<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

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

                                   FORM 10-Q

                   QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934



       For the quarter ended                              Commission File
           June 30, 1999                                    No. 1-9767

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


                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<CAPTION>
               DELAWARE                                    94-2579751
      -------------------------------                  ------------------
<S>                                                    <C>
      (State or other jurisdiction of                   (I.R.S. Employer
      incorporation or organization)                   Identification No.)


      9162 Eton Avenue, Chatsworth CA                         91311
  ---------------------------------------                   ----------
  (Address of principal executive offices)                  (Zip Code)
</TABLE>

                         Telephone Number: 818-709-1244


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.


                          Yes  X      No
                              ---        ---


     The number of shares of Common Stock of the registrant outstanding as of
July 30, 1999 was 6,578,607.

<PAGE>   2

                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.


                               INDEX TO FORM 10-Q

                    Three and Six Months Ended June 30, 1999

<TABLE>
<CAPTION>
                                                                             PAGE
PART 1 -- FINANCIAL INFORMATION

<S>                                                                          <C>
     ITEM 1 -- Consolidated Financial Statements

     Consolidated Balance Sheets............................................   3

     Consolidated Statements of Operations..................................   4

     Consolidated Statements of Cash Flows..................................   6

     Consolidated Statements of Comprehensive Income........................   7

     Notes to Consolidated Financial Statements.............................   8

     ITEM 2 -- Management's Discussion and Analysis of
                Financial Condition and Results of Operations...............  13

     ITEM 3 -- Quantitative and Qualitative Disclosures About
                Market Risk.................................................  20

PART 2 -- OTHER INFORMATION

     ITEM 1 -- Legal Proceedings............................................  21

     ITEM 2 -- Changes in Securities and Use of Proceeds....................  21

     ITEM 4 -- Submission of Matters to a Vote of Security
                Holders.....................................................  21

     ITEM 6 -- Exhibits and Reports on Form 8-K
          (a) Exhibits......................................................  21
          (b) Reports on Form 8-K...........................................  21


SIGNATURE...................................................................  22
</TABLE>

<PAGE>   3

PART 1 -- FINANCIAL INFORMATION

ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS


                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS
<TABLE>
<CAPTION>
                                                                             At December 31,    At June 30,
                                                                             ------------------------------
                                                                                  1998             1999
                                                                             ------------      ------------
                                                                                                (unaudited)
<S>                                                                          <C>               <C>
Current assets:
Cash and cash equivalents                                                    $    389,495      $  1,231,372
Accounts receivable, net of allowance for doubtful
 accounts of $271,544 in 1998 and $272,316 in 1999                              5,615,799         5,339,521
Inventories                                                                     4,503,446         4,054,687
Prepaid expenses and other current assets                                         251,483           301,758
Deferred tax asset                                                                942,589           942,589
                                                                             ------------      ------------
     Total current assets                                                      11,702,812        11,869,927

Property and equipment, at cost, net of accumulated depreciation
 of $5,140,169 in 1998 and $5,575,509 in 1999                                   2,004,661         1,620,160
Purchased intangibles, net of accumulated amortization                          7,512,100         7,053,244
Software development costs, net of accumulated amortization of
 $1,558,597 in 1998 and $1,720,495 in 1999                                      1,097,907         1,138,316
Deferred tax asset                                                              7,914,129         8,236,402
Other assets                                                                    1,875,475         1,754,010
                                                                             ------------      ------------
     Total assets                                                            $ 32,107,084      $ 31,672,059
                                                                             ============      ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
 Short-term borrowings                                                       $    464,769      $    726,825
 Current portion of long-term debt                                              1,742,027         1,442,027
 Accounts payable                                                               2,871,613         2,331,568
 Accrued expenses                                                               2,259,802         2,566,155
 Deferred income -- service contracts and other                                   794,688         1,028,804
                                                                             ------------      ------------
     Total current liabilities                                                  8,132,899         8,095,379

Subordinated note payable                                                       7,000,000         7,000,000
Deferred income -- service contracts and other liabilities                        274,798         1,745,481
Notes payable, long-term portion                                                1,700,000         1,100,000
                                                                             ------------      ------------
     Total liabilities                                                         17,107,697        17,940,860

Commitments and contingencies

Shareholders' equity:
 Preferred stock, $.01 par value; Authorized: 3,000,000 shares;
  Convertible Series A shares issued and outstanding : 1998
  and 1999 -- 3,000 ($3,000,000 liquidation preference)                                30                30
 Common stock, $.01 par value; Authorized: 15,600,000 shares
  Shares issued and outstanding: 1998 -- 6,432,875 and 1999 -- 6,550,829           64,328            65,507
 Additional paid-in capital                                                    38,134,290        38,235,573
 Unearned compensation                                                           (204,294)         (144,328)
 Foreign currency translation adjustment                                           47,510            55,707
 Accumulated deficit                                                          (23,042,477)      (24,481,290)
                                                                             ------------      ------------
     Total shareholders' equity                                                14,999,387        13,731,199
                                                                             ------------      ------------
     Total liabilities and shareholders' equity                              $ 32,107,084      $ 31,672,059
                                                                             ============      ============
</TABLE>
---------------
The accompanying notes are an integral part of these consolidated financial
statements.


                                       3
<PAGE>   4

                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)

<TABLE>
<CAPTION>
                                                             For the three months ended June 30,
                                                             -----------------------------------
                                                                    1998             1999
                                                                -----------      -----------
<S>                                                             <C>              <C>
Sales of IVD systems                                            $ 2,739,827      $ 2,809,454
Sales of IVD supplies and services                                2,957,675        3,395,350
Sales of small instruments and supplies                             985,637        1,123,815
Royalties and licensing revenues                                     23,891           37,299
                                                                -----------      -----------
Net revenues                                                      6,707,030        7,365,918
                                                                -----------      -----------
Cost of goods -- IVD systems                                      1,754,244        1,735,936
Cost of goods -- IVD supplies and services                        1,519,843        1,527,978
Cost of goods -- small instruments and supplies                     536,569          618,363
                                                                -----------      -----------
Cost of goods sold                                                3,810,656        3,882,277
                                                                -----------      -----------
Gross margin                                                      2,896,374        3,483,641

Marketing and selling                                             1,220,030        1,297,328
General and administrative                                          942,400          975,000
Research and development, net                                       466,788          358,721
Amortization of intangibles                                         290,004          291,038
Unusual legal charges                                                48,922          426,542
                                                                -----------      -----------
Total operating expenses                                          2,968,144        3,348,629

Operating income (loss)                                             (71,770)         135,012

Other income (expense):
  Interest income                                                    18,390           10,032
  Interest expense                                                 (288,212)        (261,732)
  Other income (expense)                                              6,546          (10,308)
                                                                -----------      -----------
Loss before benefit for income taxes                               (335,046)        (126,996)

Benefit for income taxes                                           (123,956)          (7,252)
                                                                -----------      -----------
Net loss                                                        $  (211,090)     $  (119,744)
                                                                ===========      ===========
Net loss per common share -- basic                              $      (.03)     $      (.02)
                                                                ===========      ===========
Net loss per common share -- diluted                            $      (.03)     $      (.02)
                                                                ===========      ===========
Weighted average number of common shares -- basic                 6,278,417        6,490,422
                                                                ===========      ===========
Weighted average number of common shares and common
    share equivalents outstanding for the period -- diluted       6,278,417        6,490,422
                                                                ===========      ===========
</TABLE>
---------------
The accompanying notes are an integral part of these consolidated financial
statements.


                                       4
<PAGE>   5

                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                  For the six months ended June 30,
                                                                 ----------------------------------
                                                                     1998                  1999
                                                                 ------------          ------------
<S>                                                              <C>                   <C>
Sales of IVD systems                                             $  5,185,764          $  4,821,735
Sales of IVD supplies and services                                  5,925,876             6,806,089
Sales of small instruments and supplies                             2,097,281             2,258,085
Royalty and license revenue                                            90,750               102,247
                                                                 ------------          ------------
Net revenues                                                       13,299,671            13,988,156
                                                                 ------------          ------------
Cost of goods -- IVD systems                                        3,064,710             2,896,793
Cost of goods -- IVD supplies and services                          2,866,625             3,100,032
Cost of goods -- sales of small instruments and supplies            1,164,818             1,225,759
                                                                 ------------          ------------
Cost of goods sold                                                  7,096,153             7,222,584
                                                                 ------------          ------------
Gross margin                                                        6,203,518             6,765,572

Marketing and selling                                               2,486,490             2,630,390
General and administrative                                          1,760,110             1,897,040
Research and development, net                                       1,072,903               794,105
Intangibles amortization                                              579,492               581,855
Litigation settlement and unusual legal charges                        86,588             2,043,273
                                                                 ------------          ------------
Total operating expenses                                            5,985,583             7,946,663

Operating income (loss)                                               217,935            (1,181,091)

Other income (expense):
  Interest income                                                      26,559                17,846
  Interest expense                                                   (559,447)             (544,076)
  Other  expense                                                      (14,069)              (31,538)
                                                                 ------------          ------------
Loss before benefit for income taxes                                 (329,022)           (1,738,859)

Benefit for income taxes                                             (121,738)             (300,046)
                                                                 ------------          ------------
Net loss                                                         $   (207,284)         $ (1,438,813)
                                                                 ============          ============
Net loss per common share -- basic                               $       (.03)         $       (.22)
                                                                 ============          ============
Net loss per common share -- diluted                             $       (.03)         $       (.22)
                                                                 ============          ============
Weighted average number of common share -- basic                    6,274,985             6,461,807
                                                                 ============          ============
Weighted average number of common shares and common
share equivalents outstanding for the period -- diluted             6,274,985             6,461,807
                                                                 ============          ============
</TABLE>
---------------
The accompanying notes are an integral part of these consolidated financial
statements.


                                       5
<PAGE>   6

                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                              For the six months ended June 30,
                                                                              --------------------------------
                                                                                  1998                 1999
                                                                              -----------          -----------
<S>                                                                           <C>                  <C>
Cash flow from operating activities:
   Net loss                                                                   $  (207,284)         $(1,438,813)
    Adjustments to reconcile net loss to net cash provided by
    operations:
       Deferred tax benefit                                                      (167,545)            (322,273)
       Depreciation and amortization                                            1,258,612            1,204,256
       Common stock and stock option compensation amortization                    129,956              114,198
       Gain on sale of equipment previously under an operating lease                   --              (87,158)
       Litigation settlement payable in equity securities                              --            1,520,371
    Changes in assets and liabilities:
       Accounts receivable -- trade and other                                     (24,973)             108,370
       Service contracts, net                                                     214,254              330,973
       Inventories                                                               (251,179)             445,744
       Prepaid expenses and other current assets                                  (16,480)             (52,172)
       Other assets                                                              (124,088)             (24,124)
       Accounts payable                                                           131,876             (532,210)
       Accrued expenses                                                           167,017              232,034
       Deferred income and other liabilities                                       27,027                   --
                                                                              -----------          -----------
Net cash provided by operating activities                                       1,137,193            1,499,196
                                                                              -----------          -----------
Cash flow from investing activities:
    Acquisition of property and equipment                                        (307,810)             (93,835)
    Software development costs                                                   (215,600)            (202,307)
    Sale of equipment previously under an operating lease                              --              125,000
                                                                              -----------          -----------
Net cash used by investing activities                                            (523,410)            (171,142)
                                                                              -----------          -----------
Cash flow from financing activities:
    Borrowings under credit facility                                            3,600,000            6,554,651
    Repayments of credit facility                                              (3,350,000)          (6,192,596)
    Repayment of notes payable                                                   (700,000)            (906,077)
    Issuance of common stock and warrant for cash                                 194,895               40,581
    Deferred stock or debt issuance costs                                        (130,018)                  --
                                                                              -----------          -----------
Net cash used by financing activities                                            (385,123)            (503,441)
                                                                              -----------          -----------
Effect of foreign currency fluctuation on cash and cash equivalents                (2,067)              17,264
Net increase in cash and cash equivalents                                         226,593              841,877
Cash and cash equivalents at beginning of period                                1,470,861              389,495
                                                                              -----------          -----------
Cash and cash equivalents at end of period                                    $ 1,697,454          $ 1,231,372
                                                                              ===========          ===========
Supplemental schedule of non-cash investing and financing activities:
    Issuance of common stock in exchange for services                         $    75,266          $    54,232
    Capital lease obligation incurred                                              70,000                   --
    Issuance of common stock in satisfaction of liabilities                        13,956                7,650

Supplemental disclosure of cash flow information:
    Cash paid for interest                                                        519,770              506,775
    Cash paid for income taxes                                                     85,000               23,082
</TABLE>
----------------------
The accompanying notes are an integral part of these consolidated financial
statements.


                                       6
<PAGE>   7

                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                   (unaudited)

<TABLE>
<CAPTION>
                                                              For the three months ended June 30,
                                                            ---------------------------------------
                                                                1998                        1999
                                                            -----------                 -----------
<S>                                                         <C>                         <C>
Net loss                                                    $  (211,090)                $  (119,744)
     Other comprehensive income,
     foreign currency translation adjustment                      1,798                       6,259
                                                            -----------                 -----------
Comprehensive loss                                          $  (209,292)                $  (113,485)
                                                            ===========                 ===========
</TABLE>


<TABLE>
<CAPTION>
                                                               For the six months ended June 30,
                                                            ---------------------------------------
                                                                1998                        1999
                                                            -----------                 -----------
<S>                                                         <C>                         <C>
Net loss                                                    $  (207,284)                $(1,438,813)
     Other comprehensive income,
     foreign currency translation adjustment                      7,793                       8,197
                                                            -----------                 -----------
Comprehensive loss                                          $  (199,491)                $(1,430,616)
                                                            ===========                 ===========
</TABLE>
------------------
The accompanying notes are an integral part of these consolidated financial
statements.


                                       7
<PAGE>   8

                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   FORMATION AND BUSINESS OF THE COMPANY.

     International Remote Imaging Systems, Inc. was incorporated in California
in 1979 and reincorporated during 1987 in Delaware. International Remote Imaging
Systems, Inc. and its subsidiaries (collectively "IRIS" or the "Company")
operate in three segments. (See Note 13-"Segment and Geographic Information".)
The Company designs, develops, manufactures and markets in vitro diagnostic
("IVD") equipment, including imaging systems based on patented and proprietary
automated intelligent microscopy ("AIM") technology, and special purpose
centrifuges and other small instruments for specimen preparation in microscopic
and other procedures performed in clinical laboratories. The Company also
provides ongoing service and supplies to support the equipment sold.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

Basis of Presentation of Unaudited Interim Financial Statements:

     In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of the Company as of June 30, 1999 and
1998 and the results of its operations for the three and six month periods then
ended. These financial statements should be read in conjunction with the
financial statements and notes included in the Company's latest annual report on
Form 10-K. Interim results are not necessarily indicative of results for a full
year.

Use of Estimates:

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.

Principles of Consolidation:

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

Reclassifications:

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

3.   COMPREHENSIVE INCOME.

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

     The Company's only component of comprehensive income (loss) relates to
foreign currency translation adjustments. No tax effect has been allocated to
the foreign currency translation adjustment for the periods presented.

     The following is a reconciliation of accumulated other comprehensive income
balance for the six months ended June 30, 1999:

<TABLE>
<S>                                                       <C>
          Beginning balance                               $47,510
          Current period change                             8,197
                                                          -------
          Ending balance                                  $55,707
                                                          -------
</TABLE>


                                       8
<PAGE>   9

4.   INVENTORIES.

     Inventories are carried at the lower of cost or market on a first-in
first-out basis and consist of the following:

<TABLE>
<CAPTION>
                                                   At December 31, 1998       At June 30, 1999
                                                   --------------------       ----------------
<S>                                                <C>
     Finished goods                                     $1,647,028               $1,200,893

     Work-in-process                                       432,569                  385,159

     Raw materials, parts and sub-assemblies             2,423,849                2,468,635
                                                        ----------               ----------
                                                        $4,503,446               $4,054,687
                                                        ==========               ==========
</TABLE>


5.   PURCHASED INTANGIBLES.

     Purchased intangibles, at cost, consist of the following:

<TABLE>
<CAPTION>
                                                   At December 31, 1998       At June 30, 1999
                                                   --------------------       ----------------
<S>                                                <C>
      Goodwill                                          $  383,108               $  383,108

      International distribution channel                 5,403,938                5,403,938

      Acquired technology and know-how                   3,960,904                3,960,904
                                                        ----------               ----------
                                                         9,747,950                9,747,950

      Less accumulated amortization                     (2,235,850)              (2,694,706)
                                                        ----------               ----------
      Total                                             $7,512,100               $7,053,244
                                                        ==========               ==========
</TABLE>


6.   SHORT-TERM BORROWINGS AND NOTES PAYABLE.

     At June 30, 1999, the outstanding amount under the credit facility with
Foothill Capital Corporation, consists of $2.3 million outstanding under a $3.6
million term loan and $726,825 outstanding under a $4.0 million revolving line
of credit. Borrowings under the line of credit are limited to a percentage of
eligible accounts receivable. The Company had approximately $600,000 available
under the line of credit at June 30, 1999. The term loan bears interest at the
lender's prime rate (7.75% on June 30, 1999) plus 3.0% and is payable in monthly
installments of $100,000. The revolving credit line bears interest at the
lender's prime rate plus 1.0%. The credit facility is subject to minimum
interest charges, prepayment penalties and customary fees, is collateralized by
a first priority lien on all assets of the Company and matures in 2001. It also
contains financial covenants based primarily on tangible net worth and cash
flows and imposes restrictions on acquisitions, capital expenditures and cash
dividends.

     On June 30, 1999, the Company had outstanding notes payable in the
aggregate amount of $242,027 from the repurchase of common stock and warrants
from an affiliate of Roche Diagnostics, a former strategic partner in 1996. The
notes bear interest at the rate of 8%, and the principal is due in bi-monthly
installments of $100,000.

7.   CAPITAL STOCK.

Stock Issuances:

     During the six months ended June 30, 1999, the Company (i) issued options
to purchase 301,550 shares of common stock under the Company's stock option
plans and (ii) cancelled options to purchase 94,300 shares of common stock. At
June 30, 1999, options to purchase 1,708,251 shares of common stock were issued
and outstanding under the Company's stock options plans. The outstanding options
expire by the end of 2009. The exercise price for these options ranges from
$0.69 to $4.50 per share. At June 30, 1999, there were 168,917 shares of common
stock available for the granting of future options under the Company's stock
option plans.

Warrants:

     At June 30, 1999, the following warrants to purchase shares of common stock
were outstanding and exercisable:


                                       9
<PAGE>   10

<TABLE>
<CAPTION>
     Number of Shares           Per Share Price       Expiration Date
     ----------------           ---------------       ---------------
<S>                             <C>                   <C>
         50,000                     $3.875            January 15, 2000
        298,633                      4.00             March 29, 2000
         25,000                      4.375            June 1, 2000
         25,000                      4.0625           July 1, 2000
        123,000                      7.80             September 28, 2000
        875,000                      3.56             July 31, 2001
         84,270                      3.56             December 31, 2001
         10,000                      4.31             May 15, 2002
</TABLE>


8.   COMMITMENTS AND CONTINGENCIES.

     In July 1996, the Company acquired Perceptive Scientific Instruments, Inc.
("PSI") from Digital Imaging Technologies, Inc. ("DITI"). As part of the
purchase price, the Company issued to DITI a five-year warrant to purchase
875,000 shares of common stock at $8.00 per share. In August 1997, the Company
filed a demand for arbitration against DITI with the American Arbitration
Association. The Company's demand for arbitration alleges material breaches of
the representations, warranties and covenants in the purchase agreement
governing the PSI acquisition. DITI subsequently filed a counterclaim in the
arbitration proceeding alleging that the Company misrepresented or omitted to
disclose material facts in connection with the PSI acquisition. DITI previously
requested a reduction in the exercise price of the warrant but elected to seek
unspecified monetary damages in the counterclaim. The Company made an
unconditional offer to reduce the warrant exercise price to $3.56 per share. The
arbitration hearing was held the week of May 10, 1999. The Company is now in the
process of completing and responding to post arbitration briefs and expects a
decision in the third quarter of 1999. Although the Company does not presently
anticipate any material adverse effect as a result of this arbitration
proceeding, there can be no assurance that it will not have such an effect on
the Company or result in additional dilution to holders of the common stock.


9.   RESEARCH AND DEVELOPMENT GRANTS AND CONTRACTS.

     The Company partially funds its research and development programs through
(i) grants from NASA and the National Institutes of Health, (ii) joint
development programs with strategic partners and (iii) Company sponsored
research and development entities.

     Reimbursements and direct costs connected with research and development
grants and agreements were as follows:

<TABLE>
<CAPTION>
                           Three Months Ended June 30,           Six Months Ended June 30,
                           --------------------------           ---------------------------
                             1998              1999               1998               1999
                           --------          --------           --------           --------
<S>                        <C>               <C>                <C>                <C>
     Reimbursements        $369,626          $136,478           $575,750           $213,679
     Costs                  341,599           125,276            636,385            242,450
                           --------          --------           --------           --------
     Net costs             $(28,027)         $(11,202)          $ 60,635           $ 28,771
                           ========          ========           ========           ========
</TABLE>


     Net costs incurred under research and development grants and contracts have
been included in research and development expense in the statements of
operations.

10.  UNUSUAL CHARGES.

     The results of operations for the six month period ended June 30, 1999
include litigation settlement and other unusual charges totaling $2,043,273.
Charges related to the settlement with Poly U/A Systems, Inc. totaled
$1,582,828. Expenses associated with the pending arbitration matter with DITI
totaled $450,289 in the current period as compared to $86,588 in the prior year.
For the three months ended June 30, 1999 unusual charges totaled $426,542 and
related primarily to the settlement with Poly U/A Systems ($55,829) and the
arbitration matter with DITI ($365,356).

     In September 1995, the Company and Poly U/A Systems Inc., a
Company-sponsored research and development entity ("Poly UA"), entered into a
joint development project for the development of several new products to enhance
automated urinalysis using the Company's technology. During the fall of 1998,
the Company decided not to exercise a previously negotiated $5.1 million option
to acquire Poly UA and instead entered into discussions to acquire Poly UA at a
lower price. Subsequently, certain shareholders of Poly UA threatened in writing
to file a lawsuit if the Company failed to purchase Poly UA for an amount
substantially equal to the $5.1 million option price. Primarily to avoid
litigation which, regardless of its merits, could adversely affect the Company's
ability to negotiate strategic transactions, the Company entered into a letter
of intent on April 28, 1999 with Poly UA to settle the matter for a package of
Company securities with an estimated value of up to $1.5 million. The Company
recorded this amount as litigation settlement expense in the first quarter of
1999.

     In order to implement the terms of the settlement, the Company commenced a
tender offer on June 8, 1999 for all 256,000 outstanding shares of Poly UA
common stock. The Company offered to pay for each share of Poly UA common stock
(and a signed release of claims from the tendering stockholder) a package of the
Company's securities consisting of the following: (a) 3 shares of the Company's
Common Stock, (b) 1 share of a new series of callable preferred stock and


                                       10
<PAGE>   11

(c)  a three-year warrant to purchase 3 shares of the Company's Common Stock.
The Company successfully completed the tender offer on July 26, 1999 and
accepted 198,000 shares of Poly UA common stock (or 77% of the total
outstanding) from 93% of the Poly UA stockholders. The Company subsequently
issued to the tendering stockholders a total of 594,000 shares of Common Stock,
198,000 shares of a new Series B Callable Preferred Stock and Series G Warrants
to purchase an additional 594,000 shares of the Common Stock. As a result, Poly
UA became a majority-owned subsidiary of the Company, with the Company owning
77% of the equity of Poly UA and the non-tendering stockholders retaining 23% of
the equity.


11.  INCOME TAXES.

     The income tax benefit for the six-month period ended June 30, 1999 was
$300,046 as compared to an income tax benefit of $121,738 for the comparable
period last year. The income tax benefit for the three month period ended June
30, 1999 totaled $7,252, as compared to $123,956 in the prior year. The income
tax benefit differs from the federal statutory rate due primarily to state
income taxes, unutilized foreign losses, permanent differences between income
reported for financial statement and income tax purposes and an increase in the
tax valuation allowance relating to the loss on the Poly UA settlement and the
related tax benefits to be acquired, which management has determined may not be
realizable.

     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 tax NOL generated prior to the ownership change
would be subject to an annual limitation. If this occurred, a further adjustment
of the valuation allowance would be necessary.


12.  EARNINGS PER SHARE (EPS).

     The computation of per share amounts for the three and six months ended
June 30, 1999 is based on the average number of common shares outstanding for
the period. Options and warrants to purchase 3,199,154 and 3,094,904 shares of
common stock outstanding during the three and six months ended June 30, 1999 and
three and six months ended June 30, 1998, respectively, were not considered in
the computation of diluted EPS because their inclusion would be antidilutive.
Preferred stock convertible into 2,000,000 and 887,574 common shares at June 30,
1999 and 1998, respectively, was also not considered in the computation of
diluted EPS for the three and six month periods then ended because their
inclusion would also be antidilutive.


13.  SEGMENT AND GEOGRAPHIC INFORMATION.

     The Company is organized on the basis of products and related services and
under FAS 131 operates in three segments: (1) urinalysis, (2) genetic analysis
and (3) small laboratory devices.

     The urinalysis segment designs, develops, manufactures and markets IVD
imaging systems based on patented and proprietary AIM technology for automating
microscopic procedures for urinalysis. In December 1997, this segment also began
distributing the UF-100 urine cell analyzer in the United States under an
existing agreement with its Japanese manufacturer. The segment also provides
ongoing sales of supplies and service necessary for the operation of installed
urinalysis workstations. In the United States, these products are sold through a
direct sales force. Internationally, these products are sold through
distributors. This segment has also had a major program over a number of years
to develop The White IRIS leukocyte differential analyzer. The Company has
elected not to launch The White IRIS at this time due to limited resources and
the potential impact of product launch costs on profitability. The Company is
exploring strategic alternatives for The White IRIS program and therefore cannot
reasonably estimate any impact on the recoverability of the capitalized costs
associated with the product line, principally capitalized software and
inventory. If the Company is unable to develop a viable strategic alternative
for the program and as a result abandons the product line, it would incur a
charge against future earnings of up to $1.2 million for the related amounts
capitalized.

     The genetic analysis segment designs, develops, manufactures and markets
IVD imaging systems for karyotyping, DNA probe analysis and comparative genomic
hybridization. These products are sold in the United States through a direct
sales force and internationally through its United Kingdom subsidiary directly
as well as through distributors and agents.

     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.


                                       11
<PAGE>   12

     The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies" included in this report on Form
10-Q and in the Company's report on Form 10-K for the year ended December 31,
1998. The Company evaluates the performance of its segments and allocates
resources to them based on earnings before income taxes, excluding corporate
charges ("Segment Profit").

     The tables below present information about reported segments for the three
and six month periods ended June 30, 1999 and 1998:

<TABLE>
<CAPTION>
Three Months Ended June 30, 1998:
                                                                             Small           Unallocated
                                                          Genetic         Laboratory          Corporate
                                      Urinalysis         Analysis           Devices           Expenses           Total
                                     ------------      ------------       ------------      ------------      ------------
<S>                                  <C>               <C>                <C>                <C>               <C>
Revenues                               $4,994,033        $1,248,070         $1,123,815                --        $7,365,918

Interest income                            $8,965              $393               $674                --           $10,032

Interest expense                           $1,326          $260,406                 --                --          $261,732

Depreciation and amortization            $260,933          $340,790            $39,311           $12,577          $653,611

Segment profit (loss)                  $1,214,150         $(608,907)          $223,724         $(955,963)(1)   $(126,996)

Segment assets                        $11,312,645        $9,274,083         $1,903,788        $9,181,543       $31,672,059

Investment in long-lived assets           $94,887           $56,739            $16,255                --          $167,881
</TABLE>
(1) Includes unusual legal expense of $426,542.


<TABLE>
<CAPTION>
Three Months Ended June 30, 1998:
                                                                             Small           Unallocated
                                                          Genetic         Laboratory          Corporate
                                      Urinalysis         Analysis           Devices           Expenses           Total
                                     ------------      ------------       ------------      ------------      ------------
<S>                                  <C>               <C>                <C>               <C>               <C>
Revenues                             $  4,370,595      $  1,350,798       $    985,637                --      $  6,707,030

Interest income                      $      8,997             3,471       $      5,922                --      $     18,390

Interest expense                     $      2,238      $    285,974                 --                --      $    288,212

Depreciation and amortization        $    256,865      $    377,433       $     43,123      $     16,982      $    694,403

Segment profit (loss)                $    685,185      $   (794,436)      $    192,990      $  (418,785)(1)   $   (335,046)

Segment assets                       $ 11,527,862      $ 10,525,709       $  1,987,863      $  8,783,295      $ 32,824,729

Investment in long-lived assets      $    187,823      $     70,542       $     17,433                --      $    275,798
</TABLE>
----------
(1)  Includes unusual legal expenses of $48,922.


<TABLE>
<CAPTION>
Six Months Ended June 30, 1998:
                                                                             Small           Unallocated
                                                          Genetic         Laboratory          Corporate
                                      Urinalysis         Analysis           Devices           Expenses           Total
                                     ------------      ------------       ------------      ------------      ------------
<S>                                  <C>               <C>                <C>               <C>               <C>
Revenues                               $9,348,553        $2,381,518         $2,258,085                --       $13,988,156

Interest income                            15,430            $1,197             $1,219                --           $17,846

Interest expense                           $2,723          $541,353                 --                --          $544,076

Depreciation and amortization            $524,267          $690,988            $80,859           $22,340        $1,318,454

Segment profit (loss)                  $2,228,063       $(1,397,869)          $476,913       $(3,045,966)(1)   $(1,738,859)
</TABLE>


                                       12
<PAGE>   13

<TABLE>
<S>                                    <C>              <C>               <C>                <C>              <C>
Investment in long term assets           $178,566           $96,786            $20,790                --          $296,142
</TABLE>
----------
(1) Includes litigation settlement and unusual legal expenses of $2,043,273.


<TABLE>
<CAPTION>
Six Months Ended June 30, 1998:
                                                                             Small           Unallocated
                                                          Genetic         Laboratory          Corporate
                                      Urinalysis         Analysis           Devices           Expenses           Total
                                     ------------      ------------       ------------      ------------      ------------
<S>                                  <C>               <C>                <C>               <C>               <C>
Revenues                               $8,376,637        $2,825,753         $2,097,281                --       $13,299,671

Interest income                           $11,817            $3,471            $11,271                --           $26,559

Interest expense                           $2,238          $557,209                 --                --          $559,447

Depreciation and amortization            $503,455          $764,319            $85,758            $35,036       $1,388,568

Segment profit (loss)                  $1,433,701       $(1,398,425)          $417,547         $(781,845)(1)     $(329,022)

Investment in long term assets           $310,070          $171,849            $41,491                --          $523,410
</TABLE>
----------

(1) Includes unusual legal expenses of $86,588.


     The Company ships products from three locations in the United States and
from its subsidiary in the United Kingdom. The following is sales by its United
States and United Kingdom locations for the three and six month periods ended
June 30, 1999 and 1998:

<TABLE>
<CAPTION>
                     Three Months Ended June 30,      Six Months Ended June 30,
                     ---------------------------      ----------------------------
                        1998             1999            1998             1999
                     ----------      -----------      -----------      -----------
<S>                 <C>              <C>              <C>              <C>
Sales:

  United States     $ 5,832,635      $ 6,638,089      $11,457,544      $12,678,386

  United Kingdom        874,395          727,829        1,842,127        1,309,770
                    -----------      -----------      -----------      -----------
                    $ 6,707,030      $ 7,365,918      $13,299,671      $13,988,156
                    ===========      ===========      ===========      ===========
</TABLE>


     The following is long-lived assets information by geographic area as of
December 31, 1998 and June 30, 1999:

<TABLE>
<CAPTION>
                                                    At December 31,    At June 30,
                                                    --------------    ------------
                                                         1998             1999
                                                    --------------    ------------
<S>                                                    <C>              <C>
      Long-lived assets:

         United States                                 $7,777,769       $7,211,924

         United Kingdom                                 4,712,374        4,353,806
                                                      -----------      -----------
                                                      $12,490,143      $11,565,730
                                                      ===========      ===========
</TABLE>


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

OVERVIEW

     The Company generates revenues from sales of in vitro diagnostic ("IVD")
imaging systems based on its patented and proprietary AIM technology. Following
their initial sale, these systems become part of the "installed base" and
generate follow-on sales of supplies and service necessary for their operation.
The Company also generates revenues from sales of ancillary lines of small
laboratory instruments and supplies.

     The Company began selling the PowerGene family of genetic analyzers in
August 1996 after completing the acquisition (the "PSI acquisition") of the
digital imaging business of Perceptive Scientific Instruments, Inc. ("PSI"). The
Company is currently seeking to enhance PSI's revenue stream by adding DNA probe
kits for chromosome analysis to the PowerGene product line and is pursuing this
goal through internal research and development efforts and strategic
transactions with other companies. In December 1997, the Company began
distributing the UF-100 urine cell analyzer in the United States under an
existing agreement with its Japanese manufacturer, Sysmex Corporation (Sysmex).
Sysmex initiated contractual procedures for terminating the exclusive nature of
the IRIS distribution rights to the UF-100 based on allegations of inadequate
performance. The Company disputed these allegations and entered into discussions
about the pricing and marketing of the UF-100. Those discussions did not resolve
the matter. Sysmex then asserted that it has the right to appoint additional
distributors for the UF-100 in North America and recently appointed Sysmex
Corporation of America, its US subsidiary, a distributor. IRIS believes that its
rights, as confirmed previously by the arbitration panel,


                                       13
<PAGE>   14

continue to be exclusive. IRIS plans to continue to distribute and service the
IRIS/Sysmex UF-100 and vigorously disputes any attempt by Sysmex or its
subsidiary to sell, service, or provide supplies for such instruments in North
America. The Company is presently evaluating its alternatives and may take legal
action. The Company cannot presently predict the impact of Symex's actions or
any legal action taken by the Company.

     The Company invests significant amounts in research and development for new
products and enhancements to existing products. The following table summarizes
total product technology expenditures for the periods indicated:

<TABLE>
<CAPTION>
                                                                 Three Months Ended June 30,             Six Months Ended June 30,
                                                                 ----------------------------         ------------------------------
                                                                   1998                1999              1998                1999
                                                                 --------            --------         ----------          ----------
<S>                                                              <C>                 <C>              <C>                 <C>
  Research and development expense, net                          $467,000            $359,000         $1,073,000            $794,000
  Capitalized software development costs                          121,000             103,000            216,000             202,000
  Reimbursed costs for research and
    development grants and contracts                              370,000             137,000            576,000             214,000
                                                                  -------            --------         ----------          ----------
          Total product technology expenditures                  $958,000            $599,000         $1,865,000          $1,210,000
                                                                 ========            ========         ==========          ==========
</TABLE>


     The Company partially funds its research and development programs through
(i) grants from NASA and the National Institutes of Health, (ii) joint
development programs with strategic partners and (iii) Company-sponsored
research and development entities.

     On July 26, 1999, the Company successfully completed a tender offer for the
common stock of Poly UA Systems, Inc. ("Poly UA"), a Company-sponsored research
and development entity. In exchange for the tendered shares and a release of
claims, the Company issued to the tendering stockholders a total of 594,000
shares of its Common Stock, 198,000 shares of a new Series B Callable Preferred
Stock and Series G Warrants to purchase an additional 594,000 shares of the
Common Stock. As a result, Poly UA became a majority-owned subsidiary of the
Company, with the Company owning 77% of the equity of Poly UA and the
non-tendering stockholders retaining 23% of the equity.

     The Company made the tender offer primarily to avoid litigation and does
not have any immediate plans to continue the business of Poly UA or to provide
any additional funding to Poly UA. However, the Company may elect to acquire the
remaining equity at a later date through a subsequent transaction such as a
merger. Since the Company views this transaction primarily as a settlement to
avoid litigation, the Company recorded a litigation settlement expense of $1.5
million in the first quarter of 1999 for the tender offer. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Poly
UA Transaction" and "Changes in Securities and Use of Proceeds."

RESULTS OF OPERATIONS

     COMPARISON OF QUARTER ENDED JUNE 30, 1999 TO QUARTER ENDED JUNE 30, 1998

     Net revenues for the quarter ended June 30, 1999 increased to $7.4 million,
as compared to $6.7 million in the same period last year, an increase of
$659,000 or 10%. Sales of IVD systems increased to $2.8 million from $2.7
million, an increase of $70,000 or 3% from the comparable period last year.
Revenues from sales of The Yellow IRIS family of urinalysis workstations
increased to $1.7 million from $1.5 million, an increase of $191,000 or 13%.
This increase is due to higher domestic sales, partially offset by decreased
sales to international distributors. Revenues from sales of the PowerGene line
of genetic analyzers decreased to $1.1 million from $1.2 million, or a decrease
of $121,000 or 10%. The decrease relates primarily to decreased average selling
prices. Sales of IVD system supplies and services increased to $3.4 million from
$3.0 million, an increase of $438,000 or 15% over the comparable period last
year, primarily due to the larger installed base of The Yellow IRIS IVD imaging
systems and increased prices. Sales of small instruments and supplies increased
to $1.1 million, as compared to $1.0 million in the same period last year, an
increase of $138,000 or 14%.

     Revenues from the urinalysis segment totaled $5.0 million in the current
quarter as compared to $4.4 million in the same quarter of last year, an
increase of $623,000 or 14%. This growth is the result of increased system sales
and sales of related system supplies and services to the growing installed base.
Genetic analysis segment revenues decreased to $1.2 million in the current
quarter as compared to $1.4 million in the same quarter last year, for the
reason described above. Revenues from the small laboratory devices segment grew
to $1.1 million in the current quarter, as compared to $1.0 million in the same
period last year, primarily due to increased sales of instruments and
consumables to a larger installed base.

     Cost of goods for IVD systems decreased as a percentage of sales of IVD
imaging systems to 62% for the quarter ended June 30, 1999 from 64% for the
comparable period last year. The decrease is primarily due to a lower proportion
of sales of The Yellow IRIS urinalysis workstations having lower margins to an
international distributor and a shift in mix of PowerGene units having a lower
proportion of OEM components. Cost of goods for IVD imaging system supplies and
services as a percentage of sales of such products decreased to 45% for the
current period as compared to 51% for the same period last year. The decrease is
primarily due to increased revenues while related expenses decreased, and a one
time credit received from a vendor for returned materials. Cost of goods for
small instruments and supplies as a



                                       14
<PAGE>   15

percentage of sales of small instruments and supplies totaled 55% for the
current quarter compared to 54% for the comparable period last year. The
increase is primarily due to a change in sales mix. The net result of these
changes was an increased aggregate gross margin of 47% in the current quarter as
compared to 43% in the same quarter last year.

     Cost of goods sold as a percentage of revenues from the urinalysis segment
totaled 51% this quarter as compared to 56% in the same quarter of last year.
This decrease results from increased revenues related to urinalysis supplies and
services along with lower associated expenses, the one time credit received from
a vendor for returned materials and higher margins on system sales. Cost of
goods sold as a percentage of revenues from the genetic analysis segment totaled
57% this quarter, as compared to 64% in the same quarter of last year. This
decrease is primarily the result of a change in product mix towards systems
having a lower proportion of OEM components and decreased service related
expenses. Cost of goods for small laboratory devices as a percentage of revenues
totaled 55% in the current period, as compared to 54% in the same quarter of
last year. This decrease is due to sales mix.

     Marketing and selling expenses totaled $1.3 million for the quarter ended
June 30, 1999 as compared to $1.2 million for the same period last year, or an
increase of $77,000 or 6%. Decreased marketing and selling expenses related to
the PowerGene genetic analyzers, partially offset increased expenses associated
with The Yellow IRIS urinalysis workstations. As a percentage of net revenues
these expenses totaled 18% in the current quarter and are comparable to last
year.

     General and administrative expenses increased to $975,000 for the current
quarter ended June 30, 1999 as compared to $942,000 for the comparable period
last year, an increase of $33,000 or 3%. This increase is primarily due to
higher liability insurance premiums, management incentives and increased
expenses associated with the Office of the Chief Executive, partially offset by
decreased expenses associated with the genetic analysis division. General and
administrative expenses as a percentage of net revenues decreased to 13% in the
current year from 14% in the prior year.

     Net research and development expenses decreased to $359,000 for the quarter
ended June 30, 1999 from $467,000, a decrease of $108,000 or 23% from the
comparable period last year. Net research and development expenses decreased as
a percentage of revenues from 7% to 5%. Reimbursements under joint development
programs decreased to $137,000 from $370,000. Total product technology
expenditures, including capitalized software development costs and reimbursed
costs under research and development grants and contracts, decreased to
$599,000 from $958,000, a decrease of $359,000 or 37% as compared to the
comparable period last year. The decline in total product technology
expenditures is due to decreased spending on The Yellow IRIS and PowerGene
families of products.

     The results of operations for the quarter ended June 30, 1999 include
unusual legal expenses of $427,000 as compared to $49,000 in the prior year's
quarter. Legal and related expenses associated with the arbitration with DITI
totaled $374,000 in the current period as compared to $49,000 in the prior
period. This increase was due primarily to preparation for and representation at
the arbitration hearing held the week of May 10, 1999. Legal expenses related to
the settlement with Poly U/A totaled $56,000 in the current period as compared
to none last year.

     The net result of the above-described changes is an operating income of
$135,000 for the quarter ended June 30, 1999 as compared to an operating loss of
$72,000 for the same quarter last year. Excluding the unusual legal charges,
operating income totaled $562,000 for the current quarter as compared to an
operating loss of $23,000 in the same quarter of the prior year, an improvement
of $585,000.

     Interest expense decreased to $262,000 for the quarter ended June 30, 1999
from $288,000 for the comparable period last year due to decreased indebtedness,
partially offset by the effect of increased rates on the credit facility.

     For the quarter ended June 30, 1999, urinalysis segment profits increased
to $1.2 million as compared to $685,000 in the same period last year, an
increase of $529,000, or 77%. This increase is largely due to higher revenue and
gross margins. Losses for the genetic analysis segment totaled $609,000 in the
current quarter as compared to losses of $794,000 in the same period last year,
a decreased loss of $185,000 or 23%. The decreased loss is due to lower
operating expenses. Small laboratory devices segment profits totaled $224,000 in
the current quarter as compared to $193,000 in the same period last year, an
increase of $31,000, or 16%. The improvement was primarily caused by the
increased gross margins as described above. Unallocated corporate expenses
totaled $956,000 in the current period as compared to $419,000 in the comparable
period last year, an increase of $537,000. This increase is primarily due to the
higher legal and related expenses associated with the pending DITI arbitration
and the Poly U/A settlement, liability insurance premiums, management incentives
and expenses associated with the Office of the Chief Executive.

     The income tax benefit for the quarter ended June 30, 1999 was $7,000, as
compared to an income tax benefit of $124,000 for the comparable period in 1998.
The difference between the effective tax rate and federal statutory rate relates
primarily to state income taxes, unutilized foreign losses and permanent
differences between income reported for financial and income tax purposes.

     The above factors contributed to a net loss of $120,000 or $0.02 per
diluted share for the quarter ended June 30, 1999 as compared to a net loss of
$211,000 or $0.03 per diluted share for the quarter ended June 30, 1998.
Excluding unusual legal expenses, the second quarter net income for 1999 would
have totaled $146,000 (or $0.02 per diluted share) as compared to a net loss of
$180,000 (or $0.03 per diluted share) for the same period last year.


                                       15
<PAGE>   16

     COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 TO SIX MONTHS ENDED JUNE 30,
     1998

     Net revenues for the six months ended June 30, 1999 increased to $14.0
million from $13.3 million, an increase of $688,000 or 5% over the comparable
period last year. Sales of IVD imaging systems decreased to $4.8 million from
$5.2 million, a decrease of $364,000 or 7% from the comparable period last year.
Revenues from sales of The Yellow IRIS family of urinalysis workstations
increased to $2.8 million, as compared to $2.7 million in the prior year, an
increase of $109,000 or 4%. The increase is due to higher domestic sales
partially offset by lower sales to international distributors. This increase was
offset by lower sales of the PowerGene line of genetic analyzers. Revenues from
PowerGene genetic analyzer sales decreased to $2.1 million, as compared to $2.5
million in the prior year, a decrease of $473,000, or 19%, primarily due to
lower average selling prices. Sales of IVD imaging system supplies and services
increased to $6.8 million from $5.9 million, an increase of $880,000 or 15% over
the comparable period last year, primarily due to the larger installed base of
The Yellow IRIS IVD imaging systems. Sales of small instruments and supplies
increased to $2.3 million from $2.1 million, an increase of $161,000 or 8%.

     Revenues from the urinalysis segment totaled $9.4 million in the current
six month period as compared to $8.4 million in the same period of last year, an
increase of $972,000 or 12%. This growth is due to increased sales of The Yellow
IRIS family of workstations and increased sales of related system supplies and
services to the growing installed base. Genetic analysis segment revenues
decreased due to the decline in genetic analyzer revenues described above.
Revenues from small laboratory devices increased to $2.3 million in the current
period, as compared to $2.1 million in the same period last year, an increase of
$161,000. This growth is primarily due to increased sales of instruments and
consumables to a larger installed base.

     Cost of goods for IVD systems increased as a percentage of sales of IVD
imaging systems to 60% for the six months ended June 30, 1999 from 59% for the
comparable period last year. The increase is primarily attributable to slightly
lower margins realized on the PowerGene units, partially offset by a decrease in
proportion of sales of The Yellow IRIS urinalysis workstations having lower
margins to international distributors. Cost of goods for IVD imaging system
supplies and services as a percentage of sales of such products decreased to 46%
for the current period as compared to 48% for the same period last year. This
decrease is due to increased revenues while related expenses decreased, and a
one time credit received from a vendor for returned materials. Cost of goods for
small instruments and supplies as a percentage of sales of small instruments and
supplies totaled 54% for the current quarter compared to 56% for the comparable
period last year due to a change in the sales mix. The net result of these
changes was an increase in aggregate gross margin to 48% for the six months
ended June 30, 1999, as compared to 47% in the comparable period last year.

     Cost of goods sold as a percentage of revenues from the urinalysis segment
totaled 50% this period, as compared to 53% in the same period last year. This
decrease results from increased urinalysis supplies and services revenues along
with lower associated expenses, a one time credit from a vendor for returned
materials and higher margins on system sales. Cost of goods sold as a percentage
of revenues from the genetic analysis segment totaled 57% this quarter, as
compared to 54% in the same period of last year. This increase is primarily the
result of slightly lower system margins and higher services expenses in the
first quarter. Cost of goods for small instrument devices as a percentage of
revenues totaled 54% in the current period, as compared to 56% in the same
period last year due to a change in sales mix.

     Marketing and selling expenses totaled $2.6 million for the six months
ended June 30, 1999, as compared to $2.5 million last year. Decreased marketing
and selling expenses related to the PowerGene genetic analyzers, partially
offset increased expenses associated with The Yellow IRIS urinalysis
workstation. Marketing and selling expenses as a percentage of net revenues
amounted to 19% in both periods.

     General and administrative expenses increased to $1.9 million for the six
months ended June 30, 1999 from $1.8 million, an increase of $137,000 or 8% from
the comparable period last year. This increase is primarily due to higher
liability insurance and management incentives and increased expenses associated
with the Office of the Chief Executive, partially offset by decreased expenses
associated with the genetic analyzer division. General and administrative
expenses as a percentage of net revenues totaled 14% in the current period as
compared to 13% in the same period last year.

     Net research and development expenses decreased to $794,000 for the six
months ended June 30, 1999, as compared to $1.1 million in the same period last
year. Net research and development expenses decreased as a percentage of
revenues from 8% to 6%. Reimbursements under joint development programs
decreased to $214,000 from $576,000. Total product technology expenditures,
including capitalized software development costs and reimbursed costs under
research and development grants and contracts, decreased to $1.2 million from
$1.9 million, a decrease of $655,000 or 35% as compared to the comparable period
last year. The decline in total product technology expenditures is due to
decreased spending on The Yellow IRIS and PowerGene families of products.

     The results of operations for the six months ended June 30, 1999 include
litigation settlement and other unusual legal expenses of $2.0 million as
compared to $87,000 in the prior year. The increase primarily relates to the
settlement with Poly U/A which totaled $1.6 million. Legal and related expenses
relating to the pending arbitration with DITI totaled $450,000 in the current
period as compared to $87,000 in the prior period.


                                       16
<PAGE>   17

     The net result of the above described changes is an operating loss of $1.2
million for the six months ended June 30, 1999 as compared to an operating
income of $218,000 in the same period last year. Excluding the charges for the
Poly U/A transaction and other unusual legal expenses, operating income totaled
$862,000 for the first six months of 1999 as compared to $305,000 for the same
period last year, a marked improvement.

     Interest expense decreased to $544,000 for the six months ended June 30,
1999 from $559,000 for the comparable period last year due to reduced
indebtedness, partially offset by the effect of increased interest rates on the
credit facility.

     For the six months ended June 30, 1999, urinalysis segment profits
increased to $2.2 million as compared to $1.4 million in the same period last
year, an increase of $794,000 or 55%. This increase is largely attributable to
increased sales of related supplies and service described above, and lower
operating expenses. Losses for the genetic analysis segment totaled $1.4 million
in the current period and the same period last year. Segment profits from the
small laboratory devices segment totaled $477,000 in the current period as
compared to $418,000 last year. The increase results from the segment's higher
revenues described above. Unallocated corporate expenses totaled $3.0 million in
the current period as compared to $782,000 last year, an increase of $2.3
million. The increase is due primarily to the pending settlement with Poly U/A,
as well as higher liability and management incentives, expenses associated with
the Office of the Chief Executive and increased legal and related expenses
associated with the pending DITI arbitration.

     The income tax benefit for the six months ended June 30, 1999 totaled
$300,000, as compared to an income tax benefit of $122,000 for the comparable
period in 1998.

     The above factors contributed to a net loss of $1.4 million or $.22 per
share for the six months ended June 30, 1999 as compared to a net loss of
$207,000 or $0.03 per share for the six months ended June 30, 1998. Excluding
the Poly U/A litigation settlement expenses and other unusual expenses, net of
related tax benefits, the Company would have had net income of $47,000 or $0.00
per diluted share in the current period and a net loss of $152,000, or $0.02 per
share in the prior period.

LIQUIDITY AND CAPITAL RESOURCES

     Cash and cash equivalents increased to $1.2 million at June 30, 1999 from
$389,000 at December 31, 1998. The increase is due to the cash provided by
operations in excess of amounts used by investing and financing activities. Cash
provided by operations for the six months ended June 30, 1999 increased to $1.5
million from $1.1 million for the comparable period last year. This increase is
primarily due to decreases in accounts receivable and inventories, partially
offset by a pay down of accounts payable.

     Cash used by investing activities totaled $171,000 for the six months ended
June 30, 1999, as compared to $523,000 in the prior year. The decrease is
primarily due to the decline in expenditures for property and equipment, offset
by the proceeds from the sale of The Yellow IRIS urinalysis workstations subject
to an operating lease.

     The credit facility with Foothill Capital Corporation, a Wells Fargo
Company, consists of a $3.6 million term loan and a $4.0 million revolving line
of credit. Borrowings under the line of credit are limited to a percentage of
eligible accounts receivable and are subject to a combined limit of $7.0 million
for the total credit facility. The term loan bears interest at the lender's
prime rate (7.75% on June 30, 1999) plus 3.0% and is payable in 36 equal monthly
installments. The revolving line of credit bears interest at the lender's prime
rate plus 1.0%. The credit facility is subject to minimum interest charges,
prepayment penalties and customary fees, is collateralized by a first priority
lien on all the assets of the Company and matures in 2001. It also contains
financial covenants based primarily on tangible net worth and cash flow and
imposes restrictions on acquisitions, capital expenditures and cash dividends.

     Net cash used by financing activities totaled $503,000 and consisted
primarily of principal payments made on the term loan described above and notes
payable due to a former strategic partner (discussed below), partially offset by
net proceeds from borrowings on the revolving line of credit. As of June 30,
1999, the Company had $2.3 million outstanding under the term loan and $727,000
outstanding under the revolving line of credit. The Company has $600,000
available under the revolving credit line for future borrowings.

     As of June 30, 1999, the Company also had outstanding notes payable in the
aggregate amount of $242,000 from the repurchase of common stock and warrants
from a former strategic partner in 1996. The notes bear interest at the rate of
8.0%, and principal is due in bi-monthly installments of $100,000.

     The Company has reduced its outstanding debt by $544,000 in the first six
months of 1999 and has scheduled principal payments totaling $1.4 million during
the next twelve months.

     The Company believes that its 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 the next twelve months. The Company would like
to pursue equity financing to reduce indebtedness and to fund its long-term
business strategy. However, the Company has postponed these efforts due to the
decline in its stock price.


                                       17
<PAGE>   18

     The FDA cleared The White IRIS leukocyte differential analyzer in May 1996,
but its commercial release was subsequently delayed by other priorities such as
the introductions of the Model 900 UDx urine pathology system and the UF-100
urine cell analyzer. The Company has elected not to launch The White IRIS at
this time due to limited resources and the potential impact of product launch
costs on profitability. The Company is still exploring strategic alternatives
for The White IRIS program and therefore cannot reasonably estimate any impact
on the recoverability of the capitalized costs associated with the product line,
principally capitalized software and inventory. If the Company is unable to
develop a viable strategic alternative for the program and as a result abandons
the product line, it would incur a charge against future earnings of up to $1.2
million for the related amounts capitalized.

     The Company has outstanding 3,000 shares of Series A Convertible Preferred
Stock ("Series A Preferred Stock"). Each share of Series A Preferred Stock is
convertible into a number of shares of common stock equal to (i) its $1,000
liquidation value divided by (ii) a variable conversion price. The conversion
price equals the lower of (a) $3.56 per share or (b) 85% of the average closing
bid price of the common stock for the five consecutive trading days preceding
the conversion (but in no event less than $1.50). Based on the average closing
price of $1.10 for the five-day period ending June 30, 1999, the conversion
price would be the $1.50 minimum, and the Series A Preferred Stock would convert
into 2,000,000 shares of common stock. Any unconverted shares of Series A
Preferred Stock will automatically be converted into Common Stock on December
31, 1999. The Series A Preferred Stock is non-voting, is not entitled to any
preferred dividends and is not subject to any mandatory or optional redemption
provisions. The Company may not pay cash dividends on the common stock or
repurchase any shares of its common stock without the written consent of the
holder of the Series A Preferred Stock.

     Subsequent to June 30, 1999 the Company issued 198,000 shares of Series B
Callable Preferred Stock. See "--Poly UA Transaction."

NET OPERATION LOSS CARRYFORWARDS

     At June 30, 1999, the Company had federal net operating loss carryforwards
of approximately $18.5 million. If substantially all of the Company's
outstanding options and warrants, including the warrants issued in the Poly UA
transaction, are exercised on or before December 31, 1999, these transactions in
combination with other prior stock issuances during the past three years would
constitute a "change of ownership" under Section 382 of the Internal Revenue
Code. The Company notes that most of the 2.08 million warrants are currently
out-of-the money with exercise prices ranging from $1.00 to $7.80 per share.
Section 382 imposes an annual limitation on the utilization of net operating
loss carryforwards based on a statutory rate of return (usually the applicable
federal rate) and the value of the corporation at the time of the change of
ownership. Depending on the market price of the Company's common stock at the
time a change of ownership occurs, the resulting limitations imposed by Section
382 could trigger a substantial write down in the Company's deferred tax assets
and a corresponding charge to earnings in the relevant quarter.

POLY UA TRANSACTION

     In September 1995, the Company and Poly U/A, a Company-sponsored research
and development entity, entered into a joint development project for the
development of several new products to enhance automated urinalysis using the
Company's technology. Poly UA funded most of the cost of the project with the
net proceeds from a 1995 private placement of units, each unit consisting of
shares of Poly UA common stock and warrants to purchase common stock of the
Company. The project ultimately yielded, among other things, certain new
technology for improving automated analysis of various compositions in urine.
Under the terms of the project, the Company had the right without further
payment to use this technology for enhancing The Yellow IRIS family of
urinalysis workstations, but the Company was required to purchase Poly UA to use
the new technology in stand-alone devices.

     The Company had an option until November 29, 1998 to acquire all of the
common stock of Poly UA for an aggregate price of $5.1 million, payable in cash
or shares of the Company's common stock. The Company ultimately decided not to
exercise its option and instead entered into discussions to acquire Poly UA at a
price below the option price. Subsequently, certain shareholders of Poly UA
threatened in writing to file a lawsuit if the Company failed to purchase Poly
UA for an amount substantially equal to the $5.1 million option price. Primarily
to avoid litigation which, regardless of its merits, could adversely affect the
Company's ability to negotiate strategic transactions, the Company entered into
a letter of intent on April 28, 1999 with Poly UA to settle the matter for a
package of Company securities with an estimated value of up to $1.5 million. The
Company recorded this amount as litigation settlement expense in the first
quarter of 1999.

     In order to implement the terms of the settlement, the Company commenced a
tender offer on June 8, 1999 for all 256,000 outstanding shares of Poly UA
common stock. The Company offered to pay for each share of Poly UA common stock
(and a signed release of claims from the tendering stockholder) a package of the
Company's securities consisting of the following: (a) 3 shares of the Company's
Common Stock, (b) 1 share of a new series of callable preferred stock and (c) a
three-year warrant to purchase 3 shares of the Company's common stock. The
Company successfully completed the tender offer on July 26, 1999 and accepted
198,000 shares of Poly UA common stock (or 77% of the total outstanding) from
94% of all the Poly UA investors. The Company subsequently issued to the
tendering stockholders a total of


                                       18
<PAGE>   19

594,000 shares of Common Stock, 198,000 shares of a new Series B Callable
Preferred Stock and Series G Warrants to purchase an additional 594,000 shares
of the Common Stock.

     The Series B Callable Preferred Stock has a liquidation preference of $3
per share (or an aggregate liquidation preference of $594,000). The "callable"
feature of the Series B Callable Preferred Stock entitles the Company to convert
the preferred stock at any time into a number shares of Common Stock equal to
the liquidation value divided by the market price of the common stock at the
time of conversion (subject to a minimum value of $2.00 per share of Common
stock). The preferred stock will automatically convert under the same formula on
August 3, 2002 if not converted sooner by the Company. Based on the average
closing price of $1.10 for the five-day period ending June 30, 1999, the call
price would be the $2.00 minimum, and the Company could convert the Series B
Preferred Stock into 297,000 shares of common stock. The Series B Callable
Preferred Stock is non-voting, is not entitled to any preferred dividends and is
not subject to any mandatory or optional redemption provisions. The Company may
not pay cash dividends on the Common Stock or repurchase any shares of the
Common Stock without the written consent of the holders of a majority of the
Series B Callable Preferred Stock.

     The Series G Warrants entitle the holders to purchase up to 594,000 shares
of Common Stock, half at $1.00 per share and the other half at $2.00 per share.
The warrants expire on August 6, 2001. The Company also has the right to redeem
any unexercised portion of the Series G Warrants for a nominal amount of cash
any time after the 30-day average closing price of the Common Stock exceeds 200%
of the warrant exercise price.

     Poly UA is now a majority-owned subsidiary of the Company. The Company made
the tender offer primarily to avoid litigation and does not have any immediate
plans to continue the business of Poly UA or to provide any additional funding
to Poly UA. However, the Company may elect to acquire the remaining equity at a
later date through a subsequent transaction such as a merger.

     The Company conducted the tender offer as a private placement in reliance
on Regulation D. However, the Company is preparing a Form S-3 Registration
Statement to permit public resales of the shares of common stock issued to the
tendering Poly UA stockholders as well as any shares of common stock
subsequently issued to them upon conversion of the Series B Callable Preferred
Stock and exercise of the Series G Warrants. See "Changes in Securities and Use
of Proceeds."

YEAR 2000 PROBLEM

     The Year 2000 ("Y2K") problem arose because many existing computer programs
use only the last two digits to recognize a year. Therefore, when the year 2000
arrives, these programs may not properly recognize a year beginning with "2000"
instead of the familiar "1900". The Y2K problem may result in the improper
processing of dates and date-sensitive calculations by computers and other
microprocessor-controlled equipment as the year 2000 is approached and reached.

     State of Readiness

     The Company has divided its review of Y2K problems into three major areas:
(1) internal systems, (2) Company products, including components supplied by
outside vendors, and (3) potential Y2K problems associated with outside vendors.

     The Company has focused most of its Y2K efforts on internal systems because
it believes this area could be its primary source of Y2K problems. The Company's
internal computer systems are the foundation for its business operations and
include such critical functions as order entry, shipping, purchasing, inventory
control, manufacturing, accounts receivable, accounts payable and the general
ledger. The Company completed a review of these critical systems and determined
that they were not Y2K compliant. These systems are supported by third parties
that had certified software updates available. The Company has purchased and
installed these updates. Although the vendors have certified the updates as Y2K
compliant, the Company plans to test the updates on its systems by August 31,
1999. The Company is also in the process of reviewing other equipment that
contains date-sensitive information. The Company completed its review of all
other internal systems and did not uncover a risk of a material adverse effect
on its operations from Y2K problems in this area.

     The Company has reviewed its products and has determined that the IVD
imaging systems produced by the urinalysis and genetics segments have date
sensitive fields or components that have date sensitive fields. Based on
completed verification and validation testing and, if applicable, certificates
received from third party vendors, the Company has concluded that all the
genetic segment IVD imaging systems, the unattended urinalysis IVD imaging
system (the Model 900 UDx urinalysis workstation) and the UF-100 urine cell
analyzer are Y2K compliant. The Company has also determined that there are no
date sensitive fields contained in the products of the small instruments
segment. The Company has determined that the unattended IVD imaging systems
produced by the urinalysis segment (Models Bravo, 250, 300, 450 and 500
urinalysis workstations) have date sensitive fields. The Company has completed
work on the software updates to make these products Y2K compliant including
verification and validation of these software updates. The Company began
distributing these software updates in April 1999. A customer's system will not
be Y2K compliant until the customer installs



     19
<PAGE>   20

the software according to the directions provided with the updates. Customers
who elect not to install the upgrade themselves or who require hardware
upgrades, in addition to the software update, must arrange for a field service
by an IRIS field service engineer. No upgrade is being offered for the IRIScribe
Interface Computer and customers have been advised to disconnect their IRIScribe
from the workstation prior to December 31, 1999.

     The Company has completed a review of outside vendor's products that
interface with the Company's and has determined that the Company's products need
no further modification to interface with the products of these vendors. The
Company is also in the process of identifying any potential Y2K problems from
other outside vendors whose systems interface with the Company's internal
systems. The Company expects to complete this review by September 30, 1999.

     Based on a preliminary review of the Y2K problem associated with outside
vendors, the Company does not expect this issue to have a material adverse
effect on its operations. However, since third-party Y2K compliance is not
within the Company's control, the Company cannot assure stockholders that Y2K
problems affecting the systems of other companies on which the Company's systems
rely will not have a material adverse effect on the Company's operations.

     Costs to Address the Y2K Issue

     Costs to address the Y2K problem include hardware, software, and
implementation costs paid to outside consultants are estimated at $175,000. To
date, the Company has incurred approximately $165,000, the majority of which has
been expensed. The Company estimates that the cost to complete its Y2K work at
less than $10,000 to complete installation of Y2K software upgrades on its
customers IVD imaging systems.

     Risks Presented by the Year 2000 Issue

     To date, the Company has not identified any Y2K problem that it believes
could materially adversely affect the Company or for which a suitable solution
cannot be timely implemented. However, as the review of its interfaces with
other outside vendors progresses and the verification and validation of changes
made to the urinalysis segment's unattended IVD imaging systems is completed, it
is possible that Y2K problems may be identified that could result in a material
adverse effect on its operations. Also, the Company's credit facility with
Foothill Capital Corporation requires that it be Y2K compliant by October 1,
1999. If the Company is unable to complete this work by that time, the Company
would have to seek a waiver or extension of this requirement.

     The Company cannot control Y2K planning and compliance by its customers and
cannot predict the extent to which the Y2K problem will affect them in their
business dealings with the Company. If customers are not adequately prepared for
the Y2K problem, the subsequent crisis could temporarily divert their financial
and management resources away from normal capital planning and temporarily
depress sales of high-priced instruments such as The Yellow IRIS urinalysis
workstations and the PowerGene genetic analyzers. This could have a material
adverse effect on the Company's revenues and profits. The Y2K problem may also
have a material adverse effect on the Company's cash flow if customer payments
are delayed significantly due to Y2K problems in its customers' accounting
departments.

     Contingency Plans

     Although the Company has not formulated a contingency plan to date, the
Company intends to continue to assess its Y2K risks to determine whether it
needs to do so. The Company will develop a contingency plan if its
implementation of internal systems, ongoing review of other outside vendors or
verification and validation of the urinalysis segment unattended IVD imaging
systems identify a Y2K problem that poses a significant risk to its business
operations.

INFLATION

     THE COMPANY does not foresee any material impact on its operations from
inflation.

FORWARD-LOOKING STATEMENTS

     The foregoing discussion contains various forward-looking statements that
reflect the Company's current views with respect to future events and financial
results and are subject to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, but are
not limited to, the Company's views with respect to future financial results,
capital requirements, market growth, new product introductions and the like, and
are generally identified by phrases such as "anticipates," "believes,"
"estimates," "expects," "intends," "plans" and words of similar import. The
Company reminds stockholders that forward-looking statements are merely
predictions and therefore inherently subject to uncertainties and other factors
which could cause the actual results to differ materially from the
forward-looking statement. The Company refers interested persons to its 1998
Annual Report on Form 10-K and its other SEC filings for a description of some
of the uncertainties and factors that may affect forward-looking statements.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     There was no material change in the Company's exposure to market risk on
June 30, 1999 as compared to the its market risk exposure on December 31, 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations Market Risk" in the Company's 1998 Annual Report on Form 10-K.


                                       20
<PAGE>   21

PART 2 -- OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

     In July 1996, the Company acquired PSI from Digital Imaging Technologies,
Inc. ("DITI"). As part of the purchase price, the Company issued to DITI a
five-year warrant to purchase 875,000 shares of common stock at $8.00 per share.
In August 1997, the Company filed a demand for arbitration against DITI with the
American Arbitration Association. The Company's demand for arbitration alleges
material breaches of the representations, warranties and covenants in the
purchase agreement governing the PSI acquisition. DITI subsequently filed a
counterclaim in the arbitration proceeding alleging that the Company
misrepresented or omitted to disclose material facts in connection with the PSI
acquisition. DITI had previously requested a reduction in the exercise price of
the warrant but elected to seek unspecified monetary damages in the
counterclaim. The Company unilaterally reduced the warrant exercise price to
$3.56 per share. The arbitration hearing was held the week of May 10, 1999. The
Company has completed the process of filing and responding to post arbitration
briefs and expects a decision in the third quarter of 1999. Although the Company
does not presently anticipate any material adverse effect as a result of this
arbitration proceeding, there can be no assurance that it will not have such an
effect on the Company or result in additional dilution to holders of the common
stock.

     The Company is involved in routine litigation arising in the ordinary
course of its business, and, while the results of such proceedings cannot be
predicted with certainty, the Company believes they will not have a material
adverse effect on the Company.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

     On July 26, 1999, the Company successfully completed a tender offer for the
common stock of Poly UA. In exchange for the tendered shares and a release of
claims, the Company issued to the tendering stockholders a total of 594,000
shares of its Common Stock, 198,000 shares of a new Series B Callable Preferred
Stock and Series G Warrants to purchase an additional 594,000 shares of the
Common Stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview" and "--Poly UA Transaction."

     The Company made the tender offer through a written Offer to Purchase dated
June 8, 1999. The Offer to Purchase was accompanied by copies of the Company's
1998 Annual Report (Form 10-K), 1999 Proxy Statement, Quarterly Report (Form
10-Q) for the first quarter of 1999 and Current Report (Form 8-K) dated May 7,
1999. The Company also obtained written investor representations from tendering
Poly UA stockholders regarding their status as "accredited investors" under
Regulation D and confirming their intent to acquire the securities for their own
account and not with a view to resale or distribution in violation of the
Securities Act of 1933. The Company did not engage in general solicitation or
advertising, and the securities issued in the transaction bear appropriate
restrictive legends concerning the registration requirements of the Securities
Act of 1933. The Company also filed a Form D with the Securities and Exchange
Commission. The Company believes the tender offer was exempt from the
registration requirements of the Securities Act of 1933 based on Regulation D
and Section 4(2) of the Act.

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

     The Company held its Annual Meeting of Stockholders on June 10, 1999. At
the meeting, the Company's stockholders voted on the following matters:

1.   Election of the Class 3 Directors. The stockholders re-elected Dr. Fred H.
     Deindoerfer and Dr. Thomas F. Kelley as Class 3 Directors. The voting
     results were 4,679,174 votes for and 140,635 withheld.

2.   Ratification of Appointment of Independent Auditors. The stockholders
     ratified the reappointment of the accounting firm of PricewaterhouseCoopers
     LLP as independent auditors for the Company for 1999. The voting results
     were 4,747,988 votes for, 20,334 against and 51,487 abstained.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

     (a)  Exhibits

     No.          Description

     3.1(a)   --  Certificate of Incorporation, as amended(1)
     3.1(b)   --  Certificate of Designations of Series A Convertible Preferred
                  Stock(2)
     3.1(c)   --  Certificate of Designations of Series B Callable Preferred
                  Stock
     3.2      --  Restated Bylaws(3)
     4.1      --  Specimen of Common Stock Certificate(4)
     4.2      --  Certificate of Designations of Series A Convertible Preferred
                  Stock(2)
     4.3      --  Certificate of Designations of Series B Callable Preferred
                  Stock (see Exhibit 3.1(c))


                                       21
<PAGE>   22

    27.1      -- Financial Data Schedule
----------

     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 its 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 September 30, 1994.

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

     (b)  Reports on Form 8-K

     During the quarter ended June 30, 1999, the Company filed a current report
on Form 8-K dated May 7, 1999 to voluntarily report the signing of a letter of
intent for the transaction with Poly UA. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Poly UA Transaction."


                                    SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in Chatsworth, California, on August 16,
1999.


                                      INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.



                                      By: /s/ Martin S. McDermut
                                          --------------------------------------
                                          Martin S. McDermut, Vice President,
                                          Finance & Administration and
                                          Chief Financial Officer


                                       22