash flows and imposes restrictions on
acquisition, capital expenditures and cash dividends. At
December 31, 2001, the Company was in compliance with all
of its financial covenants.

At December 31, 2001, the outstanding
principal balance on the unsecured Subordinated Note Payable was
$3.1 million. The note is payable in monthly installments
of approximately $97,000 plus interest on the unpaid balance.
The note bears interest at the prime rate (4.75% on
December 31, 2001) plus 2% and matures on July 31,
2004.

In February 2002, the Company refinanced its
existing credit facility and replaced it with a new
$8 million credit facility with California Bank and Trust.
The new facility consists of a $500,000 term loan, a
$1 million term loan and a $6.5 million revolving line
of credit. The $500,000 term loan is payable in 60 equal monthly
installments. The $1 million term loan shall carry interest
only for the first 12 months, followed by 48 months of
equal principal payments plus interest. The $6.5 million
credit line matures in June 2004. Borrowings under the line of
credit are limited to a percentage of eligible receivables and
inventory. The entire credit facility bears interest at the
lenders prime rate, or LIBOR rate plus 2%.

F-17



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

After considering the effects of the refinanced
credit facility, maturity of the Companys long term debt
obligations under the credit facility and the subordinated note
payable are $1.4 million in 2002, $1.5 million in
2003, $1 million in 2004, $350,000 in 2005, $350,000 in
2006 and $60,000 in 2007.

9.     Income
Taxes.

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

|          |         |                                 |           |         |  |      |           |           |   |   |         |         | 
|--------- | ------- | ------------------------------- | --------- | ------- |  | ---- | --------- | --------- | - | - | ------- | ------- | 
|          |         |                                
|          |         | For the Year Ended December 31,
|          |         |                                
|          |         | 2001                            |           | 2000    |  | 1999
|          |         |                                 |           |         |  |     
|Current:  |         | $                               | 40,000    |         |  | $    | 139,000   |           |   | $ | 4,000   |        
|          | Federal |                                 |           | 52,000  |  |      |           | (376,000  | ) |   |         | 32,000  | 
|          | State   |                                 |           |        |  |      |           |          |   |   |         | 36,000  | 
|          |         |                                 |           |         |  |      |           |           |   |   |         |        
|Foreign   |         |                                 |           |         |  |      |           |           |   |   |         |        
|          |         |                                 | 92,000    |         |  |      | (237,000  | )         |   |   | 72,000  |        
|          |         |                                 |           |         |  |      |           |           |   |   |         |        
|Deferred: |         |                                 |           |         |  |      |           |           |   |   |         |        
|          | Federal |                                 |           | 859,000 |  |      |           | 1,120,000 |   |   |         | 422,000 | 
|          | State   |                                 |           | 75,000  |  |      |           | 712,000   |   |   |         | 37,000  | 
|          |         |                                 |           |         |  |      |           |           |   |   |         |        
|          |         |                                 | 934,000   |         |  |      | 1,832,000 |           |   |   | 459,000 |        
|          |         |                                 |           |         |  |      |           |           |   |   |         |        
|          |         | $                               | 1,026,000 |         |  | $    | 1,595,000 |           |   | $ | 531,000 |        
|          |         |                                 |           |         |  |      |           |           |   |   |         |        

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, 2001, 2000 and 1999 as follows:

|                                                                   |  |                                 |           |      |  |      |            |   |  |   |          |  
|------------------------------------------------------------------ |  | ------------------------------- | --------- | ---- |  | ---- | ---------- | - |  | - | -------- | -
|                                                                   |  |                                
|                                                                   |  | For the Year Ended December 31,
|                                                                   |  |                                
|                                                                   |  | 2001                            |           | 2000 |  | 1999
|                                                                   |  |                                 |           |      |  |     
|Tax provision (benefit) computed at Federal
	statutory rate        |  | $                               | 872,000   |      |  | $    | 1,492,000  |   |  | $ | (189,000 | )
|Increase (decrease) in taxes due to change
	in valuation allowance |  |                                 | (426,000  | )    |  |      | (1,655,000 | ) |  |   | 649,000  |  
|Expiration of Federal NOL                                          |  |                                 | 426,000   |      |  |      | 1,655,000  |   |  |   |         |  
|State taxes, net of federal benefit                                |  |                                 | 128,000   |      |  |      | 201,000    |   |  |   | (11,000  | )
|Nondeductible expenses                                             |  |                                 | 38,000    |      |  |      | 23,000     |   |  |   | 38,000   |  
|Other                                                              |  |                                 | (12,000   | )    |  |      | (121,000   | ) |  |   | 44,000   |  
|                                                                   |  |                                 |           |      |  |      |            |   |  |   |          |  
|                                                                   |  | $                               | 1,026,000 |      |  | $    | 1,595,000  |   |  | $ | 531,000  |  
|                                                                   |  |                                 |           |      |  |      |            |   |  |   |          |  

At December 31, 2001, the Company had
federal net operating loss carryforwards of approximately
$20.4 million, which expire in fiscal years ending in 2002
through 2021.

F-18



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The primary components of temporary differences,
which give rise to the Companys net deferred tax asset at
December 31, 2001 and 2000 are as follows:

|                                   |  |                 |           |      |  |   |           |  
|---------------------------------- |  | --------------- | --------- | ---- |  | - | --------- | -
|                                   |  |                
|                                   |  | At December 31,
|                                   |  |                
|                                   |  | 2001            |           | 2000
|                                   |  |                 |           |     
|Depreciation and amortization      |  | $               | 356,000   |      |  | $ | 588,000   |  
|Allowance for doubtful accounts    |  |                 | 112,000   |      |  |   | 130,000   |  
|Accrued liabilities                |  |                 | 477,000   |      |  |   | 357,000   |  
|Deferred revenue-service contracts |  |                 | 499,000   |      |  |   | 219,000   |  
|Net operating loss carry-forwards  |  |                 | 7,277,000 |      |  |   | 8,752,000 |  
|Other                              |  |                 | 698,000   |      |  |   | 280,000   |  
|Valuation allowance                |  |                 | (569,000  | )    |  |   | (994,000  | )
|                                   |  |                 |           |      |  |   |           |  
|                                   |  | $               | 8,850,000 |      |  | $ | 9,332,000 |  
|                                   |  |                 |           |      |  |   |           |  

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
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.

10.     Capital
Stock.



| |                                        
| | ---------------------------------------
| | Issuance of Common and Preferred
	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. During the year ended
December 31, 2001, in connection with legal settlement with
Poly U/ A equity instrument, the Company issued 3,000 shares of
common stock, 1,000 shares of preferred stock and warrants to
purchase an additional 3,000 shares of common stock in exchange
for the remaining common stock of Poly U/ A Systems. The
Series B shares have a liquidation preference of $3 per
share (or an aggregate liquidation preference of $615,000). 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

F-19



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

In December 2001, the Company announced its
decision to redeem all of the outstanding rights to purchase One
Dollar Warrant Shares at $0.10 per share under the terms of the
Series G One Dollar Stock Purchase Warrants. In
response to this announcement, most warrant holders exercised
their warrants and purchased the Companys common stock
under the terms of the warrant. Two hundred fifty one thousand
one hundred (251,100) warrants were exercised during the year
leaving 45,900 unexercised series G One Dollar Stock
Purchase Warrants, which the company subsequently redeemed.



| |                           
| | --------------------------
| | 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 total compensation 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 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 2001, 2000 and 1999,
IRIS issued 10,870, 32,826 and 320,450 shares of common stock,
respectively, in exchange for $20,000, $48,000 and $238,462 in
cash and services, respectively, under this plan.



| |                                               
| | ----------------------------------------------
| | Stock Option Plans and Employee Benefit
	Plans

As of December 31, 2001, 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.

F-20



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2001.

|     |  |                         |           |           |  |             |         |           |  |  |           |  |  |  |         | 
|---- |  | ----------------------- | --------- | --------- |  | ----------- | ------- | --------- |  |  | --------- |  |  |  | ------- | 
|     |  |                        
|     |  | Number of Option Shares
|     |  |                        
|     |  |                         |           | Available
|Plan |  | Authorized              |           | Exercised |  | Outstanding |         | for Grant
|     |  |                         |           |           |  |             |         |          
|1994 |  |                         | 700,000   |           |  |             | 167,733 |           |  |  | 528,500   |  |  |  | 3,767   | 
|1997 |  |                         | 600,000   |           |  |             | 114,492 |           |  |  | 482,034   |  |  |  | 3,474   | 
|1998 |  |                         | 1,900,000 |           |  |             | 27,848  |           |  |  | 1,317,813 |  |  |  | 554,339 | 
|     |  |                         |           |           |  |             |         |           |  |  |           |  |  |  |         | 
|     |  |                         | 3,200,000 |           |  |             | 310,073 |           |  |  | 2,328,347 |  |  |  | 561,580 | 
|     |  |                         |           |           |  |             |         |           |  |  |           |  |  |  |         | 

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
2001, 2000 and 1999, 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:

|                                                               |  |                                 |           |      |  |      |           |  |  |   |            |  
|-------------------------------------------------------------- |  | ------------------------------- | --------- | ---- |  | ---- | --------- |  |  | - | ---------- | -
|                                                               |  |                                
|                                                               |  | For the Year Ended December 31,
|                                                               |  |                                
|                                                               |  | 2001                            |           | 2000 |  | 1999
|                                                               |  |                                 |           |      |  |     
|Income (loss) attributable to Common
	stockholders as reported |  | $                               | 1,539,373 |      |  | $    | 2,307,967 |  |  | $ | (6,275,145 | )
|Income (loss) attributable to Common
	stockholders pro forma   |  |                                 | 1,226,688 |      |  |      | 2,071,305 |  |  |   | (6,665,244 | )
|Income (loss) per diluted share as reported                    |  |                                 | 0.14      |      |  |      | 0.22      |  |  |   | (0.86      | )
|Income (loss) per diluted share pro forma                      |  |                                 | 0.11      |      |  |      | 0.20      |  |  |   | (0.92      | )

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 1999, 2000 and 2001.

|                        |  |                    |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ------------------ | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  |                   
|                        |  | For the Year Ended
|                        |  | December 31,      
|                        |  |                   
|                        |  | 2001               |      | 2000 |  | 1999
|                        |  |                    |      |      |  |     
|Risk free interest rate |  |                    | 4.68 | %    |  |      | 6.43 | % |  |  | 5.82 | %
|Expected lives (years)  |  |                    | 5    |      |  |      | 5    |   |  |  | 5    |  
|Expected volatility     |  |                    | 53   | %    |  |      | 81   | % |  |  | 74   | %
|Expected dividend yield |  |                    |      |      |  |      |      |   |  |  |      |  

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.

F-21



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth certain
information relative to stock options during the years ended
December 31, 1999, 2000 and 2001.

|                                 |                                   |        |           |          |   |                |               |               |      |      |  |  |   |      | 
|-------------------------------- | --------------------------------- | ------ | --------- | -------- | - | -------------- | ------------- | ------------- | ---- | ---- |  |  | - | ---- | 
|                                 |                                   |        |           |          |   |                |               | Fair Value at
|                                 |                                   |        |           |          |   |                |               | Grant Date   
|                                 |                                   |        |           |          |   | Weighted       |               | Weighted     
|                                 |                                   | Shares |           | Range    |   | Average        |               | Average      
|                                 |                                   |        |           |          |   |                |               |              
|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 |      |  |  |   |     
|                                 | Granted                           |        |           | 473,005  |   |                | 2.00 to  2.70 |               |      | 2.17 |  |  | $ | 1.10 | 
|                                 | Exercised                         |        |           | (116,101 | ) |                | 0.75 to  1.50 |               |      | 1.31 |  |  |   |     | 
|                                 | Canceled or expired               |        |           | (31,441  | ) |                | 1.25 to  1.37 |               |      | 1.37 |  |  |   |     | 
|                                 |                                   |        |           |          |   |                |               |               |      |      |  |  |   |     
|Outstanding at December 31, 2001 |                                   |        | 2,328,347 |          |   | $0.69 to $4.38 |               | $             | 1.47 |      |  |  |  |     
|Outstanding at December 31, 2001 |                                   |        | 2,328,347 |          |   |                |               | $             | 1.47 |      |  |  |   |     
|                                 | Weighted average life  85 months |        |           |          |   |                |               |               |      |      |  |  |   |      | 
|Exercisable at December 31, 2001 |                                   |        | 1,661,261 |          |   |                |               | $             | 1.47 |      |  |  |   |     
|                                 | Weighted average life  47 months |        |           |          |   |                |               |               |      |      |  |  |   |      | 

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
$55,931 and $48,948 to the plan for 2001 and 2000, respectively.



| |         
| | --------
| | Warrants

At December 31, 2001, the following warrants
to purchase common stock were outstanding and exercisable:

|                 |  |                 |      |                 |  |                  
|---------------- |  | --------------- | ---- | --------------- |  | -----------------
|Number of Shares |  | Per Share Price |      | Expiration Date
|                 |  |                 |      |                
|100,000          |  |                 | 1.50 |                 |  | February 10, 2002
|10,000           |  |                 | 4.31 |                 |  | May 15, 2002     
|294,000          |  |                 | 2.00 |                 |  | August 6, 2002   
|853,040          |  |                 | 1.90 |                 |  | July 31, 2004    
|50,000           |  |                 | 2.13 |                 |  | October 31, 2005 
|45,045           |  |                 | 2.22 |                 |  | October 1, 2006  

11.     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.

F-22



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Future minimum rental payments required under
capital and operating leases that have an initial term in excess
of one year as of December 31, 2001, are as follows:

|                        |      |         |         |           |  |   |           |         | 
|----------------------- | ---- | ------- | ------- | --------- |  | - | --------- | ------- | 
|                        |      | Capital |         | Operating
|                        |      | Leases  |         | Leases   
|                        |      |         |         |          
|Year Ended December 31, |      |         |         |           |  |   |           |        
|                        | 2002 |         | $       | 39,489    |  |   | $         | 555,649 | 
|                        | 2003 |         |         | 39,489    |  |   |           | 540,477 | 
|                        | 2004 |         |         | 39,489    |  |   |           | 516,594 | 
|                        | 2005 |         |         | 18,051    |  |   |           | 460,208 | 
|                        | 2006 |         |         |          |  |   |           | 427,917 | 
|                        |      |         |         |           |  |   |           |        
|                        |      | $       | 136,518 |           |  | $ | 2,500,845 |        
|                        |      |         |         |           |  |   |           |        

Rent expense under all operating leases during
2001, 2000 and 1999 was $569,768, $512,842 and $530,000
respectively.



| |           
| | ----------
| | 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.

12.     Earnings per
Share.

The computation of per share amounts for 2001,
2000 and 1999 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. Options and warrants to purchase
197,445 and 1,660,237 shares of common stock were not considered
in the computation of diluted EPS for 2001 and 2000,
respectively, because their inclusion would have been
antidilutive.

The following is a reconciliation of shares used
in computing basic and diluted earnings per share for 2000 and
2001:

|                                            |                 |      |            |         |  |  |            |         | 
|------------------------------------------- | --------------- | ---- | ---------- | ------- |  |  | ---------- | ------- | 
|                                            |                 | 2001 |            | 2000   
|                                            |                 |      |            |        
|Weighted average number of shares  basic   |                 |      | 9,978,532  |         |  |  | 9,654,272  |        
|Effect of dilutive securities:              |                 |      |            |         |  |  |            |        
|                                            | Options         |      |            | 463,349 |  |  |            | 300,041 | 
|                                            | Warrants        |      |            | 254,493 |  |  |            | 145,294 | 
|                                            | Preferred stock |      |            | 306,212 |  |  |            | 305,190 | 
|                                            |                 |      |            |         |  |  |            |        
|Weighed average number of shares 
	diluted |                 |      | 11,002,586 |         |  |  | 10,404,797 |        
|                                            |                 |      |            |         |  |  |            |        

13.     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
$393,356, $601,511 and $310,587 in 2001, 2000 and 1999
respectively.

F-23



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

14.     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.

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

|                                                     |                                                                   |        |          |          |  
|---------------------------------------------------- | ----------------------------------------------------------------- | ------ | -------- | -------- | -
|                                                     |                                                                   | Amount
|                                                     |                                                                   |       
|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 | )       
|                                                     |                                                                   |        |          |         

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

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

|                                  |  |        |            |  
|--------------------------------- |  | ------ | ---------- | -
|                                  |  | Amount
|                                  |  |       
|Revenues                          |  | $      | 4,218,647  |  
|Loss from discontinued operations |  |        | (5,187,221 | )

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

|                                                             |  |      |          |  
|------------------------------------------------------------ |  | ---- | -------- | -
|                                                             |  | 1999
|                                                             |  |     
|Cash provided by (used in) operations                        |  | $    | 279,321  |  
|Cash used by investing activities                            |  |      | (230,166 | )
|Effect of foreign currency fluctuations on cash
	equivalents |  |      | 11,234   |  
|                                                             |  |      |          |  
|Cash provided (used) by discontinued
	operations             |  | $    | 60,389   |  
|                                                             |  |      |          |  

15.     Unusual
Charges.

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, 2001 and 2000.

F-24



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

16.     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 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 services 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. 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-25



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The tables below present information about
reported segments for the three years ended December 31,
2001:

|                                       |  |            |            |            |  |             |           |       |  |   |            |   |  |   |            |  
|-------------------------------------- |  | ---------- | ---------- | ---------- |  | ----------- | --------- | ----- |  | - | ---------- | - |  | - | ---------- | -
|                                       |  |            |            | Small      |  | Unallocated |           |      
|                                       |  |            |            | Laboratory |  | Corporate   |           |      
|                                       |  | Urinalysis |            | Devices    |  | Expenses    |           | Total
|                                       |  |            |            |            |  |             |           |      
|For the Year Ended December 31,
	2001: |  |            |            |            |  |             |           |       |  |   |            |   |  |   |            |  
|Revenues                               |  | $          | 21,953,524 |            |  | $           | 6,694,145 |       |  |   |           |   |  | $ | 28,647,669 |  
|Interest income                        |  | $          | 116,394    |            |  | $           | 2,377     |       |  |   |           |   |  | $ | 118,771    |  
|Interest expense                       |  | $          | 7,244      |            |  |             |          |       |  | $ | 851,516    |   |  | $ | 858,760    |  
|Depreciation and amortization          |  | $          | 935,390    |            |  | $           | 120,661   |       |  | $ | 174,195    |   |  | $ | 1,230,246  |  
|Other non-cash items                   |  | $          | 8,360      |            |  |             |          |       |  |   |           |   |  | $ | 8,360      |  
|Segment profit (loss)                  |  | $          | 3,742,299  |            |  | $           | 1,907,307 |       |  | $ | (3,083,985 | ) |  | $ | 2,565,621  |  
|Segment assets                         |  | $          | 15,756,750 |            |  | $           | 2,255,463 |       |  | $ | 8,490,827  |   |  | $ | 26,503,040 |  
|Investment in long-lived assets        |  | $          | 1,754,033  |            |  | $           | 51,314    |       |  |   |           |   |  | $ | 1,805,347  |  
|                                      
|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 non-cash 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    |  
|                                      
|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 non-cash 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    |  



---



|    |                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------
|(1) | Includes write-off 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 $3,620,018 and
$2,758,926 as of December 31, 2001 and 2000, respectively.

F-26



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

17.     Selected
Quarterly Data (unaudited).

The following table summarizes certain financial
information by quarter for 2001 and 2000:

|                                                                |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 
|--------------------------------------------------------------- |  | ------------------ | --------- | ------- |  | ------------ | --------- | ----------- |  | - | --------- |  |  | - | --------- | 
|                                                                |  |                   
|                                                                |  | 2001 Quarter Ended
|                                                                |  |                   
|                                                                |  | March 31           |           | June 30 |  | September 30 |           | December 31
|                                                                |  |                    |           |         |  |              |           |            
|Net revenues                                                    |  | $                  | 7,277,824 |         |  | $            | 7,006,084 |             |  | $ | 6,911,735 |  |  | $ | 7,452,026 | 
|Gross margin                                                    |  | $                  | 3,891,479 |         |  | $            | 3,951,033 |             |  | $ | 3,850,427 |  |  | $ | 3,875,555 | 
|Income from continuing operations                               |  | $                  | 360,666   |         |  | $            | 375,376   |             |  | $ | 279,564   |  |  | $ | 523,767   | 
|Net income                                                      |  | $                  | 360,666   |         |  | $            | 375,376   |             |  | $ | 279,564   |  |  | $ | 523,767   | 
|Income per share  basic                                        |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 
|Income from continuing operations                               |  | $                  | 0.04      |         |  | $            | 0.04      |             |  | $ | 0.03      |  |  | $ | 0.05      | 
|                                                                |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 
|Income per share attributable to common
	shareholders  basic   |  | $                  | 0.04      |         |  | $            | 0.04      |             |  | $ | 0.03      |  |  | $ | 0.05      | 
|                                                                |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 
|Income per share  diluted:                                     |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 
|Income from continuing operations                               |  | $                  | 0.03      |         |  | $            | 0.03      |             |  | $ | 0.02      |  |  | $ | 0.05      | 
|                                                                |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 
|Income per share attributable to common
	shareholders  diluted |  | $                  | 0.03      |         |  | $            | 0.03      |             |  | $ | 0.02      |  |  | $ | 0.05      | 
|                                                                |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 

|                                                                     |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 
|-------------------------------------------------------------------- |  | ------------------ | --------- | ------- |  | ------------ | --------- | ----------- |  | - | --------- |  |  | - | --------- | 
|                                                                     |  |                   
|                                                                     |  | 2000 Quarter Ended
|                                                                     |  |                   
|                                                                     |  | March 31           |           | June 30 |  | September 30 |           | December 31
|                                                                     |  |                    |           |         |  |              |           |            
|Net revenues                                                         |  | $                  | 6,753,138 |         |  | $            | 7,476,481 |             |  | $ | 7,145,775 |  |  | $ | 7,270,362 | 
|Gross margin                                                         |  | $                  | 3,536,932 |         |  | $            | 3,838,670 |             |  | $ | 3,934,044 |  |  | $ | 4,294,514 | 
|Income from continuing operations                                    |  | $                  | 637,310   |         |  | $            | 674,132   |             |  | $ | 719,185   |  |  | $ | 762,884   | 
|Loss from discontinued operations                                    |  | $                  | (286,385  | )       |  | $            | (199,159  | )           |  |   |          |  |  |   |          | 
|Net income                                                           |  | $                  | 350,925   |         |  | $            | 474,973   |             |  | $ | 719,185   |  |  | $ | 762,884   | 
|Income per share  basic:                                            |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 
|Income 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 per share  diluted:                                          |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 
|Income from continuing operations                                    |  | $                  | 0.06      |         |  | $            | 0.07      |             |  | $ | 0.07      |  |  | $ | 0.07      | 
|Loss from discontinued operations                                    |  | $                  | (0.03     | )       |  | $            | (0.02     | )           |  |   |          |  |  |   |          | 
|                                                                     |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 
|Income per share attributable to common
	shareholders  diluted      |  | $                  | 0.03      |         |  | $            | 0.05      |             |  | $ | 0.07      |  |  | $ | 0.07      | 
|                                                                     |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 

F-27



---



##### 



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

|                                       |  |           |           |            |  |            |         |            |  |         |   |  |  |   |            |      |  |   |           | 
|-------------------------------------- |  | --------- | --------- | ---------- |  | ---------- | ------- | ---------- |  | ------- | - |  |  | - | ---------- | ---- |  | - | --------- | 
|                                       |  |           |           |            |  | Additions  |         |            |  |        
|                                       |  |           |           | Charged to |  | Charged to |         |            |  |        
|                                       |  | Beginning |           | cost and   |  | other      |         |            |  | Ending 
|                                       |  | Balance   |           | expenses   |  | accounts   |         | Deductions |  | Balance
|                                       |  |           |           |            |  |            |         |            |  |        
|Year Ended December 31, 2001           |  |           |           |            |  |            |         |            |  |         |   |  |  |   |            |      |  |   |           | 
|Allowance for Doubtful Accounts        |  | $         | 334,696   |            |  |            |        |            |  |         |  |  |  | $ | (48,569    | )(1) |  | $ | 286,127   | 
|Reserve for Inventory Obsolescence     |  | $         | 977,631   |            |  | $          | 237,671 |            |  |         |  |  |  |   |           |      |  | $ | 1,215,302 | 
|Deferred Tax Asset Valuation Allowance |  | $         | 994,000   |            |  |            |        |            |  |         |  |  |  |   | (425,000   | )(2) |  |   | 569,000   | 
|                                      
|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 | 



---



|    |                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------
|(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 carry-forwards.

This schedule contains summary financial
information extracted from the consolidated balance sheet at
December 31, 2001 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