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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,
2002

Commission File No. 1-9767



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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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act.)     Yes o          No þ

The aggregate market value of the shares of
Common Stock held by non-affiliates of the Registrant was
approximately $24.7 million based upon the closing price of
$2.84 per share of Common Stock as reported on the American
Stock Exchange on June 30, 2002. 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 10,972,857 shares of Common
Stock outstanding on March 10, 2003.

Part III incorporates information by
reference from the Proxy Statement for the Registrants
2003 Annual Meeting of Stockholders.



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TABLE OF CONTENTS



|                                           |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                    
|                                           | Item 1. Business                                                                             
|                                           | Item 3. Legal Proceedings                                                                    
|                                           | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                   
|                                           | Item 5. Market for the Registrants Common Stock and Related Stockholder Matters             
|                                           | Item 6. Selected Financial Data                                                              
|                                           | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                           | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                           | Item 8. Financial Statements and Supplementary Data                                          
|                                           | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                  
|                                           | Item 10. Directors and Executive Officers of the Registrant                                  
|                                           | Item 11. Executive Compensation                                                              
|                                           | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                           | Item 13. Certain Relationships and Related Transactions                                      
|                                           | Item 14. Controls and Procedures                                                             
|PART IV                                   
|                                           | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES                                
|INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|Exhibit 10.9(a)                           
|Exhibit 10.9(b)                           
|Exhibit 10.9(c)                           
|Exhibit 10.9(d)                           
|Exhibit 23.14                             
|Exhibit 23.2                              
|Exhibit 99                                
|Exhibit 99.1                              
|Exhibit 99.2                              



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INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.

FORM 10-K ANNUAL REPORT

Fiscal Year Ended December 31,
2002


|              |  |                                                                                           |    |  |    | 
|------------- |  | ----------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I       
|Item 1.       |  | Business                                                                                  |    |  | 2  | 
|Item 2.       |  | Properties                                                                                |    |  | 10 | 
|Item 3.       |  | Legal Proceedings                                                                         |    |  | 10 | 
|Item 4.       |  | Submission of Matters to a Vote of Security
    Holders                                   |    |  | 10 | 
|PART II      
|Item 5.       |  | Market for the Registrants Common Stock and
    Related Stockholder Matters              |    |  | 10 | 
|Item 6.       |  | Selected Financial Data                                                                   |    |  | 11 | 
|Item 7.       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |  | 11 | 
|Item 7A.      |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |    |  | 19 | 
|Item 8.       |  | Financial Statements and Supplementary Data                                               |    |  | 19 | 
|Item 9.       |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |    |  | 19 | 
|PART III     
|Item 10.      |  | Directors and Executive Officers of the Registrant                                        |    |  | 19 | 
|Item 11.      |  | Executive Compensation                                                                    |    |  | 20 | 
|Item 12.      |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |  | 20 | 
|Item 13.      |  | Certain Relationships and Related Transactions                                            |    |  | 20 | 
|Item 14.      |  | Controls and Procedures                                                                   |    |  | 20 | 
|PART IV      
|Item 15.      |  | Exhibits, Financial Statements Schedules, and
    Reports on Form 8-K                     |    |  | 21 | 
|Signatures    |  |                                                                                           | 24 | 
|Certification |  |                                                                                           | 25 | 

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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. In 2001, we also
became the exclusive U.S. distributor for the ARKRAY AUTION
MAXTM AX-4280 Automated Urine Chemistry
Analyzer. During 2002, the Company received 510(k) clearance
from the Food and Drug Administration to market the
Companys new product platform, the iQTM200
System. This system addresses the needs of the mid-sized
laboratory market, and was introduced in November at the Medica
Trade Show in Düsseldorf, Germany. The Company expects to
launch this product towards the end of the second quarter of
2003.

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 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

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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.


The pressure to reduce the costs and improve the
accuracy of IVD tests, together with recent technological
developments, has 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
and upcoming 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 continuous development of new product
    enhancements that will improve our new 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.In contrast to the past,
    where we focused on domestic sales for our urinalysis business,
    in 1999 we began to selectively market our product
    internationally. With the launch of our new iQ200 system, which
    is more cost effective, we will increase dramatically our focus
    on the international market, with the ultimate goal of balancing
    our urinalysis business equally between the domestic and
    international markets.                               
|
| |  | 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
discernable presentation of the specimen to the microscope
(front end processing) and for rapidly capturing,
analyzing, classifying, enhancing, arranging and displaying
images of the specimen (back end imaging). Over the
past twenty years, we have created and developed our patented
and proprietary Automated Intelligent Microscopy, or AIM,
technology to address both of these requirements. AIM technology
involves the synthesis of visual microscopy, digital image
processing and automated image interpretation/ pattern
recognition to analyze microscopic specimens.

Traditional urine sediment analysis requires
manual preparation of a slide from the specimen requiring
several steps, including centrifugation followed by carefully
positioning, staining and coverslipping a sample extracted from
the specimen. The slide is then placed under the microscope and
manually manipulated and scanned by a technologist. This
procedure is time-consuming, imprecise, and potentially
biohazardous. 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

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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 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

In November 2002, we introduced the
iQTM200 Automated Urinalysis System (iQ200 System) at
the MEDICA exposition in Germany. First product shipments will
occur towards the end of the second quarter of 2003 on a
worldwide basis. The iQ200 System incorporates the iQ200
Automated Urine Microscopy Analyzer (iQ200) and the AUTION
MAXTM AX-4280 Automated Urine Chemistry Analyzer
(AX-4280) to provide a fully integrated chemical and microscopic
analysis, including a single bi-directional LIS interface. This
new platform addresses the major barriers for additional market
penetration worldwide  cost and size. The design of
the iQ200 System increases the number of customer sites now
accessible to IRIS by several thousand. It is the only fully
automated system that performs complete urinalyses, chemistry
and microscopy combined. The system is very user friendly and is
designed for the laboratory bench-top. In addition, each module
of the iQ200 System can be used as a stand-alone instrument. The
iQ200 is available through IRIS on a worldwide basis while the
AX-4280 is available through IRIS in the U.S. only. However, the
iQ200 can be integrated with the AX-4280 outside of the U.S.
through the use of hardware and software available from IRIS.

Traditionally, our product line has been a family
of urinalysis workstations, which require customers to make
significant capital investments ranging from approximately
$100,000 to $195,000. In 2003, we will redefine our product
offering completely with the commercialization of our new iQ200
product platform. This new product platform will enable us to
compete effectively in the global market, expand our market to
include the medium-sized hospitals and laboratories and, as
well, expand our product line to include stand-alone urine
chemistry diagnostics systems.

The high cost of acquisition of our legacy
platform has limited our sales of IRIS proprietary and patented
technology mainly to large-sized hospitals and laboratories that
can justify this high level of capital investment. The new
product line will be competitively priced to penetrate the
mid-sized hospitals and laboratories, both domestically and
internationally. A revamped international distribution network
will back the new product platform. We have established
collaborations with the most reputable Laboratory Information
System (LIS) companies, which have produced the necessary
interfaces to their state of the art information systems.

We will continue to sell its Model 500 Urine
and Body Fluids Analyzer for its unique capability to perform
microscopic analysis of other body fluids. The Model 500 is
an attended workstation which can perform 10 urine chemistries,
specific gravity, and IVD imaging tests on urine and a number of
other body fluids.

The AX-4280 is produced by Arkray, Inc. Kyoto,
Japan. The AX-4280 is a well-established product with hundreds
of units installed outside of the United States.



| |                            
| | ---------------------------
| | System Supplies and Service

We realize significant recurring revenue from
sales of supplies used in the operation of our urinalysis
workstations and from their servicing. These supplies include
the sheath fluid used to position the particles and cleanse the
system in slideless microscopy and controls used in
monitoring the performance quality of the systems. We also sell
the CHEMSTRIP/ IRIStrips 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

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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 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 refractometer 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, 2002:

|                                         |  |            |            |            |  |       |           |  |  |   |            | 
|---------------------------------------- |  | ---------- | ---------- | ---------- |  | ----- | --------- |  |  | - | ---------- | 
|                                         |  |            |            | Small      |  |      
|                                         |  |            |            | Laboratory |  |      
|                                         |  | Urinalysis |            | Devices    |  | Total
|                                         |  |            |            |            |  |      
|For the Year Ended December 31, 2002     |  |            |            |            |  |       |           |  |  |   |            | 
|Sales of IVD systems                     |  | $          | 5,514,981  |            |  | $     |          |  |  | $ | 5,514,981  | 
|Sales of IVD system supplies and service |  |            | 16,436,116 |            |  |       |          |  |  |   | 16,436,116 | 
|Sales of small instruments and supplies  |  |            |           |            |  |       | 5,728,998 |  |  |   | 5,728,998  | 
|Royalty and license revenues             |  |            | 408,178    |            |  |       | 100,000   |  |  |   | 508,178    | 
|                                         |  |            |            |            |  |       |           |  |  |   |            | 
|Total                                    |  | $          | 22,359,275 |            |  | $     | 5,828,998 |  |  | $ | 28,188,273 | 
|                                         |  |            |            |            |  |       |           |  |  |   |            | 

|                                         |  |            |            |            |  |       |           |  |  |   |            | 
|---------------------------------------- |  | ---------- | ---------- | ---------- |  | ----- | --------- |  |  | - | ---------- | 
|                                         |  |            |            | Small      |  |      
|                                         |  |            |            | Laboratory |  |      
|                                         |  | Urinalysis |            | Devices    |  | Total
|                                         |  |            |            |            |  |      
|For the Year Ended December 31, 2001     |  |            |            |            |  |       |           |  |  |   |            | 
|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 | 
|                                         |  |            |            |            |  |       |           |  |  |   |            | 

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

Backlog

We did not have a material amount of backlog at
December 31, 2002 or 2001. Products are usually shipped
within ninety days of receipt of sales orders. The Company
believes that backlog is not necessarily indicative of sales for
any succeeding period.

Research and Development

In 1999, we began a major project to completely
redesign our family of urinalysis workstations and develop the
next generation operating platform, now introduced as the iQ200
system. Consequently, over the past two years, we have
significantly ramped up these expenditures, whereby our product
technology investments (including amounts reimbursed by third
parties under research and development contracts and capitalized
software costs) have increased from $3.8 million in 2000 to
$6.4 million in 2001 and $6.3 million in 2002.

As we mentioned in the preceding paragraph, we
have devoted substantially all of our research and development
efforts over the past two years to the iQ200 program, incurring
expenditures, net of capitalized software, in 2002 of
$4.7 million, an increase of $400,000 over the net research
and development expenditures in 2001. In 2001, the
$4.3 million net expenditures were $1.4 million
greater than those spent in 2000. By incorporating more than
20 years of experience and the latest developments in
computer technology, we have developed the iQ200 system which is
expected to (1) significantly improve the 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. In
October 2002, we obtained 510K clearance for the iQ200 system
from the Food and Drug Administration. We will continue to
invest significant research and development dollars in the first
part of 2003 to prepare the new resulting system for launch
towards the end of the second quarter of 2003. We then plan on
continuing development efforts throughout the balance of 2003.
We also expect to increase the funds spent in support of the
research and development efforts of our sample separation
business in Massachusetts (StatSpin).

Advanced Digital Imaging Research, LLC (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, which
have potential applications to the imaging part of our business.
We believe ADIRs existing and expected government research
grants will be sufficient to fund all of its planned operations
through at least 2003. ADIR also performs some of our internal
research and development work as well as contract research for
corporate clients.

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, telesales 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

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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
continuing global economic downturn directly impacted our
distributors ability to purchase our high end capital equipment
and sell these new systems into their respective country
markets. With the recent introduction of our new iQ200 system,
we are in the process of negotiating many new distributor
agreements throughout the world. We anticipate the international
market to play a major role in the success of our new product
launch.

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.

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 generally a one-year warranty
period) is usually 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 Chemistry 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.
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.

7



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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. We have
applied for a number of additional patent applications which are
pending in the United States and abroad. These patents also
cover image analysis, urine and blood processing. Also, numerous
patents relating to digital refractometers, centrifuges,
automated slide handling and disposable urinalysis products were
acquired in various acquisitions.

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

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

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

Government Regulations

Most of 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.

8



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

The FDA also regulates computer software of the
type used in our urinalysis workstations and is currently
reevaluating the regulation of such software. We cant
predict the extent to which the FDA will regulate such software
in the future.

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

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

In addition to domestic regulation of medical
devices, many of our products are subject to regulations in
foreign jurisdictions. The requirements for the sale of medical
devices in foreign markets vary widely from country to country,
ranging from simple product registrations to detailed
submissions similar to those required by the FDA. We have not
yet applied for regulatory clearances or approvals to market our
urinalysis workstation in most of these foreign countries. Our
business strategy includes expanding the geographic distribution
of these and other products, and we cannot guarantee that we
will be able to secure the necessary clearances and approvals in
the relevant foreign jurisdictions. Furthermore, the regulations
in certain foreign jurisdictions continue to develop and we
cannot be sure that new laws or regulations will not have a
material adverse effect on our existing business or future
plans. Among other things, CE Mark certifications are, or
may soon be required for the sale of many products in certain
international markets such as the European Community. We secured
CE Mark certification for our existing lines of urinalysis
workstations in 2000 and we will receive the CE Mark
certification for our new iQ200 system once we ship the product
toward the end of the second quarter of 2003.

We obtained the ISO 9001 and EN 46001
certification at our Small Laboratory Devices division in
Massachusetts in 2002, and in December, 2002 obtained approval
of these and EN 13485 certification for our urinalysis
division.

In October 2002, we received 510(k) clearance
from the FDA for the marketing of our iQ200 system. In February
2003, the substantial improvements to our manufacturing
facilities resulted in a flawless inspection by the FDA.

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

Employees

We had 151 full-time employees at
December 31, 2002 and 137 full-time employees at
December 31, 2001. We also use outside consultants and
part-time and temporary employees in production, administration,

9



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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 10, 2003:

|                |  |                   |        |         |  |     |        |  |  |                                                                                              
|--------------- |  | ----------------- | ------ | ------- |  | --- | ------ |  |  | ---------------------------------------------------------------------------------------------
|                |  | Approximate Floor |        | Monthly |  |    
|Location        |  | Space (Sq. Ft.)   |        | Rent    |  | Use
|                |  |                   |        |         |  |    
|Chatsworth, CA  |  |                   | 51,000 |         |  | $   | 33,100 |  |  | Sales and Marketing, Research and Development,
    Manufacturing and Corporate Administration
|               
|Norwood, MA     |  |                   | 11,000 |         |  | $   | 8,300  |  |  | Sales and Marketing, Research and Development and
    Manufacturing                          
|               
|League City, TX |  |                   | 4,000  |         |  | $   | 6,300  |  |  | Research and Development                                                                     

We believe our facilities are adequate to meet
our current needs.






|        |                  
|------- | -----------------
|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, 2002.




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 10, 2003 was $2.65 per share. The
table below sets forth high and low closing prices reported by
American Stock Exchange for the period January 1, 2001
through December 31, 2002:

|            |                |                 |   |      |  |  |   |      | 
|----------- | -------------- | --------------- | - | ---- |  |  | - | ---- | 
|            |                |                
|            |                | Price per share
|            |                |                
|            |                | High            |   | Low 
|            |                |                 |   |     
|Fiscal 2002 |                |                 |   |      |  |  |   |     
|            | First Quarter  |                 | $ | 2.60 |  |  | $ | 2.25 | 
|            | Second Quarter |                 |   | 3.95 |  |  |   | 2.55 | 
|            | Third Quarter  |                 |   | 2.95 |  |  |   | 1.93 | 
|            | Fourth Quarter |                 |   | 2.85 |  |  |   | 1.79 | 
|           
|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 | 

As of March 10, 2003, we had approximately
3,800 holders of record of our common stock.

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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.

Securities Authorized for Issuance Under
Equity Compensation Plans

The securities authorized for issuance under
equity compensation plans is incorporated by reference to the
information set forth in the caption, Equity Compensation
Plan Information in the Companys Proxy Statement for
the Annual Meeting of Stockholders.






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

This information as of December 31, 2002 and
2001 and for the years ended December 31, 2002, 2001 and
2000, is derived in part from, and should be read in conjunction
with, the our Consolidated Financial Statements, including the
Notes thereto, included elsewhere in this Annual Report.

|                                                                 |  |                                       |        |      |  |      |        |         |  |         |        |   |  |   |        |   |  |   |        |  
|---------------------------------------------------------------- |  | ------------------------------------- | ------ | ---- |  | ---- | ------ | ------- |  | ------- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                 |  |                                      
|                                                                 |  | Year Ended December 31,              
|                                                                 |  |                                      
|                                                                 |  | 2002                                  |        | 2001 |  | 2000 |        | 1999(1) |  | 1998(1)
|                                                                 |  |                                       |        |      |  |      |        |         |  |        
|                                                                 |  |                                      
|                                                                 |  | (in thousands, except per share data)
|Financial Statement Data                                         |  |                                       |        |      |  |      |        |         |  |         |        |   |  |   |        |   |  |   |        |  
|Net revenue                                                      |  | $                                     | 28,188 |      |  | $    | 28,648 |         |  | $       | 28,643 |   |  | $ | 25,725 |   |  | $ | 21,581 |  
|Operating income from continuing operations                      |  |                                       | 1,902  |      |  |      | 3,306  |         |  |         | 5,152  |   |  |   | 390    |   |  |   | 2,202  |  
|Interest and other expense, net                                  |  |                                       | (441   | )    |  |      | (740   | )       |  |         | (763   | ) |  |   | (947   | ) |  |   | (1,115 | )
|Income (loss) from continuing operations                         |  |                                       | 877    |      |  |      | 1,539  |         |  |         | 2,794  |   |  |   | (1,088 | ) |  |   | 667    |  
|Income (loss) from continuing operations per
    share  basic   |  |                                       | .08    |      |  |      | .15    |         |  |         | .29    |   |  |   | (.15   | ) |  |   | .11    |  
|Income (loss) from continuing operations per
    share  diluted |  |                                       | .08    |      |  |      | .14    |         |  |         | .27    |   |  |   | (.15   | ) |  |   | .09    |  
|Working capital                                                  |  |                                       | 6,445  |      |  |      | 8,636  |         |  |         | 8,472  |   |  |   | 5,092  |   |  |   | 3,570  |  
|Total assets                                                     |  |                                       | 27,383 |      |  |      | 26,503 |         |  |         | 28,288 |   |  |   | 26,661 |   |  |   | 32,107 |  
|Long term debt, including current portion                        |  |                                       | 3,245  |      |  |      | 5,249  |         |  |         | 7,500  |   |  |   | 8,700  |   |  |   | 10,442 |  
|Total liabilities                                                |  |                                       | 10,034 |      |  |      | 10,538 |         |  |         | 14,668 |   |  |   | 16,439 |   |  |   | 17,108 |  
|Shareholders equity                                             |  |                                       | 17,349 |      |  |      | 15,965 |         |  |         | 13,619 |   |  |   | 10,222 |   |  |   | 14,999 |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 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.






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

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

11



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inherently subject to uncertainties and other
factors which could cause the actual results to differ
materially from the forward-looking statement. These
uncertainties and other factors include, among other things,




| |   |                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | unexpected technical and marketing difficulties
    inherent in major product development efforts such as the new
    platform for our urinalysis workstation,                                                                                                                  
|
| |  | the potential need for changes in our long-term
    strategy in response to future developments,                                                                                                                                                                                
|
| |  | future advances in diagnostic testing methods and
    procedures, as well as potential changes in government
    regulations and healthcare policies, both of which could
    adversely affect the economics of the diagnostic testing
    procedures automated by our products,
|
| |  | rapid technological change in the
    microelectronics and software industries, and                                                                                                                                                                                             
|
| |  | increasing competition from imaging and
    non-imaging based in-vitro diagnostic products.                                                                                                                                                                                     

We have attempted to identify additional
significant uncertainties and other factors affecting
forward-looking statements in Exhibit 99 to this Annual
Report. Stockholders should understand that the uncertainties
and other factors identified in this Annual Report and in
Exhibit 99 are not a comprehensive list of all the
uncertainties and other factors 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.

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 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,
|                                                                       |                                       |                        
|                                                                       |                                       | 2002                    |       | 2001  |  | 2000
|                                                                       |                                       |                         |       |       |  |     
|                                                                       |                                       |                        
|                                                                       |                                       | (in thousands)         
|Research and development expense, net                                  |                                       | $                       | 4,594 |       |  | $    | 4,307 |       |  | $ | 2,526 |      
|Capitalized software development costs                                 |                                       |                         | 775   |       |  |      | 867   |       |  |   | 279   |      
|Reimbursed costs for research and development
    grants and contracts |                                       |                         | 884   |       |  |      | 1,233 |       |  |   | 972   |      
|                                                                       |                                       |                         |       |       |  |      |       |       |  |   |       |      
|                                                                       | Total product technology expenditures |                         | $     | 6,253 |  |      | $     | 6,407 |  |   | $     | 3,777 | 
|                                                                       |                                       |                         |       |       |  |      |       |       |  |   |       |      

Critical Accounting Policies

Our critical accounting policies upon which our
financial position and results of operations depend are those
related to revenue recognition, inventory valuation, and income
tax assets and liabilities. We summarize our most critical
accounting policies below.

Revenue recognitionWe recognize revenue when goods are shipped and title passes to
the customer provided that: there are no uncertainties regarding
customer acceptance; persuasive evidence of an arrangement
exists; the sales price is fixed or determinable; and
collectibility is probable. Revenue is recognized net of an
allowance for discounts when the sale is recorded.

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:

12



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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 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,
we recognize revenue on delivery based on shipping terms,
provided title has transferred, collectibility of the resulting
receivable is probable, we have 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 collectibility of the resulting receivable is
probable, we have 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.

Inventory valuationWe value inventories at the lower of cost or market value.
Inventory costs are based on standard costs, which are updated
periodically and supported by actual cost data. We include
materials, labor and manufacturing overhead in the cost of
inventories. In determining inventory market values, we give
substantial consideration to the expected product selling price
based on historical recovery rates. In determining our expected
selling prices, we consider various factors including estimated
quantities of slow-moving inventory by reviewing on-hand
quantities, outstanding purchase obligations and forecasted
sales. We then estimate expected selling prices based on our
historical recovery rates for sale of slow-moving inventory
through various channels and other factors, such as market
conditions and current customer preferences. Our estimates may
differ from actual results due to the quantity and mix of
products in inventory, customer preferences and economic
conditions.

Income tax assets and
liabilities.In establishing our
deferred income tax assets and liabilities, we make judgments
and interpretations based on enacted tax laws and published tax
guidance that are applicable to our operations. We record
deferred tax assets and liabilities and evaluate the need for
valuation allowances to reduce the deferred tax assets to
realizable amounts. The likelihood of a material change in our
expected realization of these assets is dependent on future
taxable income, our ability to use tax credit carryforwards and
the effectiveness of our tax planning strategies in the various
relevant jurisdictions. We are also subject to examination of
our income tax returns for multiple years by the Internal
Revenue Service and other tax authorities. We periodically
assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for
income taxes. Changes to our income tax provision or in the
valuation of the deferred tax assets and liabilities may affect
our annual effective income tax rate.

Results of Operations



| |                                                                                
| | -------------------------------------------------------------------------------
| | Comparison of Year Ended December 31,
    2002 to Year Ended December 31, 2001.

Net revenues for the year ended December 31,
2002 were down $459,000 or 2% from the prior year. Sales of IVD
imaging systems decreased to $5.5 million from
$5.8 million, a decrease of $310,000, or 5% 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. In November 2002, we
introduced a significantly upgraded model based on a new
operating platform. This model, named the iQ200, received
clearance from the Food and Drug Administration on
October 21, 2002. We expect to ship this new system towards
the end of the second quarter of 2003. The failure to make a
success and timely transition to the new 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 $16.4 million from $15.7 million, an
increase of $701,000 or 4% over last year, primarily due to the
larger installed base of urinalysis workstations. Royalties and
licensing revenues increased to $508,000 from $393,000 in the
prior year. The increase was

13



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primarily due to a new $100,000 royalty received
by our StatSpin subsidiary in the current year for which there
was no corresponding item in the prior year, and which we do not
believe will recur in 2003.


Revenues from the urinalysis segment totaled
$22.4 million in the current period, up slightly from
$22.0 million in the prior year. Revenues from the small
lab devices and supplies segment decreased to $5.8 million
from $6.7 million, a decrease of $865,000 or 13%. The
decline is due primarily to the decreased sales to a major OEM
customer, which more than offset the new $100,000 royalty earned
by that segment.

Cost of goods sold for IVD imaging systems as a
percentage of sales of IVD imaging systems totaled 66% in the
current period as compared to 64% last year. The increase is
primarily attributable to manufacturing overhead being
associated with lower production levels in the current year.
Cost of goods sold for IVD imaging system supplies and services
as a percentage of sales of such products decreased to 38% for
the current period as compared to 39% 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 48% for the current year as
compared to 47% in the prior year. This increase is primarily
due to increased costs resulting from smaller production runs in
the current period.

Cost of goods sold as a percentage of revenues
from the urinalysis segment totaled 44%, down slightly from 45%
in the prior year. The aggregate gross margin totaled 55% for
the year ended December 31, 2002, which is comparable with
the prior year.

Marketing and selling expenses totaled
$4.1 million, compared to $3.6 million last year, an
increase of $449,000 or 12%, due primarily to increased
marketing efforts in the urinalysis segment, particularly
associated with the marketing of the AX-4280. Marketing and
selling expenses as a percentage of net revenues were 14% in
2002, up slightly from 13% in 2001.

General and administrative expenses increased
$615,000 to $4.9 million from $4.3 million in the
prior year. This increase is due primarily to the addition of
senior management in 2002. General and administrative expenses
represented 17% of net revenue, up from 15% in the prior year.

Net research and development expenses increased
to $4.6 million for the year ended December 31, 2002,
as compared to $4.3 million in 2001, an increase of
$286,000 or 7%. Net research and development expenses as a
percentage of revenues increased to 16% in 2002 from 15% in the
prior year. Total product technology expenditures, including
capitalized software development costs and reimbursed costs
under research and development grants and contracts, was
$6.3 million, down very slightly from the prior year. The
continued high level of total product technology expenditures is
due primarily to the iQ200 project begun in 1999 to improve our
urinalysis workstation product line, and for which we have
recently received clearance from the Food and Drug
Administration. We believe that this project is important to
maintaining our competitive position in the urinalysis market.
We expect our net research and development expenses to continue
at current levels for the first half of 2003, before decreasing
slightly in the latter half of the year.

Amortization of intangible assets is lower in the
current year than in the prior year. This is due to the fact
that the balance in the current year includes only amortization
of patents, whereas the year ago amounts also included the
amortization of goodwill and intangible assets with definite
lives. The Company ceased amortization of goodwill in 2002 in
accordance with the Financial Accounting Standards Board
Statement No. 142, Goodwill and Other Intangible Assets
(SFAS 142).

Operating income for the year 2002 decreased to
$1.9 million as compared to $3.3 million in 2001,
principally due to higher operating expenses in all major
categories, as described above, as the Company prepares for the
launch of its new operating platform.

Interest expense decreased 37% to $537,000 in
2002 from $859,000 in the prior year as a result of
significantly lower interest rates associated with the revised
credit facility from the Companys new bankers, along with
a continuing reduction in the Companys long term
indebtedness.

For the year ended December 31, 2002,
urinalysis segment profits decreased to $2.7 million from
$3.7 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
$1.6 million, as compared to $1.9 million in the prior

14



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##### Table of Contents



year. This decrease resulted from lower sales
volume in that segment. Unallocated corporate expenses totaled
$2.9 million in 2002 as compared to $3.1 million in
the prior year. The decrease was primarily due to reduced
charges incurred for legal and audit fees in the current period.


The income tax provision for the year ended
December 31, 2002, totaled $584,000, as compared to
$1.0 million in 2001. The decrease reflects the decreased
taxable income experienced by the Company in 2002. This tax
provision is a non-cash item, since the Company has significant
deferred tax assets.

Income from operations decreased to $877,000, or
$0.08 per diluted share for the year ended December 31,
2002, as compared to income from operations of
$1.5 million, or $0.14 per diluted share, for the prior
year.



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

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 64% 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 increased to 39% for the
current period as compared to 37% for the same period last year.
This increase is due primarily to higher overhead associated
with improved quality assurance and inventory control 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 45%, up slightly from 44% in
the prior year. The aggregate gross margin totaled 55% for the
year ended December 31, 2001, which is up slightly from 54%
in the prior year.

Marketing and selling expenses totaled
$3.6 million, an increase of $63,000 or 2%, 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.

General and administrative expenses increased
$68,000 to $4.3 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 $4.3 million for the year ended December 31, 2001,
as compared to $2.5 million in 2000, an increase of
$1.8 million or 70%. Net research and development expenses
as a percentage of revenues increased to 15% in 2001 from 9% in
the prior year. Total product technology expenditures, including
capitalized software development costs and reimbursed costs under

15



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##### Table of Contents



research and development grants and contracts,
increased to $6.4 million from $3.8 million, an
increase of $2.6 million or 70% as compared to the prior
year. The increase in total product technology expenditures was
due primarily 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 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.

Contractual Obligations and Contingent
Liabilities and Commitments

The following table aggregates the Companys
expected contractual obligations and commitments subsequent to
December 31, 2002:

|                            |                                    |                                       |       |       |  |      |       |       |  |      |     |        |  |   |     |     |  |   |    |    |  |   |       |       | 
|--------------------------- | ---------------------------------- | ------------------------------------- | ----- | ----- |  | ---- | ----- | ----- |  | ---- | --- | ------ |  | - | --- | --- |  | - | -- | -- |  | - | ----- | ----- | 
|                            |                                    | 2003                                  |       | 2004  |  | 2005 |       | 2006  |  | 2007 |     | Totals
|                            |                                    |                                       |       |       |  |      |       |       |  |      |     |       
|                            |                                    |                                      
|                            |                                    | Payments Due by Period (in Thousands)
|Contractual Obligations     |                                    |                                       |       |       |  |      |       |       |  |      |     |        |  |   |     |     |  |   |    |    |  |   |       |      
|Long term debt              |                                    | $                                     | 1,500 |       |  | $    | 1,000 |       |  | $    | 350 |        |  | $ | 350 |     |  | $ | 60 |    |  | $ | 3,260 |      
|Capital lease commitments   |                                    | $                                     | 61    |       |  | $    | 61    |       |  | $    | 40  |        |  | $ | 18  |     |  | $ | 3  |    |  | $ | 183   |      
|Operating lease commitments |                                    | $                                     | 547   |       |  | $    | 523   |       |  | $    | 462 |        |  | $ | 428 |     |  |   |    |    |  | $ | 1,960 |      
|                            |                                    |                                       |       |       |  |      |       |       |  |      |     |        |  |   |     |     |  |   |    |    |  |   |       |      
|                            | Total Contractual cash commitments |                                       | $     | 2,108 |  |      | $     | 1,584 |  |      | $   | 852    |  |   | $   | 796 |  |   | $  | 63 |  |   | $     | 5,403 | 
|                            |                                    |                                       |       |       |  |      |       |       |  |      |     |        |  |   |     |     |  |   |    |    |  |   |       |      

Liquidity and Capital Resources

Cash and cash equivalents remained at roughly
$2.3 million at December 31, 2002, unchanged from the
balance at December 31, 2001. Cash provided by operations
for the year ended December 31, 2002 increased to
$3.3 million from $2.7 million in the prior year,
primarily due to lower receivable and inventory levels and
higher levels of accounts payables and accrued expenses, which
more than offset the drop in net income described above. Our
primary source of liquidity is cash from operations, which
depends heavily on sales of our urinalysis workstations. We
introduced the iQ200 System, built on a new operating platform,
in late November 2002. We received clearance from the Food and
Drug Administration on October 21, 2002. However, revenues
from the sale of this product are not anticipated until sometime
in the second quarter of 2003. The failure to make a successful
and timely transition to the new 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
$2.7 million in 2002, as compared to $1.8 million 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.

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##### Table of Contents



Net cash used by financing activities totaled
$643,000 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 existing
credit facility and replaced it with a new $8.0 million
credit facility with California Bank and Trust. The new facility
consists of a $500,000 term loan, a $1.0 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
$1.0 million term loan carries 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 2.0%. At December 31, 2002,
the Company was in compliance with all of its covenants under
the bank agreement.

We expect to continue to incur high levels of
research and development expenditures in 2003. We plan to
continue to fund this project with cash generated from
operations.

We reduced our outstanding debt by
$1.0 million in 2002 and, after considering the effect of
the refinancing discussed above, we have scheduled principal
payments totaling $1.5 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 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 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 The
Company adopted the provisions of SFAS 144 effective
January 1, 2002. Adoption of this Statement did not have a
material impact on its financial statements.

In April 2002, FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections
effective on or after May 15, 2002. This Statement rescinds
SFAS No. 4 and an amendment of that Statement, and SFAS
No. 64. This Statement also rescinds SFAS No. 44. This
Statement amends SFAS No. 13, to eliminate an inconsistency
between the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing
authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed market conditions. The adoption of SFAS
No. 145 did not have a material effect on the
Companys financial position or results of operations.

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In June 2002, FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, effective for activities that are initiated after
December 31, 2002, with early application encouraged. This
Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
restructuring). This adoption of SFAS No. 146 is not
expected to have a material effect on the Companys
financial position or results of operations.

In November 2002, FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guaranteed of
Indebtedness of Others, which disclosures are effective
for financial statements issued after December 15, 2002.
While the Company has various guarantees included in contracts
in the normal course of business, primarily in the form of
warranties, these guarantees would only result in immaterial
increases in future costs, but do not represent significant
commitments or contingent liabilities of the indebtedness of
others.

In December 2002, FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation  Transition
and Disclosure  An Amendment of FASB Statement
No. 123. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based
employee compensation and the effect of the method used on
reported results. The Company is required to follow the
prescribed format and provide the additional disclosures
required by SFAS No. 148 in its annual financial statements
for the year ended December 31, 2002 and must also provide
the disclosures in its quarterly reports containing condensed
financial statements for interim periods beginning with the
quarterly period ended March 31, 2003. The adoption of SFAS
No. 148 is not expected to have a material effect on the
Companys financial position or results of operations.

In January 2003, FASB issued Interpretation
No. 46, Consolidation of Variable Interest
Entities which requires the consolidation of variable
interest entities, as defined. FIN 46 is applicable to financial
statements to be issued by the Company after 2002; however,
disclosures are required currently if the Company expects to
consolidate any variable interest entities. The Company does not
currently believe that any material entities will be
consolidated with International Remote Imaging Systems, inc. as
a result of FIN 46.

Shareholder Rights Plan

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

Market Risk

Our business is exposed to various market risks,
including changes in interest rates and foreign currency
exchange rates. Market risk is the potential loss arising from
adverse changes in market rates and prices, such as interest
rates and foreign currency exchange rates. We do not 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, 2002, our debt obligations
consisted of (1) $1.9 million subordinated loan
outstanding at a variable rate of prime plus

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2.0%, (2) $1.4 million term loan
outstanding at a variable rate and (3) $1.0 million
under a revolving line of credit 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, 2003 and no principal payments for the remainder
of the year, our total interest expense would increase by less
than $22,000 for 2003 as compared to 2002.




| |                   
| | ------------------
| | Foreign Currencies

We are subject to some currency risk on a portion
of our licensing revenues, as well as from purchases of product
from our Japanese manufacturer of the AX-4280. The licensing
portion is calculated quarterly based on sales results in
Japanese Yen and subsequently converted into United States
dollars at the then current exchange rate. Our purchases of
product are negotiated annually and may be affected by changing
foreign currency rates.



| |                              
| | -----------------------------
| | Investment Available for Sale

We are subject to market risk relating to the
investment in equity investments that are held and carried as
available for sale. Market risk is the potential loss arising
from adverse changes in market conditions that may be deemed as
other than temporary declines in the fair value of the
investment.

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.






|         |                                                               
|-------- | --------------------------------------------------------------
|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 15(a) 1.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Incorporated by reference from Directors
and Executive Officers in the Proxy Statement to be filed
with the Securities and Exchange Commission for the 2003 Annual
Meeting of IRIS Shareholders.

19



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##### Table of Contents








|         |                       
|-------- | ----------------------
|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 2003 Annual Meeting
of IRIS Shareholders.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|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 2003 Annual Meeting of IRIS Shareholders.






|         |                                                   
|-------- | --------------------------------------------------
|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 2003 Annual Meeting of IRIS Shareholders.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Evaluation of Disclosure Controls and
Procedures

The Company maintains controls and procedures
designed to ensure that it is able to collect the information it
is required to disclose in the reports it files with the SEC and
to approve, summarize and disclose this information within the
time periods specified in the rules of the SEC. The
Companys Chief Executive Officer and Chief Financial
Officer are responsible for establishing and maintaining these
procedures, and, as required by the rules of the SEC, evaluate
their effectiveness. Based on their evaluation of the
Companys disclosure controls and procedures which took
place as of a date within 90 days of the filing date of
this report, the Chief Executive and Chief Financial Officers
believe that these procedures are adequate and effective to
ensure that the Company is able to collect, process and disclose
the information it is required to disclose in the reports it
files with the SEC within the required time periods.



| |                             
| | ----------------------------
| | Changes in Internal Controls

The Company maintains a system of internal
controls designed to provide reasonable assurance that
transactions are executed in accordance with managements
general or specific authorization; transactions are recorded as
necessary (1) to permit preparation of financial statements
in conformity with generally accepted accounting principles,
(2) to maintain accountability for assets, and (3) to
ensure that access to assets is permitted only in accordance
with managements general or specific authorization; and
the recorded accountability for access is compared with the
existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.

Since the date of the most recent evaluation of
the Companys internal controls by the Chief Executive
Officer and Chief Financial Officers, there have been no
significant changes in such controls or in other factors that
could have significantly affected those controls, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

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PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | 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                                                                        |  |      |      | 
|Reports of Independent Certified Public
    Accountants                                                  |  |      | F-1  | 
|Consolidated Balance Sheets at December 31,
    2002 and 2001                                            |  |      | F-3  | 
|Consolidated Statements of Operations for the
    Years Ended December 31, 2002, 2001 and 2000           |  |      | F-4  | 
|Consolidated Statements of Shareholders
    Equity for the Years Ended December 31, 2002, 2001 and 2000 |  |      | F-6  | 
|Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2002, 2001 and 2000           |  |      | F-9  | 
|Consolidated Statements of Comprehensive Income
    for the Years Ended December 31, 2002, 2001 and 2000 |  |      | F-10 | 
|Notes to Consolidated Financial Statements                                                               |  |      | F-11 | 
|                                                                                                        
|2.  Financial Statement Schedule                                                                         |  |      |      | 
|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                                                                                    |  |  | (7)  | 
|        | 10.1(b) |             |  | Lease of the Companys adjacent headquarters
    facility                                                                                       |  |  | (22) | 
|        | 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) | 

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|        |         |             |  |                                                                                                                                                                                           |  |  |      | 
|------- | ------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ---- | 
|Exhibit |         |             |  | Reference                                                                                                                                                                                
|Number  |         | Description |  | Document                                                                                                                                                                                 
|        |         |             |  |                                                                                                                                                                                          
|        | 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) | 
|        | 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) | 
|        | 10.8(a) |             |  | Business Loan Agreements dated February 7,
    2002 by and between the Company and California Bank & Trust                                                                                |  |  | (22) | 
|        | 10.8(b) |             |  | Promissory Notes dated February 7, 2002 by
    and between the Company and California Bank & Trust                                                                                        |  |  | (22) | 
|        | 10.8(c) |             |  | Commercial Security Agreements dated
    February 7, 2002 by and between the Company and California
    Bank & Trust                                                                      |  |  | (22) | 
|        | 10.8(d) |             |  | Landlords Consent dated February 7,
    2002 by and between the Company, the Companys Landlord and
    California Bank & Trust                                                          |  |  | (22) | 
|        | 10.8(e) |             |  | Subordination Agreement dated February 7,
    2002 by and between the Company, Digital Imaging Technologies,
    Inc. and California Bank & Trust                                         |  |  | (22) | 
|        | 10.8(f) |             |  | Commercial Guaranty Agreement dated
    February 7, 2002 by and between the Company, Statspin, Inc
    (the Companys affiliate) and California Bank & Trust                              |  |  | (22) | 
|        | 10.8(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 |  |  | (22) | 
|        | 10.9(a) |             |  | Employment Contract dated December 4, 2002
    by and between the Company and Mr. Kshitij Mohan                                                                                           |  |  |      | 
|        | 10.9(b) |             |  | Amendment to the Employment Agreement dated
    February 2, 2003 by and between the Company and
    Mr. Kshitij Mohan                                                                     |  |  |      | 
|        | 10.9(c) |             |  | Employment Contract dated December 31, 2001
    by and between the Company and Mr. Cesar Garcia                                                                                           |  |  |      | 
|        | 10.9(d) |             |  | Employment Contract dated August 7, 2001 by
    and between the Company and Mr. John Caloz                                                                                                |  |  |      | 
|        | 23.14   |             |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                     |  |  |     | 
|        | 23.2    |             |  | Consent of BDO Seidman, LLP                                                                                                                                                               |  |  |     | 
|        | 24      |             |  | Power of Attorney (Included on Signature Page
    hereto)                                                                                                                                 |  |  |      | 
|        | 99      |             |  | Disclosure Regarding Risk Factors And
    Forward-Looking Statements                                                                                                                      |  |  |     | 
|        | 99.1    |             |  | Statement Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 By Chief Executive Officer                                                                                        |  |  |      | 
|        | 99.2    |             |  | Statement Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 By Chief Financial Officer                                                                                        |  |  |      | 

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.                                                         

22



---



##### Table of Contents





|    |                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                       
|    
|(21) | Annual Report on Form 10-K for the year
    ended December 31, 2000.                                                                       
|    
|(22) | Annual Report on Form 10-K for the year
    ended December 31, 2001.                                                                       
|    
|(23) | Registration Statement on Form S-8, as filed
    with the Securities and Exchange Commission on February 23,
    2003 (File No. 333-103462)

(b) Reports on Form 8-K.

We did not file any reports on Form 8-K
during the quarter ended December 31, 2002.

(c) Exhibits  See (a)(3)
above.

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

23



---



##### Table of Contents






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 28, 2003.



| |                                           
| | ------------------------------------------
| | INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
|
| | /s/ KSHITIJ MOHAN                         
| |                                           
| | Kshitij Mohan                             
| | 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                                                                                      |  | March 28, 2003
|                                      
|/s/ KSHITIJ MOHANKshitij Mohan         |  | President and Chief Executive Officer (Principal
    Executive Officer)                                    |  | March 28, 2003
|                                      
|/s/ JOHN Y. CALOZJohn Y. Caloz         |  | Corporate Vice President, Finance, Chief
    Financial Officer and Secretary (Principal Financial Officer) |  | March 28, 2003
|                                      
|/s/ DONALD E. HORACEKDonald E. Horacek |  | Controller
    (Principal Accounting Officer)                                                              |  | March 28, 2003
|                                      
|/s/ STEVEN M. BESBECKSteven M. Besbeck |  | Director                                                                                                   |  | March 28, 2003
|                                      
|/s/ THOMAS F. KELLEYThomas F. Kelley   |  | Director                                                                                                   |  | March 28, 2003
|                                      
|/s/ RICHARD G. NADEAURichard G. Nadeau |  | Director                                                                                                   |  | March 28, 2003

24



---



##### Table of Contents



Statement Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

By


Principal Executive Officer


Regarding Facts and Circumstances Relating to
Exchange Act Filings


I, Kshitij Mohan, certify that:

1. I have reviewed this annual report on
Form 10-K of International Remote Imaging Systems, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls.                                                                                                                                                        

6. The registrants other certifying
officer and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                                          
| | -----------------------------------------
| | /s/ KSHITIJ MOHAN                        
| |                                          
| | Kshitij Mohan                            
| | President and Chief Executive
    Officer

Date: March 7, 2003

25



---



##### Table of Contents



Statement Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

By


Principal Financial Officer


Regarding Facts and Circumstances Relating to
Exchange Act Filings


I, John Y. Caloz, certify that:

1. I have reviewed this annual report on
Form 10-K of International Remote Imaging Systems, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls.                                                                                                                                                        

6. The registrants other certifying
officer and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                                          
| | -----------------------------------------
| | /s/ JOHN Y. CALOZ                        
| |                                          
| | John Y. Caloz                            
| | Corporate Vice President, Finance,       
| | Chief Financial Officer and
    Secretary

Date: March 7, 2003

26



---



##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS

To the Board of Directors and Shareholders

of International Remote Imaging Systems, Inc.


Chatsworth, California


We have audited the accompanying consolidated
balance sheets of International Remote Imaging Systems, Inc. as
of December 31, 2002 and 2001, the related consolidated
statements of operations, shareholders equity, cash flows
and comprehensive income for the years then ended. We have also
audited the schedule listed in the accompanying index as of and
for the years ended December 31, 2002 and 2001. 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
audits.

We conducted our audits 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 audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of International Remote Imaging
Systems, Inc. at December 31, 2002 and 2001, and the
results of its operations, cash flows and comprehensive income
for the years 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.

As discussed in Note 2 to the consolidated
financial statements, effective January 1, 2002,
International Remote Imaging Systems, Inc. adopted the
provisions of SFAS No. 142, Goodwill and Other
Intangible Assets, and changed its method of accounting
for goodwill.



| |                  
| | -----------------
| | sBDO Seidman, LLP

Los Angeles, California

March 27, 2003


F-1



---



##### Table of Contents



REPORT OF PRICEWATERHOUSECOOPERS LLP,
INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders

of International Remote Imaging Systems, Inc.


In our opinion, the accompanying consolidated
statements of operations, shareholders equity, cash flows
and comprehensive income present fairly, in all material
respects, the results of operations and cash flows of
International Remote Imaging Systems, Inc. and its subsidiaries
for the year 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 the year ended December 31, 2000, listed in
the index appearing under Item 15(a)2 of this
Form 10-K, 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



---



##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.

CONSOLIDATED BALANCE SHEETS

|                                                                                                                          |                                                                                                                               |                                            |           |             |            |  |           |             |            | 
|------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ----------- | ---------- |  | --------- | ----------- | ---------- | 
|                                                                                                                          |                                                                                                                               |                                           
|                                                                                                                          |                                                                                                                               | At December 31,                           
|                                                                                                                          |                                                                                                                               |                                           
|                                                                                                                          |                                                                                                                               | 2002                                       |           | 2001       
|                                                                                                                          |                                                                                                                               |                                            |           |            
|ASSETS                                                                                                                   
|Current assets:                                                                                                           |                                                                                                                               |                                            |           |             |            |  |           |            
|                                                                                                                          | Cash and cash equivalents (note 2)                                                                                            |                                            | $         | 2,336,973   |            |  | $         | 2,312,451   |           
|                                                                                                                          | Accounts receivable, net of allowance for
    doubtful accounts of $298,324 in 2002 and $286,127 in 2001 (
    notes 2 and 8) |                                            |           | 4,312,965   |            |  |           | 4,838,252   |           
|                                                                                                                          | Inventories, net (notes 2, 3 and 8)                                                                                           |                                            |           | 5,423,684   |            |  |           | 5,578,139   |           
|                                                                                                                          | Prepaid expenses and other current assets                                                                                     |                                            |           | 330,245     |            |  |           | 268,348     |           
|                                                                                                                          | Investment available for sale (note 2)                                                                                        |                                            |           | 847,816     |            |  |           | 1,036,648   |           
|                                                                                                                          | Deferred tax asset (note 9)                                                                                                   |                                            |           | 998,663     |            |  |           | 1,568,466   |           
|                                                                                                                          |                                                                                                                               |                                            |           |             |            |  |           |            
|                                                                                                                          |                                                                                                                               | Total current assets                       |           |             | 14,250,346 |  |           |             | 15,602,304 | 
|Property and equipment, at cost, net of
    accumulated depreciation ( notes 2 and 4)                                     |                                                                                                                               |                                            | 2,896,008 |             |            |  | 1,666,226 |            
|Goodwill (note 2)                                                                                                         |                                                                                                                               |                                            | 188,911   |             |            |  | 188,911   |            
|Software development costs, net of accumulated
    amortization of $1,545,007 in 2002 and $1,532,011 in 2001
    (note 2) |                                                                                                                               |                                            | 1,907,782 |             |            |  | 1,146,204 |            
|Deferred tax asset (note 9)                                                                                               |                                                                                                                               |                                            | 7,280,718 |             |            |  | 7,280,718 |            
|Loan to related party (note 5)                                                                                            |                                                                                                                               |                                            | 125,000   |             |            |  |          |            
|Other assets                                                                                                              |                                                                                                                               |                                            | 574,729   |             |            |  | 618,677   |            
|                                                                                                                          |                                                                                                                               |                                            |           |             |            |  |           |            
|                                                                                                                          |                                                                                                                               | Total assets                               |           | $           | 27,223,494 |  |           | $           | 26,503,040 | 
|                                                                                                                          |                                                                                                                               |                                            |           |             |            |  |           |            
|                                                                                                                         
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                 
|Current liabilities:                                                                                                      |                                                                                                                               |                                            |           |             |            |  |           |            
|                                                                                                                          | Short-term borrowings (note 8)                                                                                                |                                            | $         | 1,000,000   |            |  | $         |            |           
|                                                                                                                          | Current portion of long-term debt (note 8)                                                                                    |                                            |           | 1,383,192   |            |  |           | 1,993,783   |           
|                                                                                                                          | Accounts payable                                                                                                              |                                            |           | 2,654,076   |            |  |           | 2,295,637   |           
|                                                                                                                          | Accrued expenses (note 7)                                                                                                     |                                            |           | 1,857,164   |            |  |           | 1,792,829   |           
|                                                                                                                          | Deferred income  service contracts and
    other                                                                             |                                            |           | 910,515     |            |  |           | 883,819     |           
|                                                                                                                          |                                                                                                                               |                                            |           |             |            |  |           |            
|                                                                                                                          |                                                                                                                               | Total current liabilities                  |           |             | 7,804,947  |  |           |             | 6,966,068  | 
|Long-term debt (note 8)                                                                                                   |                                                                                                                               |                                            | 1,862,276 |             |            |  | 3,254,801 |            
|Deferred income  service contracts and
    other                                                                         |                                                                                                                               |                                            | 206,982   |             |            |  | 317,416   |            
|                                                                                                                          |                                                                                                                               |                                            |           |             |            |  |           |            
|                                                                                                                          |                                                                                                                               | Total liabilities                          |           |             | 9,874,205  |  |           |             | 10,538,285 | 
|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:                                                                          |                                            |           |             |            |  |           |             |           
|                                                                                                                          | 2002  none; 2001  205,000
    (liquidation value  $615,000 in 2001)                                                        |                                            |           |            |            |  |           | 2,050       |           
|                                                                                                                          | Common stock, $.01 par value                                                                                                  |                                            |           |             |            |  |           |             |           
|                                                                                                                          | Authorized: 50,000,000 shares                                                                                                 |                                            |           |             |            |  |           |             |           
|                                                                                                                          | Shares issued and outstanding: 2002 
    10,844,990; 2001  10,264,926;                                                      |                                            |           | 108,448     |            |  |           | 102,648     |           
|                                                                                                                          | Additional paid-in capital                                                                                                    |                                            |           | 41,891,355  |            |  |           | 41,311,847  |           
|                                                                                                                          | Unearned compensation                                                                                                         |                                            |           | (16,378     | )          |  |           | (54,343     | )         
|                                                                                                                          | Accumulated other comprehensive income (loss)                                                                                 |                                            |           | (40,464     | )          |  |           | 72,835      |           
|                                                                                                                          | Accumulated deficit                                                                                                           |                                            |           | (24,593,672 | )          |  |           | (25,470,282 | )         
|                                                                                                                          |                                                                                                                               |                                            |           |             |            |  |           |            
|                                                                                                                          |                                                                                                                               | Total shareholders equity                 |           |             | 17,349,289 |  |           |             | 15,964,755 | 
|                                                                                                                          |                                                                                                                               |                                            |           |             |            |  |           |            
|                                                                                                                          |                                                                                                                               | Total liabilities and shareholders equity |           | $           | 27,223,494 |  |           | $           | 26,503,040 | 
|                                                                                                                          |                                                                                                                               |                                            |           |             |            |  |           |            

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

F-3



---



##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                        |                                                                                                                                                |                                 |            |          |   |      |            |          |   |   |            |          |  
|----------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ---------- | -------- | - | ---- | ---------- | -------- | - | - | ---------- | -------- | -
|                                                                        |                                                                                                                                                |                                
|                                                                        |                                                                                                                                                | For the Year ended December 31,
|                                                                        |                                                                                                                                                |                                
|                                                                        |                                                                                                                                                | 2002                            |            | 2001     |   | 2000
|                                                                        |                                                                                                                                                |                                 |            |          |   |     
|Sales of IVD imaging systems                                            |                                                                                                                                                | $                               | 5,514,981  |          |   | $    | 5,824,832  |          |   | $ | 6,981,886  |         
|Sales of IVD imaging system supplies and services                       |                                                                                                                                                |                                 | 16,436,116 |          |   |      | 15,735,336 |          |   |   | 14,849,392 |         
|Sales of small instruments and supplies                                 |                                                                                                                                                |                                 | 5,728,998  |          |   |      | 6,694,145  |          |   |   | 6,209,967  |         
|Royalty and license revenues                                            |                                                                                                                                                |                                 | 508,178    |          |   |      | 393,356    |          |   |   | 601,511    |         
|                                                                        |                                                                                                                                                |                                 |            |          |   |      |            |          |   |   |            |         
|Net revenues                                                            |                                                                                                                                                |                                 | 28,188,273 |          |   |      | 28,647,669 |          |   |   | 28,642,756 |         
|                                                                        |                                                                                                                                                |                                 |            |          |   |      |            |          |   |   |            |         
|Cost of goods  IVD imaging systems                                     |                                                                                                                                                |                                 | 3,648,903  |          |   |      | 3,733,655  |          |   |   | 4,356,133  |         
|Cost of goods  IVD imaging system
    supplies and services            |                                                                                                                                                |                                 | 6,176,753  |          |   |      | 6,065,939  |          |   |   | 5,466,194  |         
|Cost of goods  small instruments and
    supplies                      |                                                                                                                                                |                                 | 2,774,317  |          |   |      | 3,175,410  |          |   |   | 3,216,269  |         
|                                                                        |                                                                                                                                                |                                 |            |          |   |      |            |          |   |   |            |         
|Cost of goods sold                                                      |                                                                                                                                                |                                 | 12,599,973 |          |   |      | 12,975,004 |          |   |   | 13,038,596 |         
|                                                                        |                                                                                                                                                |                                 |            |          |   |      |            |          |   |   |            |         
|Gross margin                                                            |                                                                                                                                                |                                 | 15,588,300 |          |   |      | 15,672,665 |          |   |   | 15,604,160 |         
|                                                                        |                                                                                                                                                |                                 |            |          |   |      |            |          |   |   |            |         
|Marketing and selling                                                   |                                                                                                                                                |                                 | 4,068,054  |          |   |      | 3,618,987  |          |   |   | 3,555,622  |         
|General and administrative                                              |                                                                                                                                                |                                 | 4,910,360  |          |   |      | 4,295,488  |          |   |   | 4,227,851  |         
|Research and development, net                                           |                                                                                                                                                |                                 | 4,593,595  |          |   |      | 4,307,376  |          |   |   | 2,526,465  |         
|Amortization of intangibles                                             |                                                                                                                                                |                                 | 114,199    |          |   |      | 145,204    |          |   |   | 142,604    |         
|                                                                        |                                                                                                                                                |                                 |            |          |   |      |            |          |   |   |            |         
|Total operating expenses                                                |                                                                                                                                                |                                 | 13,686,208 |          |   |      | 12,367,055 |          |   |   | 10,452,542 |         
|                                                                        |                                                                                                                                                |                                 |            |          |   |      |            |          |   |   |            |         
|Operating income                                                        |                                                                                                                                                |                                 | 1,902,092  |          |   |      | 3,305,610  |          |   |   | 5,151,618  |         
|Other income (expense):                                                 |                                                                                                                                                |                                 |            |          |   |      |            |          |   |   |            |         
|                                                                        | Interest income                                                                                                                                |                                 |            | 56,789   |   |      |            | 118,771  |   |   |            | 197,012  |  
|                                                                        | Interest expense                                                                                                                               |                                 |            | (537,417 | ) |      |            | (858,760 | ) |   |            | (979,269 | )
|                                                                        | Other income                                                                                                                                   |                                 |            | 39,552   |   |      |            |         |   |   |            | 19,049   |  
|                                                                        |                                                                                                                                                |                                 |            |          |   |      |            |          |   |   |            |         
|Income from continuing operations before
    provision for income taxes |                                                                                                                                                |                                 | 1,461,016  |          |   |      | 2,565,621  |          |   |   | 4,388,410  |         
|Provision for income taxes                                              |                                                                                                                                                |                                 | (584,406   | )        |   |      | (1,026,248 | )        |   |   | (1,594,899 | )       
|                                                                        |                                                                                                                                                |                                 |            |          |   |      |            |          |   |   |            |         
|Income from continuing operations                                       |                                                                                                                                                |                                 | 876,610    |          |   |      | 1,539,373  |          |   |   | 2,793,511  |         
|Loss from discontinued operations:                                      |                                                                                                                                                |                                 |            |          |   |      |            |          |   |   |            |         
|                                                                        | Loss from operations of discontinued segment
    prior to March 31, 2000, net of tax benefit of $61,015 in
    2000, $0 in 2001 and $0 in 2002 |                                 |            |         |   |      |            |         |   |   |            | (286,385 | )
|                                                                        | Loss on disposal of discontinued segment,
    including tax provision of $29,374                                                               |                                 |            |         |   |      |            |         |   |   |            | (199,159 | )
|                                                                        |                                                                                                                                                |                                 |            |          |   |      |            |          |   |   |            |         
|Loss from discontinued operations                                       |                                                                                                                                                |                                 |           |          |   |      |           |          |   |   | (485,544   | )       
|                                                                        |                                                                                                                                                |                                 |            |          |   |      |            |          |   |   |            |         
|Net income                                                              |                                                                                                                                                | $                               | 876,610    |          |   | $    | 1,539,373  |          |   | $ | 2,307,967  |         
|                                                                        |                                                                                                                                                |                                 |            |          |   |      |            |          |   |   |            |         

F-4



---



##### Table of Contents



|                                                                   |                                   |                                 |            |      |  |      |            |      |  |   |            |       |  
|------------------------------------------------------------------ | --------------------------------- | ------------------------------- | ---------- | ---- |  | ---- | ---------- | ---- |  | - | ---------- | ----- | -
|                                                                   |                                   |                                
|                                                                   |                                   | For the Year ended December 31,
|                                                                   |                                   |                                
|                                                                   |                                   | 2002                            |            | 2001 |  | 2000
|                                                                   |                                   |                                 |            |      |  |     
|Income per share  basic:                                          |                                   |                                 |            |      |  |      |            |      |  |   |            |      
|                                                                   | Income from continuing operations |                                 | $          | 0.08 |  |      | $          | 0.15 |  |   | $          | 0.29  |  
|                                                                   | Loss from discontinued operations |                                 |            |     |  |      |            |     |  |   |            | (0.05 | )
|                                                                   |                                   |                                 |            |      |  |      |            |      |  |   |            |      
|Income per share attributable to common
    shareholders  basic   |                                   | $                               | 0.08       |      |  | $    | 0.15       |      |  | $ | 0.24       |      
|                                                                   |                                   |                                 |            |      |  |      |            |      |  |   |            |      
|Income per share  diluted:                                        |                                   |                                 |            |      |  |      |            |      |  |   |            |      
|                                                                   | Income from continuing operations |                                 | $          | 0.08 |  |      | $          | 0.14 |  |   | $          | 0.27  |  
|                                                                   | Loss from discontinued operations |                                 |            |     |  |      |            |     |  |   |            | (0.05 | )
|                                                                   |                                   |                                 |            |      |  |      |            |      |  |   |            |      
|Income per share attributable to common
    shareholders  diluted |                                   | $                               | 0.08       |      |  | $    | 0.14       |      |  | $ | 0.22       |      
|                                                                   |                                   |                                 |            |      |  |      |            |      |  |   |            |      
|Weighted average number of common shares
    outstanding  basic   |                                   |                                 | 10,565,941 |      |  |      | 9,978,532  |      |  |   | 9,654,272  |      
|                                                                   |                                   |                                 |            |      |  |      |            |      |  |   |            |      
|Weighted average number of common shares
    outstanding  diluted |                                   |                                 | 11,542,449 |      |  |      | 11,002,586 |      |  |   | 10,404,797 |      
|                                                                   |                                   |                                 |            |      |  |      |            |      |  |   |            |      

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

F-5



---



##### Table of Contents



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, 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 |  
|Common stock issued under Employee Stock Purchase
    Plan for cash                                            |  |                   |        |              |  |            |      |          |  |               | 32,826    |              |  |        | 328    |         |  |       | 47,672     |  |  |   | (24,000  | ) |  |   |        |   |  |   |            |   |  |   | 24,000     |  
|Common stock issued on exercise of 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 at 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



---



##### Table of Contents



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 under Employee Stock Purchase
    Plan for Cash                                            |  |                   |        |              |  |            |      |          |  |               | 10,870     |              |  |        | 109     |         |  |       | 19,891     |   |  |   | (10,000  | ) |  |   |         |   |  |   |            |   |  |   | 10,000     |  
|Common stock issued on exercise stock options and
    warrants                                                 |  |                   |        |              |  |            |      |          |  |               | 382,201    |              |  |        | 3,822   |         |  |       | 428,248    |   |  |   |         |   |  |   |         |   |  |   |            |   |  |   | 432,070    |  
|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 losses 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



---



##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                                                    |  |                   |          |              |  |            |        |          |  |               |            |              |  |        |         |         |  |       |            |   |  |   |         |   |  |   |          |   |  |   |             |   |  |   |            |  
|------------------------------------------------------------------- |  | ----------------- | -------- | ------------ |  | ---------- | ------ | -------- |  | ------------- | ---------- | ------------ |  | ------ | ------- | ------- |  | ----- | ---------- | - |  | - | ------- | - |  | - | -------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                                    |  |                   |          |              |  |            |        |          |  |               |            | Accumulated  |  |        |         |        
|                                                                    |  | Callable Series B |          |              |  |            |        |          |  | Other         |            |              |  |       
|                                                                    |  | Preferred Stock   |          | Common Stock |  | Additional |        |          |  | Comprehensive |            |              |  |       
|                                                                    |  |                   |          |              |  | Paid-In    |        | Unearned |  | Income        |            | Accumulated  |  |       
|                                                                    |  | Shares            |          | Amount       |  | Shares     |        | Amount   |  | Capital       |            | Compensation |  | (Loss) |         | Deficit |  | Total
|                                                                    |  |                   |          |              |  |            |        |          |  |               |            |              |  |        |         |         |  |      
|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 |  
|Common stock issued on exercise of stock options
    and warrants   |  |                   |         |              |  |            |       |          |  |               | 318,383    |              |  |        | 3,184   |         |  |       | 550,074    |   |  |   |        |   |  |   |         |   |  |   |            |   |  |   | 553,258    |  
|Common stock issued under employee stock purchase
    plan for cash |  |                   |         |              |  |            |       |          |  |               | 13,631     |              |  |        | 136     |         |  |       | 29,864     |   |  |   | (15,000 | ) |  |   |         |   |  |   |            |   |  |   | 15,000     |  
|Conversion of Series B Convertible Preferred
    Stock              |  |                   | (205,000 | )            |  |            | (2,050 | )        |  |               | 248,050    |              |  |        | 2,480   |         |  |       | (430       | ) |  |   |        |   |  |   |         |   |  |   |            |   |  |   |           |  
|Amortization of unearned compensation                               |  |                   |         |              |  |            |       |          |  |               |           |              |  |        |        |         |  |       |           |   |  |   | 52,965  |   |  |   |         |   |  |   |            |   |  |   | 52,965     |  
|Unrealized losses on investments, net of taxes                      |  |                   |         |              |  |            |       |          |  |               |           |              |  |        |        |         |  |       |           |   |  |   |        |   |  |   | (113,299 | ) |  |   |            |   |  |   | (113,299   | )
|Net income                                                          |  |                   |         |              |  |            |       |          |  |               |           |              |  |        |        |         |  |       |           |   |  |   |        |   |  |   |         |   |  |   | 876,610     |   |  |   | 876,610    |  
|                                                                    |  |                   |          |              |  |            |        |          |  |               |            |              |  |        |         |         |  |       |            |   |  |   |         |   |  |   |          |   |  |   |             |   |  |   |            |  
|Balance, December 31, 2002                                          |  |                   |         |              |  | $          |       |          |  |               | 10,844,990 |              |  | $      | 108,448 |         |  | $     | 41,891,355 |   |  | $ | (16,378 | ) |  | $ | (40,464  | ) |  | $ | (24,593,672 | ) |  | $ | 17,349,289 |  
|                                                                    |  |                   |          |              |  |            |        |          |  |               |            |              |  |        |         |         |  |       |            |   |  |   |         |   |  |   |          |   |  |   |             |   |  |   |            |  

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

F-8



---



##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                            |                                                                                                                |                                                    |            |            |           |      |            |             |           |   |           |             |            |  
|----------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ---------- | ---------- | --------- | ---- | ---------- | ----------- | --------- | - | --------- | ----------- | ---------- | -
|                                                            |                                                                                                                |                                                   
|                                                            |                                                                                                                | For the Year ended December 31,                   
|                                                            |                                                                                                                |                                                   
|                                                            |                                                                                                                | 2002                                               |            | 2001       |           | 2000
|                                                            |                                                                                                                |                                                    |            |            |           |     
|Cash flows from operating activities:                       |                                                                                                                |                                                    |            |            |           |      |            |             |           |   |           |            
|                                                            | Net income                                                                                                     |                                                    | $          | 876,610    |           |      | $          | 1,539,373   |           |   | $         | 2,307,967   |           
|                                                            | Adjustments to reconcile net income to net cash
    provided by operations:                                    |                                                    |            |            |           |      |            |             |           |   |           |             |           
|                                                            |                                                                                                                | Loss from discontinued operations                  |            |            |          |      |            |             |          |   |           |             | 485,544    |  
|                                                            |                                                                                                                | Deferred taxes                                     |            |            | 645,337   |      |            |             | 933,912   |   |           |             | 1,832,567  |  
|                                                            |                                                                                                                | Depreciation and amortization                      |            |            | 1,011,858 |      |            |             | 1,034,498 |   |           |             | 881,743    |  
|                                                            |                                                                                                                | Common stock and stock option compensation         |            |            | 52,965    |      |            |             | 195,748   |   |           |             | 240,661    |  
|                                                            |                                                                                                                | Litigation settlement payable in equity securities |            |            |          |      |            |             | 14,301    |   |           |             |           |  
|                                                            |                                                                                                                | Gain on disposal of property and equipment         |            |            |          |      |            |             |          |   |           |             | (1,677     | )
|                                                            |                                                                                                                | Allowance for doubtful accounts                    |            |            | 12,197    |      |            |             | 48,569    |   |           |             |           |  
|                                                            |                                                                                                                | Changes in assets and liabilities:                 |            |            |           |      |            |             |           |   |           |             |            |  
|                                                            |                                                                                                                | Accounts receivable                                |            |            | 634,318   |      |            |             | 652,320   |   |           |             | 7,803      |  
|                                                            |                                                                                                                | Service contracts, net                             |            |            | (204,966  | )    |            |             | (2,488    | ) |           |             | (415,906   | )
|                                                            |                                                                                                                | Inventories, net                                   |            |            | 154,455   |      |            |             | (393,867  | ) |           |             | (2,106,813 | )
|                                                            |                                                                                                                | Prepaid expenses and other current assets          |            |            | (61,897   | )    |            |             | (119,101  | ) |           |             | (224,695   | )
|                                                            |                                                                                                                | Other assets                                       |            |            | (130,334  | )    |            |             | 5,441     |   |           |             | (88,022    | )
|                                                            |                                                                                                                | Accounts payable                                   |            |            | 358,439   |      |            |             | (382,361  | ) |           |             | 573,432    |  
|                                                            |                                                                                                                | Accrued expenses                                   |            |            | 100,468   |      |            |             | (853,791  | ) |           |             | 901,111    |  
|                                                            |                                                                                                                |                                                    |            |            |           |      |            |             |           |   |           |            
|Net cash provided by continuing operations                  |                                                                                                                |                                                    | 3,449,450  |            |           |      | 2,672,554  |             |           |   | 4,393,715 |            
|Net cash used by discontinued operations                    |                                                                                                                |                                                    |           |            |           |      |           |             |           |   | (858,988  | )          
|                                                            |                                                                                                                |                                                    |            |            |           |      |            |             |           |   |           |            
|Net cash provided by operating activities                   |                                                                                                                |                                                    | 3,449,450  |            |           |      | 2,672,554  |             |           |   | 3,534,727 |            
|                                                            |                                                                                                                |                                                    |            |            |           |      |            |             |           |   |           |            
|Cash flows from investing activities:                       |                                                                                                                |                                                    |            |            |           |      |            |             |           |   |           |            
|                                                            | Acquisition of property and equipment                                                                          |                                                    |            | (1,882,146 | )         |      |            | (938,708    | )         |   |           | (522,643    | )         
|                                                            | Software development costs                                                                                     |                                                    |            | (774,574   | )         |      |            | (866,639    | )         |   |           | (278,543    | )         
|                                                            | Loan to related party                                                                                          |                                                    |            | (125,000   | )         |      |            |            |           |   |           |            |           
|                                                            |                                                                                                                |                                                    |            |            |           |      |            |             |           |   |           |            
|                                                            | Investing activities of discontinued operations                                                                |                                                    |            |           |           |      |            |            |           |   |           | (136,694    | )         
|                                                            |                                                                                                                |                                                    |            |            |           |      |            |             |           |   |           |            
|Net cash used by investing activities                       |                                                                                                                |                                                    | (2,781,720 | )          |           |      | (1,805,347 | )           |           |   | (937,880  | )          
|                                                            |                                                                                                                |                                                    |            |            |           |      |            |             |           |   |           |            
|Cash flows from financing activities:                       |                                                                                                                |                                                    |            |            |           |      |            |             |           |   |           |            
|                                                            | Issuance of common and preferred stock and
    warrants for cash                                               |                                                    |            | 568,257    |           |      |            | 442,070     |           |   |           | 255,623     |           
|                                                            | Borrowings under line of credit                                                                                |                                                    |            | 4,500,000  |           |      |            | 15,369,068  |           |   |           | 21,255,000  |           
|                                                            | Redemption of warrants                                                                                         |                                                    |            |           |           |      |            | (4,540      | )         |   |           |            |           
|                                                            | Repayments of line of credit                                                                                   |                                                    |            | (3,500,000 | )         |      |            | (16,018,091 | )         |   |           | (21,261,064 | )         
|                                                            | Borrowings under term loan                                                                                     |                                                    |            | 1,500,000  |           |      |            | 3,000,000   |           |   |           |            |           
|                                                            | Repayments of term loan                                                                                        |                                                    |            | (2,508,332 | )         |      |            | (1,083,331  | )         |   |           | (1,200,000  | )         
|                                                            | Repayments of notes payable                                                                                    |                                                    |            | (1,167,000 | )         |      |            | (3,889,000  | )         |   |           |            |           
|                                                            | Payments of capital lease obligations                                                                          |                                                    |            | (36,133    | )         |      |            | (32,242     | )         |   |           | (19,689     | )         
|                                                            |                                                                                                                |                                                    |            |            |           |      |            |             |           |   |           |            
|Net cash used in financing activities                       |                                                                                                                |                                                    | (643,208   | )          |           |      | (2,216,066 | )           |           |   | (970,130  | )          
|                                                            |                                                                                                                |                                                    |            |            |           |      |            |             |           |   |           |            
|Net increase (decrease) in cash and cash
    equivalents    |                                                                                                                |                                                    | 24,522     |            |           |      | (1348,859  | )           |           |   | 1,626,717 |            
|Cash and cash equivalents at beginning of year              |                                                                                                                |                                                    | 2,312,451  |            |           |      | 3,661,310  |             |           |   | 2,034,593 |            
|                                                            |                                                                                                                |                                                    |            |            |           |      |            |             |           |   |           |            
|Cash and cash equivalents at end of year                    |                                                                                                                | $                                                  | 2,336,973  |            |           | $    | 2,312,451  |             |           | $ | 3,661,310 |            
|                                                            |                                                                                                                |                                                    |            |            |           |      |            |             |           |   |           |            
|Supplemental schedule of non-cash financing
    activities: |                                                                                                                |                                                    |            |            |           |      |            |             |           |   |           |            
|                                                            | Non-cash issuance of common stock and common
    stock warrants                                                |                                                    | $          | 15,000     |           |      | $          | 45,000      |           |   | $         | 157,000     |           
|                                                            | Issuance of series B convertible preferred
    stock and common stock in connection with litigation settlement |                                                    |            |           |           |      |            | 14,301      |           |   |           |            |           
|                                                            | Conversion of series B convertible preferred
    stock into common stock                                       |                                                    |            | 2,050      |           |      |            |            |           |   |           |            |           
|                                                            | 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                                                                                     |                                                    |            | 76,735     |           |      |            | 47,312      |           |   |           | 25,536      |           
|                                                            | Cash paid for interest                                                                                         |                                                    |            | 278,629    |           |      |            | 778,028     |           |   |           | 865,153     |           

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

F-9



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##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME

|                                                          |  |                                 |          |      |  |      |           |   |  |   |           |  
|--------------------------------------------------------- |  | ------------------------------- | -------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                                                          |  |                                
|                                                          |  | For the Year ended December 31,
|                                                          |  |                                
|                                                          |  | 2002                            |          | 2001 |  | 2000
|                                                          |  |                                 |          |      |  |     
|Net income                                                |  | $                               | 876,610  |      |  | $    | 1,539,373 |   |  | $ | 2,307,967 |  
|Unrealized gains (losses) on investment, net of
    taxes |  |                                 | (113,299 | )    |  |      | (216,193  | ) |  |   | 289,028   |  
|Foreign currency translation adjustment                   |  |                                 |         |      |  |      |          |   |  |   | (67,207   | )
|                                                          |  |                                 |          |      |  |      |           |   |  |   |           |  
|Comprehensive income                                      |  | $                               | 763,311  |      |  | $    | 1,323,180 |   |  | $ | 2,529,788 |  
|                                                          |  |                                 |          |      |  |      |           |   |  |   |           |  

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

F-10



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##### Table of Contents






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 accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. The
significant estimates in the preparation of the consolidated
financial statements relate to the assessment of the carrying
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-11



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##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                              
| | -----------------------------
| | Investment 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,
or until management believes a permanent decline in value has
occurred. Realized gains and losses are included in earnings.
There were no realized gains and losses for the years ended
December 31, 2002, 2001 and 2000.

The cost, gross unrealized holding losses and
fair value as of December 31, 2002 are as follows:

|                              |  |      |         |            |  |            |         |   |  |   |         | 
|----------------------------- |  | ---- | ------- | ---------- |  | ---------- | ------- | - |  | - | ------- | 
|                              |  |      |         | Gross      |  |           
|                              |  |      |         | Unrealized |  |           
|                              |  |      |         | Holding    |  |           
|                              |  | Cost |         | (Losses)   |  | Fair Value
|                              |  |      |         |            |  |           
|Available for sale securities |  | $    | 915,256 |            |  | $          | (67,440 | ) |  | $ | 847,816 | 
|                              |  |      |         |            |  |            |         |   |  |   |         | 

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

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



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



| |         
| | --------
| | Goodwill

Goodwill is recorded at cost. The realizability
of the goodwill 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. The
amortization of goodwill was $0 in 2002, $34,692 in 2001 and
$34,692 in 2000.

Prior to 2002, goodwill, representing the excess
of the purchase price over the estimated fair value of the net
assets of the acquired business, was amortized over the period
of expected benefit of 10 years. However, effective
January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets, (SFAS No. 142) which
requires that the Company cease amortization of all intangible
assets having indefinite useful economic lives. Such assets
should be tested for impairment annually or on an interim basis
if events or circumstances indicate that the fair value of the
asset has decreased below its carrying value. At
December 31, 2002, the Company evaluated its goodwill and
determined that fair value had not decreased below carrying
value and no adjustment to impair goodwill was necessary in
accordance with SFAS No. 142.

F-12



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##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                           
| | --------------------------
| | Software Development Costs

The Company capitalizes certain software
development costs for new products and product enhancements once
all planning, designing, coding and testing activities necessary
to establish that the product can be produced to meet its design
specifications are completed, and concludes capitalization when
the product is ready for general release. Research and
development costs relating to software development are expensed
as incurred. Amortization of capitalized software development
costs is provided on a product-by-product basis at the greater
of the amount computed using (a) the ratio of current
revenues for a product to the total of current and anticipated
future revenues or (b) the straight-line method over the
remaining estimated economic life of the product. 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 was
$12,996, $155,957 and $90,975 for 2002, 2001 and 2000,
respectively.



| |                  
| | -----------------
| | Long-Lived Assets

The Company identifies and records an impairment
loss 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. 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.

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
2002, 2001 and 2000, consistent with the

F-13



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##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

provisions of Statement of Financial Accounting
Standards No. 123, the Companys net income and income
per share would have been reduced to the pro forma amounts
indicated below:

|                                                                                                                                                     |  |                                 |          |      |  |      |           |   |  |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | -------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                                                                                                                                                     |  |                                
|                                                                                                                                                     |  | For the Year Ended December 31,
|                                                                                                                                                     |  |                                
|                                                                                                                                                     |  | 2002                            |          | 2001 |  | 2000
|                                                                                                                                                     |  |                                 |          |      |  |     
|Net income attributable to Common stockholders as
    reported                                                                                       |  | $                               | 876,610  |      |  | $    | 1,539,373 |   |  | $ | 2,307,967 |  
|Add: Stock-based Employee compensation expense
    included in reported income, net of related tax effects                                           |  |                                 | 31,779   |      |  |      | 117,449   |   |  |   | 144,397   |  
|Deduct: Total stock-based Employee compensation
    expense determined under fair value based methods for all
    awards, net of related tax effects |  |                                 | (319,803 | )    |  |      | (269,141  | ) |  |   | (381,059  | )
|                                                                                                                                                     |  |                                 |          |      |  |      |           |   |  |   |           |  
|Pro forma net income attributable to Common
    stockholders                                                                                         |  |                                 | 588,586  |      |  |      | 1,387,681 |   |  |   | 2,071,305 |  
|                                                                                                                                                     |  |                                 |          |      |  |      |           |   |  |   |           |  
|Income per diluted share as reported                                                                                                                 |  |                                 | 0.08     |      |  |      | 0.14      |   |  |   | 0.22      |  
|                                                                                                                                                     |  |                                 |          |      |  |      |           |   |  |   |           |  
|Income per diluted share proforma                                                                                                                    |  | $                               | 0.05     |      |  | $    | 0.13      |   |  | $ | 0.20      |  
|                                                                                                                                                     |  |                                 |          |      |  |      |           |   |  |   |           |  

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.



| |                    
| | -------------------
| | 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 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 collectibility of
the resulting receivable is probable, the Company has received
an authorized purchase order and the price is fixed and
determinable.

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



| |           
| | ----------
| | Warranties

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



| |                                          
| | -----------------------------------------
| | Research and Development
    Expenditures

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

F-14



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##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing
net income by the weighted average number of common shares and
common stock equivalents outstanding, calculated on the treasury
stock method for options and warrants 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. See Note 15 
Segment and Geographic Information.



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

Certain reclassifications have been made to the
2000 and 2001 financial statements to conform to the 2002
presentation with no change in the previously reported net
income or shareholders equity.



| |                              
| | -----------------------------
| | New Accounting Pronouncements

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

F-15



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##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, which will be effective as of
January 1, 2003, 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. SFAS 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. The
Company adopted the provisions of SFAS 144 effective
January 1, 2002. Adoption of this Statement did not have a
material impact on its financial statements.

In April 2002, FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections
effective on or after May 15, 2002. This Statement rescinds
SFAS No. 4 and an amendment of that Statement, and SFAS
No. 64. This Statement also rescinds SFAS No. 44. This
Statement amends SFAS No. 13, to eliminate an inconsistency
between the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing
authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed market conditions. The adoption of SFAS
No. 145 did not have a material effect on the
Companys financial position or results of operations.

In June 2002, FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, effective for activities that are initiated after
December 31, 2002, with early application encouraged. This
Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
restructuring). This adoption of SFAS No. 146 is not
expected to have a material effect on the Companys
financial position or results of operations.

In December 2002, FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation  Transition
and Disclosure  An Amendment of FASB Statement
No. 123. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based
employee compensation and the effect of the method used on
reported results. The Company is required to follow the
prescribed format and provide the additional disclosures
required by SFAS No. 148 in its annual financial statements
for the year ended December 31, 2002 and must also provide
the disclosures in its quarterly reports containing condensed
financial statements for interim periods beginning with the
quarterly period ended March 31, 2003. The adoption of SFAS
No. 148 is not expected to have a material effect on the
Companys financial position or results of operations.

In November 2002, FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guaranteed of
Indebtedness of Others, which disclosures are effective
for financial statements issued after December 15, 2002.
While the Company has various guarantees included in contracts
in the normal course of business, primarily in the form of
warranties, these guarantees would only result in immaterial
increases in future costs, but do not represent significant
commitments or contingent liabilities of the indebtedness of
others.

In January 2003, FASB issued Interpretation
No. 46, Consolidation of Variable Interest
Entities which requires the consolidation of variable
interest entities, as defined. FIN 46 is applicable to financial
statements to be issued by the Company after 2002; however,
disclosures are required currently if the Company expects to

F-16



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##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

consolidate any variable interest entities. The
Company does not currently believe that any material entities
will be consolidated with International Remote Imaging Systems,
inc. as a result of FIN 46.



| |                                    
| | -----------------------------------
| | Certain Risks and
    Uncertainties

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

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 also is the exclusive North American distributor of
the Arkray AUTION MAX AX-4280 Automated Urine Chemistry
Analyzer, which will affect the success of the Companys
domestic sales of new iQ200 urinalysis workstations, which will
be launched in 2003. The Companys inability to transition
successfully to replacement components, to secure adequate
supplies of discontinued components on satisfactory terms, or
the loss of the distribution rights to the Arkray product could
have a material adverse effect on the Company.



|   |             
|-- | ------------
|3. | Inventories.

Inventories consist of the following:

|                                        |  |                 |           |      |  |   |            |  
|--------------------------------------- |  | --------------- | --------- | ---- |  | - | ---------- | -
|                                        |  |                
|                                        |  | At December 31,
|                                        |  |                
|                                        |  | 2002            |           | 2001
|                                        |  |                 |           |     
|Finished goods                          |  | $               | 1,972,320 |      |  | $ | 2,270,973  |  
|Work-in-process                         |  |                 | 167,839   |      |  |   | 479,809    |  
|Raw materials, parts and sub-assemblies |  |                 | 4,081,424 |      |  |   | 4,042,659  |  
|                                        |  |                 |           |      |  |   |            |  
|                                        |  |                 | 6,221,583 |      |  |   | 6,793,441  |  
|Reserved for Obsolescence               |  |                 | (797,899  | )    |  |   | (1,215,302 | )
|                                        |  |                 |           |      |  |   |            |  
|Net inventories                         |  | $               | 5,423,684 |      |  | $ | 5,578,139  |  
|                                        |  |                 |           |      |  |   |            |  

F-17



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##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                        
|-- | -----------------------
|4. | Property and Equipment.

Property and equipment consist of the following:

|                              |  |                 |            |      |  |   |            |  
|----------------------------- |  | --------------- | ---------- | ---- |  | - | ---------- | -
|                              |  |                
|                              |  | At December 31,
|                              |  |                
|                              |  | 2002            |            | 2001
|                              |  |                 |            |     
|Leasehold improvements        |  | $               | 1,593,033  |      |  | $ | 771,029    |  
|Furniture and fixtures        |  |                 | 365,149    |      |  |   | 244,217    |  
|Machinery and equipment       |  |                 | 3,389,179  |      |  |   | 2,950,271  |  
|Construction in progress      |  |                 | 408,486    |      |  |   | 228,442    |  
|Tooling, dies and mold        |  |                 | 1,208,500  |      |  |   | 1,087,600  |  
|Rental units                  |  |                 | 981,801    |      |  |   | 1,023,343  |  
|                              |  |                 |            |      |  |   |            |  
|                              |  |                 | 7,946,148  |      |  |   | 6,304,902  |  
|Less accumulated depreciation |  |                 | (5,050,140 | )    |  |   | (4,638,676 | )
|                              |  |                 |            |      |  |   |            |  
|                              |  | $               | 2,896,008  |      |  | $ | 1,666,226  |  
|                              |  |                 |            |      |  |   |            |  

Property and equipment includes and $2,775,622
and $2,575,199, respectively, at December 31, 2002 and
2001, of fully depreciated assets which remain in service.
Depreciation expense was $652,364, $616,900 and $601,186 for
2002, 2001 and 2000, respectively.



|   |                           
|-- | --------------------------
|5. | Related Party Transaction.

In April 2002, the Company made a $125,000 loan
to Dr. John A. OMalley, the Chairman, CEO and
President of the Company, in accordance with his current
employment agreement. The loan bears interest at the rate of
5 percent per annum and has a term of five years. It is
secured by 120,000 shares of the Companys stock owned by
Dr. OMalley. The loan will be repaid firstly, from
the proceeds of any future sale of common shares of the Company
by Dr. OMalley and, secondly, at
Dr. OMalleys discretion. At the end of the term
of the loan, any remaining unpaid balance will be settled by the
forfeiture by Dr. OMalley of the remaining shares
held by the Company as security. Pursuant to the agreement,
Dr. OMalley paid $2,967 of interest during 2002.



|   |                  
|-- | -----------------
|6. | Equipment Leasing

For sales-type leases, the components of net
investment in sales-type leases recorded in other assets are as
follows at December 31, 2002 and 2001.

|                                                             |  |                 |         |      |  |   |          |  
|------------------------------------------------------------ |  | --------------- | ------- | ---- |  | - | -------- | -
|                                                             |  |                
|                                                             |  | At December 31,
|                                                             |  |                
|                                                             |  | 2002            |         | 2001
|                                                             |  |                 |         |     
|Total minimum lease payments                                 |  | $               | 183,313 |      |  | $ | 348,457  |  
|Less: Estimated executory costs including profit
    thereon |  |                 | (63,130 | )    |  |   | (120,274 | )
|                                                             |  |                 |         |      |  |   |          |  
|Net minimum lease payments                                   |  |                 | 120,183 |      |  |   | 228,183  |  
|Less: Unearned income                                        |  |                 | (35,191 | )    |  |   | (65,779  | )
|                                                             |  |                 |         |      |  |   |          |  
|Net investment in sales-type leases                          |  |                 | 84,992  |      |  |   | 162,404  |  
|Less: Current portion                                        |  |                 | (61,796 | )    |  |   | (77,412  | )
|                                                             |  |                 |         |      |  |   |          |  
|                                                             |  | $               | 23,196  |      |  | $ | 84,992   |  
|                                                             |  |                 |         |      |  |   |          |  

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

F-18



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##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 $905,740 and $970,793 at December 31,
2002 and 2001, respectively.

Future minimum lease payments due from customers
under sales-type leases and noncancellable operating leases as
of December 31, 2002 are as follows:

|     |  |              |         |           |  |   |         | 
|---- |  | ------------ | ------- | --------- |  | - | ------- | 
|     |  | Sales  Type |         | Operating
|     |  | Leases       |         | Leases   
|     |  |              |         |          
|2003 |  | $            | 132,888 |           |  | $ | 300,187 | 
|2004 |  |              | 50,425  |           |  |   |        | 
|     |  |              |         |           |  |   |         | 
|     |  | $            | 183,313 |           |  | $ | 300,187 | 
|     |  |              |         |           |  |   |         | 

7.     Accrued
Expenses.

Accrued expenses consist of the following:

|                          |  |                 |           |      |  |   |           | 
|------------------------- |  | --------------- | --------- | ---- |  | - | --------- | 
|                          |  |                
|                          |  | At December 31,
|                          |  |                
|                          |  | 2002            |           | 2001
|                          |  |                 |           |     
|Accrued bonuses           |  | $               | 534,000   |      |  | $ | 339,026   | 
|Accrued commissions       |  |                 | 121,162   |      |  |   | 100,943   | 
|Accrued payroll           |  |                 | 147,424   |      |  |   | 100,466   | 
|Accrued vacation          |  |                 | 426,619   |      |  |   | 363,587   | 
|Accrued professional fees |  |                 | 105,497   |      |  |   | 130,494   | 
|Accrued warranty expense  |  |                 | 297,742   |      |  |   | 281,683   | 
|Accrued interest          |  |                 | 26,172    |      |  |   | 40,527    | 
|Accrued  other           |  |                 | 198,548   |      |  |   | 436,103   | 
|                          |  |                 |           |      |  |   |           | 
|                          |  | $               | 1,857,164 |      |  | $ | 1,792,829 | 
|                          |  |                 |           |      |  |   |           | 

8.     Short-Term
Borrowings and Notes Payable.

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
$1.0 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 $1.0 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 (4.25% on
December 31, 2002), or LIBOR rate plus 2.0%, and is secured
by all of the Companys Assets. The Company is subject to
certain financial covenants under the debt agreement with
California Bank and Trust. As of December 31, 2002, the
Company was in compliance with all of the covenants under the
debt agreement.

At December 31, 2002, the outstanding
amounts under the Companys credit facility consist of
$408,000 under the first term loan, $1.0 million under the
second term loan and $1.0 million under the revolving line
of credit. An additional $2.8 million was available under
the line of credit at that date.

At December 31, 2002, the outstanding
principal balance on the unsecured Subordinated Note Payable
from an unrelated party was approximately $1.9 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 (4.25% on December 31, 2002) plus 2.0% and
matures on July 31, 2004.

F-19



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##### Table of Contents



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 (exclusive of the effect of the discount of $107,000)
are $1.5 million in 2003, $1.0 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,
|          |         |                                
|          |         | 2002                            |         | 2001    |  | 2000
|          |         |                                 |         |         |  |     
|Current:  |         | $                               |         |         |  | $    |           |         |  | $ |           |          
|          | Federal |                                 |         |        |  |      |           | 40,000  |  |   |           | 139,000   |  
|          | State   |                                 |         | 14,000  |  |      |           | 52,000  |  |   |           | (376,000  | )
|          |         |                                 |         |         |  |      |           |         |  |   |           |          
|          |         |                                 | 14,000  |         |  |      | 92,000    |         |  |   | (237,000  | )        
|          |         |                                 |         |         |  |      |           |         |  |   |           |          
|Deferred: |         |                                 |         |         |  |      |           |         |  |   |           |          
|          | Federal |                                 |         | 470,000 |  |      |           | 859,000 |  |   |           | 1,120,000 |  
|          | State   |                                 |         | 100,000 |  |      |           | 75,000  |  |   |           | 712,000   |  
|          |         |                                 |         |         |  |      |           |         |  |   |           |          
|          |         |                                 | 570,000 |         |  |      | 934,000   |         |  |   | 1,832,000 |          
|          |         |                                 |         |         |  |      |           |         |  |   |           |          
|          |         | $                               | 584,000 |         |  | $    | 1,026,000 |         |  | $ | 1,595,000 |          
|          |         |                                 |         |         |  |      |           |         |  |   |           |          

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, 2002, 2001 and 2000 as follows:

|                                                               |  |                                 |         |      |  |      |           |   |  |   |            |  
|-------------------------------------------------------------- |  | ------------------------------- | ------- | ---- |  | ---- | --------- | - |  | - | ---------- | -
|                                                               |  |                                
|                                                               |  | For the Year Ended December 31,
|                                                               |  |                                
|                                                               |  | 2002                            |         | 2001 |  | 2000
|                                                               |  |                                 |         |      |  |     
|Tax provision (benefit) computed at Federal
    statutory rate |  | $                               | 497,000 |      |  | $    | 872,000   |   |  | $ | 1,492,000  |  
|Decrease in taxes due to change in valuation
    allowance     |  |                                 |        |      |  |      | (426,000  | ) |  |   | (1,655,000 | )
|Expiration of Federal NOL                                      |  |                                 |        |      |  |      | 426,000   |   |  |   | 1,655,000  |  
|State taxes, net of federal benefit                            |  |                                 | 73,000  |      |  |      | 128,000   |   |  |   | 201,000    |  
|Nondeductible expenses                                         |  |                                 | 30,000  |      |  |      | 38,000    |   |  |   | 23,000     |  
|Other                                                          |  |                                 | (16,000 | )    |  |      | (12,000   | ) |  |   | (121,000   | )
|                                                               |  |                                 |         |      |  |      |           |   |  |   |            |  
|                                                               |  | $                               | 584,000 |      |  | $    | 1,026,000 |   |  | $ | 1,595,000  |  
|                                                               |  |                                 |         |      |  |      |           |   |  |   |            |  

At December 31, 2002, the Company had
federal net operating loss carryforwards of approximately
$19.4 million, and state net operating loss carryforwards
of $9.1 million, which expire in fiscal years ending in
2003 through 2021.

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##### Table of Contents



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, 2002 and 2001 are as follows:

|                                   |  |                 |           |      |  |   |           |  
|---------------------------------- |  | --------------- | --------- | ---- |  | - | --------- | -
|                                   |  |                
|                                   |  | At December 31,
|                                   |  |                
|                                   |  | 2002            |           | 2001
|                                   |  |                 |           |     
|Depreciation and amortization      |  | $               | 804,000   |      |  | $ | 356,000   |  
|Allowance for doubtful accounts    |  |                 | 124,000   |      |  |   | 112,000   |  
|Accrued liabilities                |  |                 | 760,000   |      |  |   | 477,000   |  
|Deferred revenue-service contracts |  |                 | 194,000   |      |  |   | 499,000   |  
|Net operating loss carry-forwards  |  |                 | 7,098,000 |      |  |   | 7,277,000 |  
|Other                              |  |                 | (131,000  | )    |  |   | 698,000   |  
|Valuation allowance                |  |                 | (569,000  | )    |  |   | (569,000  | )
|                                   |  |                 |           |      |  |   |           |  
|                                   |  | $               | 8,280,000 |      |  | $ | 8,850,000 |  
|                                   |  |                 |           |      |  |   |           |  

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.



| |                              
| | -----------------------------
| | Conversion of Preferred Stock

On August 3, 2002, the Companys
Series B Preferred Stock automatically converted into
common stock at the ratio of 1.21 shares of common stock for
each share of preferred stock, a total of 248,050 common shares
were issued. The conversion ratio represented the ratio of the
liquidation value of each preferred share ($3.00 per share)
divided by the average daily closing price of the common stock
for the five trading days ending three trading days prior to the
August 3, 2002 conversion date ($2.47 per share).



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

F-21



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##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                
| | ---------------
| | 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 2002, 2001 and 2000,
IRIS issued 13,631, 10,870 and 32,826 shares of common stock,
respectively, in exchange for $30,000, $20,000 and $48,000 in
cash and services, respectively, under this plan.



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

As of December 31, 2002, 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 have been granted under
these plans.

The following schedule sets forth options
authorized, exercised, outstanding and available for grant under
the Companys three stock option plans as of
December 31, 2002.

|     |  |                         |           |           |  |             |         |           |  |  |           |  |  |  |         | 
|---- |  | ----------------------- | --------- | --------- |  | ----------- | ------- | --------- |  |  | --------- |  |  |  | ------- | 
|     |  |                        
|     |  | Number of Option Shares
|     |  |                        
|     |  |                         |           | Available
|Plan |  | Authorized              |           | Exercised |  | Outstanding |         | for Grant
|     |  |                         |           |           |  |             |         |          
|1994 |  |                         | 700,000   |           |  |             | 179,266 |           |  |  | 500,800   |  |  |  | 19,934  | 
|1997 |  |                         | 600,000   |           |  |             | 134,492 |           |  |  | 455,100   |  |  |  | 10,408  | 
|1998 |  |                         | 1,900,000 |           |  |             | 47,298  |           |  |  | 1,719,810 |  |  |  | 132,892 | 
|     |  |                         |           |           |  |             |         |           |  |  |           |  |  |  |         | 
|     |  |                         | 3,200,000 |           |  |             | 361,056 |           |  |  | 2,675,710 |  |  |  | 163,234 | 
|     |  |                         |           |           |  |             |         |           |  |  |           |  |  |  |         | 

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 either three or four years and expire either
five or ten years from the date of grant.

The fair value of each option grant is estimated
on the date of the grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for
grants in 2002, 2001 and 2000.

|                        |  |                    |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ------------------ | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  |                   
|                        |  | For the Year Ended
|                        |  | December 31,      
|                        |  |                   
|                        |  | 2002               |      | 2001 |  | 2000
|                        |  |                    |      |      |  |     
|Risk free interest rate |  |                    | 4.18 | %    |  |      | 4.68 | % |  |  | 6.43 | %
|Expected lives (years)  |  |                    | 5    |      |  |      | 5    |   |  |  | 5    |  
|Expected volatility     |  |                    | 57   | %    |  |      | 53   | % |  |  | 81   | %
|Expected dividend yield |  |                    |     |      |  |      |     |   |  |  |     |  

F-22



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##### Table of Contents



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, 2000, 2001 and 2002.

|                                 |                                   |        |           |          |   |          |               |               |  |   |      |      |  |  |   |      | 
|-------------------------------- | --------------------------------- | ------ | --------- | -------- | - | -------- | ------------- | ------------- |  | - | ---- | ---- |  |  | - | ---- | 
|                                 |                                   |        |           |          |   |          |               | Fair Value at
|                                 |                                   |        |           |          |   |          |               | Grant Date   
|                                 |                                   |        |           |          |   | Weighted |               | Weighted     
|                                 |                                   | Shares |           | Range    |   | Average  |               | Average      
|                                 |                                   |        |           |          |   |          |               |              
|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 |      |  |  |  |     
|                                 | Granted                           |        |           | 514,030  |   |          |               | 2.01 to  3.01 |  |   |      | 2.61 |  |  | $ | 1.52 | 
|                                 | Exercised                         |        |           | (50,983  | ) |          |               | 0.88 to  2.00 |  |   |      | 1.34 |  |  |   |     | 
|                                 | Canceled or expired               |        |           | (115,684 | ) |          |               | 0.75 to  3.03 |  |   |      | 1.74 |  |  |   |     | 
|                                 |                                   |        |           |          |   |          |               |               |  |   |      |      |  |  |   |     
|Outstanding at December 31, 2002 |                                   |        | 2,675,710 |          |   | $        | 0.69 to $4.38 |               |  |   | 1.73 |      |  |  |  |     
|Outstanding at December 31, 2002 |                                   |        | 2,675,710 |          |   |          |               |               |  |   | 1.73 |      |  |  |   |     
|                                 | Weighted average life  73 months |        |           |          |   |          |               |               |  |   |      |      |  |  |   |      | 
|Exercisable at December 31, 2002 |                                   |        | 1,947,376 |          |   |          |               |               |  |   | 1.45 |      |  |  |   |     
|                                 | Weighted average life  69 months |        |           |          |   |          |               |               |  |   |      |      |  |  |   |      | 

In 1996, the Company adopted a 401(k) Plan. All
employees are eligible to participate in the plan at the
beginning of the first quarter following their start date.
Although the Companys contributions are discretionary, our
current practice is to match $0.25 per $1 contributed by the
employees up to 4 per cent of the employees
contributions. Employees vest in amounts contributed by the
Company immediately. The Company contributed $62,861 and $55,931
to the plan for 2002 and 2001, respectively.

Warrants

At December 31, 2002, the following warrants
to purchase common stock were outstanding and exercisable:

|                 |         |                 |  |                 |      |  |  |  |                  | 
|---------------- | ------- | --------------- |  | --------------- | ---- |  |  |  | ---------------- | 
|Number of Shares |         | Per Share Price |  | Expiration Date
|                 |         |                 |  |                
|                 | 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 and equipment
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.

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##### Table of Contents



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, 2002, are as follows:

|                        |  |         |         |           |  |   |           | 
|----------------------- |  | ------- | ------- | --------- |  | - | --------- | 
|                        |  | Capital |         | Operating
|Year Ended December 31, |  | Leases  |         | Leases   
|                        |  |         |         |          
|2003                    |  | $       | 61,484  |           |  | $ | 546,537   | 
|2004                    |  |         | 61,484  |           |  |   | 522,654   | 
|2005                    |  |         | 39,805  |           |  |   | 461,723   | 
|2006                    |  |         | 17,911  |           |  |   | 427,917   | 
|2007                    |  |         | 2,796   |           |  |   |          | 
|                        |  |         |         |           |  |   |           | 
|                        |  | $       | 183,480 |           |  | $ | 1,958,831 | 
|                        |  |         |         |           |  |   |           | 

Rent expense under all operating leases during
2002, 2001 and 2000 was $583,957, $569,768 and $512,842
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 2002,
2001 and 2000 is based on the average number of common shares
outstanding for each period. Options and warrants to purchase
621,630, 197,445 and 1,660,237 shares of common stock were
not considered in the computation of diluted EPS for 2002, 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 2002,
2001, and 2000:

|                                               |                 |      |            |         |  |      |            |         |  |  |            |         | 
|---------------------------------------------- | --------------- | ---- | ---------- | ------- |  | ---- | ---------- | ------- |  |  | ---------- | ------- | 
|                                               |                 | 2002 |            | 2001    |  | 2000
|                                               |                 |      |            |         |  |     
|Weighted average number of shares 
    basic  |                 |      | 10,565,941 |         |  |      | 9,978,532  |         |  |  | 9,654,272  |        
|Effect of dilutive securities:                 |                 |      |            |         |  |      |            |         |  |  |            |        
|                                               | Options         |      |            | 560,768 |  |      |            | 463,349 |  |  |            | 300,041 | 
|                                               | Warrants        |      |            | 269,477 |  |      |            | 254,493 |  |  |            | 145,294 | 
|                                               | Preferred stock |      |            | 146,263 |  |      |            | 306,212 |  |  |            | 305,190 | 
|                                               |                 |      |            |         |  |      |            |         |  |  |            |        
|Weighed average number of shares 
    diluted |                 |      | 11,542,449 |         |  |      | 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
$408,178, $393,356 and $601,511 in 2002, 2001 and 2000
respectively.

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

F-24



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##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(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.

15.     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. 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



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##### Table of Contents



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,
2002:

|                                      |  |            |            |            |  |             |           |       |  |   |            |   |  |   |            |  
|------------------------------------- |  | ---------- | ---------- | ---------- |  | ----------- | --------- | ----- |  | - | ---------- | - |  | - | ---------- | -
|                                      |  |            |            | Small      |  | Unallocated |           |      
|                                      |  |            |            | Laboratory |  | Corporate   |           |      
|                                      |  | Urinalysis |            | Devices    |  | Expenses    |           | Total
|                                      |  |            |            |            |  |             |           |      
|For the Year Ended December 31, 2002: |  |            |            |            |  |             |           |       |  |   |            |   |  |   |            |  
|Revenues                              |  | $          | 22,359,275 |            |  | $           | 5,828,998 |       |  | $ |           |   |  | $ | 28,188,273 |  
|Interest income                       |  |            | 54,917     |            |  |             | 1,872     |       |  |   |           |   |  |   | 56,789     |  
|Interest expense                      |  |            | 6,539      |            |  |             |          |       |  |   | 530,878    |   |  |   | 537,417    |  
|Depreciation and amortization         |  |            | 931,717    |            |  |             | 86,059    |       |  |   | 47,047     |   |  |   | 1,064,823  |  
|Other non-cash items                  |  |            |           |            |  |             |          |       |  |   |           |   |  |   |           |  
|Segment profit (loss)                 |  |            | 2,737,976  |            |  |             | 1,588,540 |       |  |   | (2,865,500 | ) |  |   | 1,461,016  |  
|Segment assets                        |  |            | 16,837,422 |            |  |             | 2,106,691 |       |  |   | 8,439,129  |   |  |   | 27,383,242 |  
|Investment in long-lived assets       |  |            | 2,618,953  |            |  |             | 37,767    |       |  |   |           |   |  |   | 2,656,720  |  
|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                  |  |            | 14,301     |            |  |             |          |       |  |   |           |   |  |   | 14,301     |  
|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    |  

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 $5,567,430 and
$3,620,018 as of December 31, 2002 and 2001, respectively.

F-26



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##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

16.     Selected
Quarterly Data (Unaudited).

The following table summarizes certain financial
information by quarter for 2002 and 2001:

|                                                                    |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 
|------------------------------------------------------------------- |  | ------------------ | --------- | ------- |  | ------------ | --------- | ----------- |  | - | --------- |  |  | - | --------- | 
|                                                                    |  |                   
|                                                                    |  | 2002 Quarter Ended
|                                                                    |  |                   
|                                                                    |  | March 31           |           | June 30 |  | September 30 |           | December 31
|                                                                    |  |                    |           |         |  |              |           |            
|Net revenues                                                        |  | $                  | 6,741,226 |         |  | $            | 6,992,166 |             |  | $ | 7,072,142 |  |  | $ | 7,382,739 | 
|Gross margin                                                        |  |                    | 3,811,134 |         |  |              | 4,076,776 |             |  |   | 3,748,286 |  |  |   | 3,952,104 | 
|Net income                                                          |  |                    | 329,873   |         |  |              | 331,271   |             |  |   | 103,794   |  |  |   | 111,672   | 
|Income per share attributable to common
    shareholders  basic:   |  | $                  | 0.03      |         |  | $            | 0.03      |             |  | $ | 0.01      |  |  | $ | 0.01      | 
|                                                                    |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 
|Income per share attributable to common
    shareholders  diluted: |  | $                  | 0.03      |         |  | $            | 0.03      |             |  | $ | 0.01      |  |  | $ | 0.01      | 
|                                                                    |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 

|                                                                    |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 
|------------------------------------------------------------------- |  | ------------------ | --------- | ------- |  | ------------ | --------- | ----------- |  | - | --------- |  |  | - | --------- | 
|                                                                    |  |                   
|                                                                    |  | 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                                                        |  |                    | 3,916,739 |         |  |              | 3,976,427 |             |  |   | 3,870,619 |  |  |   | 3,908,880 | 
|Net income                                                          |  |                    | 360,666   |         |  |              | 375,376   |             |  |   | 279,564   |  |  |   | 523,767   | 
|Income per share attributable to common
    shareholders  basic:   |  | $                  | 0.04      |         |  | $            | 0.04      |             |  | $ | 0.03      |  |  | $ | 0.05      | 
|                                                                    |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 
|Income per share attributable to common
    shareholders  diluted: |  | $                  | 0.03      |         |  | $            | 0.03      |             |  | $ | 0.02      |  |  | $ | 0.05      | 
|                                                                    |  |                    |           |         |  |              |           |             |  |   |           |  |  |   |           | 

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##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

|                                       |  |           |           |            |  |           |         |            |  |         |   |  |  |   |            |      |  |   |         | 
|-------------------------------------- |  | --------- | --------- | ---------- |  | --------- | ------- | ---------- |  | ------- | - |  |  | - | ---------- | ---- |  | - | ------- | 
|                                       |  |           |           |            |  | Additions |         |            |  |        
|                                       |  |           |           |            |  | Charged   |         |            |  |        
|                                       |  |           |           | Charged To |  | To        |         |            |  |        
|                                       |  | Beginning |           | Cost and   |  | Other     |         |            |  | Ending 
|Year Ended December 31, 2002           |  | Balance   |           | Expenses   |  | Accounts  |         | Deductions |  | Balance
|                                       |  |           |           |            |  |           |         |            |  |        
|Allowance for doubtful accounts        |  | $         | 286,127   |            |  | $         | 79,018  |            |  | $       |  |  |  | $ | (66,821    | )(1) |  | $ | 298,324 | 
|Reserve for inventory obsolescence     |  |           | 1,215,302 |            |  |           |         |            |  |         |  |  |  |   | (417,403   | )(1) |  |   | 797,899 | 
|Deferred tax asset valuation allowance |  |           | 569,000   |            |  |           |        |            |  |         |  |  |  |   |            |      |  |   |         | 
|Year Ended December 31, 2001           |  |           |           |            |  |           |         |            |  |         |   |  |  |   |            |      |  |   |         | 
|Allowance for doubtful accounts        |  | $         | 334,696   |            |  | $         |        |            |  | $       |  |  |  | $ | (48,569    | )(1) |  | $ | 286,127 | 
|Reserve for inventory obsolescence     |  |           | 977,631   |            |  |           | 237,671 |            |  |         |  |  |  |   |           |      |  |   |         | 
|Deferred tax asset valuation allowance |  |           | 994,000   |            |  |           |        |            |  |         |  |  |  |   | (425,000   | )(2) |  |   | 569,000 | 
|Year Ended December 31, 2000           |  |           |           |            |  |           |         |            |  |         |   |  |  |   |            |      |  |   |         | 
|Allowance for doubtful allowance       |  |           | 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 | 



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|    |                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------
|(1) | Relates to the write-off of accounts receivable,
    disposal of obsolete inventory or specific portion of reserve no
    longer needed.
|   
|(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, 2002, 2001 and 2000 and the consolidated
statement of operations for each of the years then ended and is
qualified in its entirety by reference to such financial
statements.

F-28