##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



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FORM 10-Q

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

|                                     |  |                               
|------------------------------------ |  | ------------------------------
|For the quarter ended
March 31, 2002 |  | Commission File No.
No. 1-9767

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

(Exact Name of Registrant as Specified in Its Charter)


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

|                                                                          |  |                 
|------------------------------------------------------------------------- |  | ----------------
|9172 Eton Avenue, Chatsworth CA.
(Address of principal executive offices) |  | 91311
(Zip Code)

Registrants 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 registrant had 10,375,092 shares of common stock outstanding as of
April 30, 2002.





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TABLE OF CONTENTS



|                             |                                                                                               |                                                 |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION
|                             | Item 1. Consolidated Financial Statements                                                    
|                             |                                                                                               | CONSOLIDATED BALANCE SHEETS                    
|                             |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS          
|                             |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS          
|                             |                                                                                               | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|                             |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     
|                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                             | Item 3. Quantitative And Qualitative Disclosures About Market Risk.                          
|PART II OTHER INFORMATION   
|                             | Item 1. Legal Proceedings.                                                                   
|                             | Item 6. Exhibits And Reports On Form 8-K.                                                    
|                             |                                                                                               | (a) Exhibits                                   
|                             |                                                                                               | (b) Reports on Form 8-K                        
|SIGNATURE                   



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##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

INDEX TO FORM 10-Q

Three Months Ended March 31, 2002

|                               |  |                                                                                       |    |                                                 |    |      |    | 
|------------------------------ |  | ------------------------------------------------------------------------------------- | -- | ----------------------------------------------- | -- | ---- | -- | 
|                               |  |                                                                                       |    |                                                 |    | Page
|                               |  |                                                                                       |    |                                                 |    |     
|PART I - FINANCIAL INFORMATION |  |                                                                                       |    |                                                
|Item 1 -                       |  | Consolidated Financial Statements                                                     |    |                                                 |    |     
|                               |  |                                                                                       |    | Consolidated Balance Sheets                     |    |      | 2  | 
|                               |  |                                                                                       |    | Consolidated Statements of Operations           |    |      | 3  | 
|                               |  |                                                                                       |    | Consolidated Statements of Cash Flows           |    |      | 4  | 
|                               |  |                                                                                       |    | Consolidated Statements of Comprehensive Income |    |      | 5  | 
|                               |  |                                                                                       |    | Notes to Consolidated Financial Statements      |    |      | 6  | 
|Item 2 -                       |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations |    |                                                 | 9  |     
|Item 3 -                       |  | Quantitative and Qualitative Disclosure
About Market Risk                             |    |                                                 | 13 |     
|PART II - OTHER INFORMATION    |  |                                                                                       |    |                                                
|Item 1 -                       |  | Legal Proceedings                                                                     |    |                                                 | 14 |     
|Item 6 -                       |  | Exhibits and Reports on Form 8-K                                                      |    |                                                 |    |     
|                               |  |                                                                                       |    | (a) Exhibits                                    |    |      | 14 | 
|                               |  |                                                                                       |    | (b) Reports on Form 8-K                         |    |      | 14 | 
|SIGNATURE                      |  |                                                                                       | 14 |                                                

1



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##### Table of Contents






PART I
FINANCIAL INFORMATION




Item 1. Consolidated Financial Statements




INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS

Assets

|                                                                                                                |                                                  |                                            |                            |       |              |            |                 |       |            |            | 
|--------------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------ | -------------------------- | ----- | ------------ | ---------- | --------------- | ----- | ---------- | ---------- | 
|                                                                                                                |                                                  |                                            |                            |       | At March 31, |            | At December 31,
|                                                                                                                |                                                  |                                            |                            |       | 2002         |            | 2001           
|                                                                                                                |                                                  |                                            |                            |       |              |            |                
|                                                                                                                |                                                  |                                            |                            |       | (unaudited)  |            |                 |       |           
|Current assets:                                                                                                 |                                                  |                                            |                            |       |              |            |                 |      
|Cash and cash equivalents                                                                                       |                                                  | $                                          | 1,799,076                  |       |              | $          | 2,312,451       |      
|Accounts receivable, net of allowance for doubtful
accounts of $285,406 in 2002 and $286,127 in 2001            |                                                  |                                            | 4,738,989                  |       |              |            | 4,838,252       |      
|Inventories                                                                                                     |                                                  |                                            | 5,921,758                  |       |              |            | 5,578,139       |      
|Prepaid expenses and other current assets                                                                       |                                                  |                                            | 596,339                    |       |              |            | 268,348         |      
|Investments available for sale                                                                                  |                                                  |                                            | 928,975                    |       |              |            | 1,036,648       |      
|Deferred tax asset                                                                                              |                                                  |                                            | 1,399,618                  |       |              |            | 1,568,466       |      
|                                                                                                                |                                                  |                                            |                            |       |              |            |                 |      
|                                                                                                                |                                                  | Total current assets                       |                            |       | 15,384,755   |            |                 |       | 15,602,304 |           
|Property and equipment, at cost, net of accumulated depreciation
of $4,780,866 in 2002 and $4,638,676 in 2001   |                                                  |                                            | 1,774,340                  |       |              |            | 1,666,226       |      
|Purchased intangibles, net of accumulated amortization
of $194,197 in 2002 and 2001                             |                                                  |                                            | 188,911                    |       |              |            | 188,911         |      
|Software development costs, net of accumulated amortization of
$1,545,007 in 2002 and $1,532,011 in 2001        |                                                  |                                            | 1,421,762                  |       |              |            | 1,146,204       |      
|Deferred tax asset                                                                                              |                                                  |                                            | 7,280,718                  |       |              |            | 7,280,718       |      
|Other assets                                                                                                    |                                                  |                                            | 576,287                    |       |              |            | 618,677         |      
|                                                                                                                |                                                  |                                            |                            |       |              |            |                 |      
|                                                                                                                |                                                  | Total assets                               |                            | $     | 26,626,773   |            |                 | $     | 26,503,040 |           
|                                                                                                                |                                                  |                                            |                            |       |              |            |                 |      
|Liabilities And Shareholders Equity                                                                           
|Current liabilities:                                                                                            |                                                  |                                            |                            |       |              |            |                 |      
|Short-term borrowings                                                                                           |                                                  | $                                          | 1,500,000                  |       |              | $          |                |      
|Current portion of long-term debt                                                                               |                                                  |                                            | 1,114,052                  |       |              |            | 1,993,783       |      
|Accounts payable                                                                                                |                                                  |                                            | 2,504,074                  |       |              |            | 2,295,637       |      
|Accrued expenses                                                                                                |                                                  |                                            | 1,894,388                  |       |              |            | 1,792,829       |      
|Deferred income  service contracts and other                                                                   |                                                  |                                            | 962,326                    |       |              |            | 883,819         |      
|                                                                                                                |                                                  |                                            |                            |       |              |            |                 |      
|                                                                                                                |                                                  | Total current liabilities                  |                            |       | 7,974,840    |            |                 |       | 6,966,068  |           
|Long term debt                                                                                                  |                                                  |                                            | 1,968,437                  |       |              |            | 3,254,801       |      
|Deferred income  service contracts and other                                                                   |                                                  |                                            | 272,938                    |       |              |            | 317,416         |      
|                                                                                                                |                                                  |                                            |                            |       |              |            |                 |      
|                                                                                                                |                                                  | Total liabilities                          |                            |       | 10,216,215   |            |                 |       | 10,538,285 |           
|Shareholders equity:                                                                                           |                                                  |                                            |                            |       |              |            |                 |      
|Preferred stock, $.01 par value; Authorized: 3,000,000 shares;
Callable Series B shares issued and outstanding: |                                                  |                                            |                            |       |              |            |                 |      
|                                                                                                                | 2001 - 205,000 ($615,000 liquidation preference) |                                            |                            |       |              |            |                 |       |           
|                                                                                                                | 2002 - 205,000 ($615,000 liquidation preference) |                                            |                            | 2,050 |              |            |                 | 2,050 |           
|Common stock, $.01 par value; Authorized: 50,000,000 shares                                                     |                                                  |                                            |                            |       |              |            |                 |      
|Shares issued and outstanding: 2002 - 10,374,759 and
2001 - 10,264,926                                          |                                                  |                                            | 103,746                    |       |              |            | 102,648         |      
|Additional paid-in capital                                                                                      |                                                  |                                            | 41,473,115                 |       |              |            | 41,311,847      |      
|Unearned compensation                                                                                           |                                                  |                                            | (36,176                    | )     |              |            | (54,343         | )    
|Accumulated other comprehensive income                                                                          |                                                  |                                            | 8,232                      |       |              |            | 72,835          |      
|Accumulated deficit                                                                                             |                                                  |                                            | (25,140,409                | )     |              |            | (25,470,282     | )    
|                                                                                                                |                                                  |                                            |                            |       |              |            |                 |      
|                                                                                                                |                                                  |                                            | Total shareholders equity |       |              | 16,410,558 |                 |       |            | 15,964,755 | 
|                                                                                                                |                                                  |                                            |                            |       |              |            |                 |      
|                                                                                                                |                                                  | Total liabilities and shareholders equity |                            | $     | 26,626,773   |            |                 | $     | 26,503,040 |           
|                                                                                                                |                                                  |                                            |                            |       |              |            |                 |      

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

2



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

|                                                     |                  |   |                                      |          |      |   |            |          |  
|---------------------------------------------------- | ---------------- | - | ------------------------------------ | -------- | ---- | - | ---------- | -------- | -
|                                                     |                  |   | For the three months ended March 31,
|                                                     |                  |   |                                     
|                                                     |                  |   | 2002                                 |          | 2001
|                                                     |                  |   |                                      |          |     
|Sales of IVD systems                                 |                  | $ | 1,134,980                            |          |      | $ | 1,670,794  |         
|Sales of IVD supplies and services                   |                  |   | 3,991,316                            |          |      |   | 3,868,857  |         
|Sales of small lab devices and supplies              |                  |   | 1,534,957                            |          |      |   | 1,682,163  |         
|Royalties and licensing revenues                     |                  |   | 79,973                               |          |      |   | 56,010     |         
|                                                     |                  |   |                                      |          |      |   |            |         
|Net revenues                                         |                  |   | 6,741,226                            |          |      |   | 7,277,824  |         
|                                                     |                  |   |                                      |          |      |   |            |         
|Cost of goods  IVD systems                          |                  |   | 684,510                              |          |      |   | 1,022,609  |         
|Cost of goods  IVD supplies and services            |                  |   | 1,521,161                            |          |      |   | 1,519,747  |         
|Cost of goods  lab devices and supplies             |                  |   | 724,421                              |          |      |   | 818,729    |         
|                                                     |                  |   |                                      |          |      |   |            |         
|Cost of goods sold                                   |                  |   | 2,930,092                            |          |      |   | 3,361,085  |         
|                                                     |                  |   |                                      |          |      |   |            |         
|Gross margin                                         |                  |   | 3,811,134                            |          |      |   | 3,916,739  |         
|                                                     |                  |   |                                      |          |      |   |            |         
|Marketing and selling                                |                  |   | 905,145                              |          |      |   | 929,983    |         
|General and administrative                           |                  |   | 1,151,975                            |          |      |   | 1,007,792  |         
|Research and development, net                        |                  |   | 1,010,370                            |          |      |   | 1,166,580  |         
|Amortization of intangibles                          |                  |   | 27,834                               |          |      |   | 35,817     |         
|                                                     |                  |   |                                      |          |      |   |            |         
|Total operating expenses                             |                  |   | 3,095,324                            |          |      |   | 3,140,172  |         
|                                                     |                  |   |                                      |          |      |   |            |         
|Operating income                                     |                  |   | 715,810                              |          |      |   | 776,567    |         
|Other income (expense):                              |                  |   |                                      |          |      |   |            |         
|                                                     | Interest income  |   |                                      | 15,150   |      |   |            | 51,990   |  
|                                                     | Interest expense |   |                                      | (181,172 | )    |   |            | (228,637 | )
|                                                     | Other income     |   |                                      |         |      |   |            | 1,190    |  
|                                                     |                  |   |                                      |          |      |   |            |         
|Income before income taxes                           |                  |   | 549,788                              |          |      |   | 601,110    |         
|Income taxes                                         |                  |   | 219,915                              |          |      |   | 240,444    |         
|                                                     |                  |   |                                      |          |      |   |            |         
|Net income                                           |                  | $ | 329,873                              |          |      | $ | 360,666    |         
|                                                     |                  |   |                                      |          |      |   |            |         
|Net income per common share                          |                  |   |                                      |          |      |   |            |         
|- basic                                              |                  | $ | 0.03                                 |          |      | $ | 0.04       |         
|                                                     |                  |   |                                      |          |      |   |            |         
|- diluted                                            |                  | $ | 0.03                                 |          |      | $ | 0.03       |         
|                                                     |                  |   |                                      |          |      |   |            |         
|Weighted average number of common shares outstanding |                  |   |                                      |          |      |   |            |         
|- basic                                              |                  |   | 10,327,979                           |          |      |   | 9,800,064  |         
|                                                     |                  |   |                                      |          |      |   |            |         
|- diluted                                            |                  |   | 11,374,948                           |          |      |   | 10,557,108 |         
|                                                     |                  |   |                                      |          |      |   |            |         

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

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

|                                                                      |            |                                    |                                                                         |         |                                      |            |           |         |   |            |  
|--------------------------------------------------------------------- | ---------- | ---------------------------------- | ----------------------------------------------------------------------- | ------- | ------------------------------------ | ---------- | --------- | ------- | - | ---------- | -
|                                                                      |            |                                    |                                                                         |         | For the three months ended March 31,
|                                                                      |            |                                    |                                                                         |         |                                     
|                                                                      |            |                                    |                                                                         |         | 2002                                 |            | 2001     
|                                                                      |            |                                    |                                                                         |         |                                      |            |          
|Operating activities:                                                 |            |                                    |                                                                         |         |                                      |            |           |        
|                                                                      | Net income |                                    | $                                                                       | 329,873 |                                      |            | $         | 360,666 |  
|                                                                      |            |                                    | Adjustments to reconcile net income to net cash provided by
operations: |         |                                      |            |           |         |   |            |  
|                                                                      |            |                                    | Deferred tax benefit                                                    |         |                                      | 211,918    |           |         |   | 234,843    |  
|                                                                      |            |                                    | Depreciation and amortization                                           |         |                                      | 257,009    |           |         |   | 238,799    |  
|                                                                      |            |                                    | Common stock and stock option compensation amortization                 |         |                                      | 18,167     |           |         |   | 67,890     |  
|                                                                      |            | Changes in assets and liabilities: |                                                                         |         |                                      |            |           |         |   |           
|                                                                      |            |                                    | Accounts receivable  trade and other                                   |         |                                      | 75,279     |           |         |   | (178,866   | )
|                                                                      |            |                                    | Service contracts, net                                                  |         |                                      | 58,013     |           |         |   | 142,507    |  
|                                                                      |            |                                    | Inventories                                                             |         |                                      | (343,619   | )         |         |   | (379,718   | )
|                                                                      |            |                                    | Prepaid expenses and other current assets                               |         |                                      | (327,991   | )         |         |   | (30,670    | )
|                                                                      |            |                                    | Other assets                                                            |         |                                      | (8,777     | )         |         |   | (23,263    | )
|                                                                      |            |                                    | Accounts payable                                                        |         |                                      | 208,437    |           |         |   | 435,316    |  
|                                                                      |            |                                    | Accrued expenses                                                        |         |                                      | 109,866    |           |         |   | (781,037   | )
|                                                                      |            |                                    |                                                                         |         |                                      |            |           |        
|Net cash provided by operating activities                             |            |                                    | 588,175                                                                 |         |                                      |            | 86,467    |        
|                                                                      |            |                                    |                                                                         |         |                                      |            |           |        
|Investing activities:                                                 |            |                                    |                                                                         |         |                                      |            |           |        
|                                                                      |            |                                    | Acquisition of property and equipment                                   |         |                                      | (250,305   | )         |         |   | (204,209   | )
|                                                                      |            |                                    | Software development costs                                              |         |                                      | (288,554   | )         |         |   | (140,336   | )
|                                                                      |            |                                    |                                                                         |         |                                      |            |           |        
|Net cash used in investing activities                                 |            |                                    | (538,859                                                                | )       |                                      |            | (344,545  | )      
|                                                                      |            |                                    |                                                                         |         |                                      |            |           |        
|Financing activities:                                                 |            |                                    |                                                                         |         |                                      |            |           |        
|                                                                      |            |                                    | Borrowings under line of credit                                         |         |                                      | 2,000,000  |           |         |   | 8,050,000  |  
|                                                                      |            |                                    | Repayments of line of credit                                            |         |                                      | (500,000   | )         |         |   | (8,202,761 | )
|                                                                      |            |                                    | Borrowings under term loan                                              |         |                                      | 500,000    |           |         |   |           |  
|                                                                      |            |                                    | Repayments of term loan                                                 |         |                                      | (2,425,000 | )         |         |   |           |  
|                                                                      |            |                                    | Repayment of notes payable                                              |         |                                      | (291,750   | )         |         |   | (300,000   | )
|                                                                      |            |                                    | Payments of capital lease obligations                                   |         |                                      | (8,307     | )         |         |   | (8,646     | )
|                                                                      |            |                                    | Issuance of common stock and warrant for cash                           |         |                                      | 162,366    |           |         |   | 126,017    |  
|                                                                      |            |                                    |                                                                         |         |                                      |            |           |        
|Net cash used in financing activities                                 |            |                                    | (562,691                                                                | )       |                                      |            | (335,390  | )      
|                                                                      |            |                                    |                                                                         |         |                                      |            |           |        
|Net decrease in cash and cash equivalents                             |            |                                    | (513,375                                                                | )       |                                      |            | (593,468  | )      
|Cash and cash equivalents at beginning of period                      |            |                                    | 2,312,451                                                               |         |                                      |            | 3,661,310 |        
|                                                                      |            |                                    |                                                                         |         |                                      |            |           |        
|Cash and cash equivalents at end of period                            |            | $                                  | 1,799,076                                                               |         |                                      | $          | 3,067,842 |        
|                                                                      |            |                                    |                                                                         |         |                                      |            |           |        
|Supplemental schedule of non-cash investing and financing activities: |            |                                    |                                                                         |         |                                      |            |           |        
|                                                                      |            |                                    | Issuance of warrants in connection with debt financing                  |         |                                      |           |           |         | $ | 374,768    |  
|Supplemental disclosure of cash flow information:                     |            |                                    |                                                                         |         |                                      |            |           |        
|                                                                      |            |                                    | Cash paid for interest                                                  |         | $                                    | 96,859     |           |         | $ | 223,988    |  
|                                                                      |            |                                    | Cash paid for income taxes                                              |         |                                      | 22,340     |           |         |   | 14,592     |  

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

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

|                                             |  |                                      |         |      |  |   |          |  
|-------------------------------------------- |  | ------------------------------------ | ------- | ---- |  | - | -------- | -
|                                             |  | For the three months ended March 31,
|                                             |  |                                     
|                                             |  | 2002                                 |         | 2001
|                                             |  |                                      |         |     
|Net income                                   |  | $                                    | 329,873 |      |  | $ | 360,666  |  
|Unrealized loss on investments, net of taxes |  |                                      | (64,603 | )    |  |   | (361,863 | )
|                                             |  |                                      |         |      |  |   |          |  
|Comprehensive income (loss)                  |  | $                                    | 265,270 |      |  | $ | (1,197   | )
|                                             |  |                                      |         |      |  |   |          |  

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

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

1. Formation and Business of the Company.

International Remote Imaging Systems, Inc., (collectively IRIS or the
Company) was incorporated in California in 1979 and reincorporated during
1987 in Delaware. International Remote Imaging Systems, Inc. and its
subsidiaries design, develop, manufacture and market in vitrodiagnostic
(IVD) equipment, including IVD imaging systems based on patented and
proprietary automated intelligent microscopy (AIM) technology, as well as
special purpose centrifuges and other small instruments for automating
microscopic procedures performed in clinical laboratories.

2. Summary of Significant Accounting Policies.

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 March 31, 2002 and
2001 and the results of its operations for the three-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. The significant estimates in the preparation of the
consolidated financial statements relate to the assessment of the carrying
value of accounts receivables, inventories, purchased intangibles, estimated
provisions for warranty costs and deferred tax assets. Actual results could
differ from those estimates.

Principles of Consolidation:

The 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.

Recent Accounting Pronouncements:

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 (SFAS 141), Business
Combinations. SFAS 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company does not believe that the adoption of
SFAS 141 will have a significant impact on its financial statements.

In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 (SFAS 142), Goodwill and Other Intangible Assets, which is
effective January 1, 2002. SFAS 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS 142 also requires companies to
complete a transitional goodwill impairment test six months from the date of
adoption. The Company is currently evaluating the impact that SFAS 142 will
have on its financial statements.

Reclassifications:

Certain reclassifications have been made to the 2001 financial statements
to conform to the 2002 presentation.

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3. Comprehensive Income.

The Companys components of comprehensive income are net income and
unrealized gains (losses) on investments. Income tax effect allocated to the
unrealized gains and losses on available for sale securities for the three
months ended March 31, 2002 was a benefit of $43,070.

The following is a reconciliation of accumulated other comprehensive
income balance for the three months ended March 31, 2002:

|                      |  |              |         |  
|--------------------- |  | ------------ | ------- | -
|                      |  | Three months
|                      |  |             
|Beginning balance     |  | $            | 72,835  |  
|Current period change |  |              | (64,603 | )
|                      |  |              |         |  
|Ending balance        |  | $            | 8,232   |  
|                      |  |              |         |  

4. Inventories.

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

|                                        |  |                   |            |                      |  |   |            |  
|--------------------------------------- |  | ----------------- | ---------- | -------------------- |  | - | ---------- | -
|                                        |  | At March 31, 2002 |            | At December 31, 2001
|                                        |  |                   |            |                     
|Finished goods                          |  | $                 | 2,029,491  |                      |  | $ | 2,270,973  |  
|Work-in-process                         |  |                   | 640,454    |                      |  |   | 479,809    |  
|Raw materials, parts and sub-assemblies |  |                   | 4,453,708  |                      |  |   | 4,042,659  |  
|                                        |  |                   |            |                      |  |   |            |  
|                                        |  |                   | 7,123,653  |                      |  |   | 6,793,441  |  
|Reserved for obsolescence               |  |                   | (1,201,895 | )                    |  |   | (1,215,302 | )
|                                        |  |                   |            |                      |  |   |            |  
|Net inventories                         |  | $                 | 5,921,758  |                      |  | $ | 5,578,139  |  
|                                        |  |                   |            |                      |  |   |            |  

5.Short-Term Borrowings and Notes Payable.

In February 2002, the Company refinanced its existing credit facility and
replaced it with a new $8.0 million credit facility with California Bank and
Trust. The new facility consists of a $500,000 term loan, a $1.0 million term
loan and a $6.5 million revolving line of credit. The $500,000 term loan is
payable in 60 equal monthly installments. The $1.0 million term loan shall
carry interest only for the first 12 months, followed by 48 months of equal
principal payments plus interest. The $6.5 million credit line matures in June
2004. Borrowings under the line of credit are limited to a percentage of
eligible receivables and inventory. The entire credit facility bears interest
at the lenders prime rate (4.75% at March 31, 2002), or LIBOR rate plus 2.0%

At March 31, 2002, the outstanding amounts under the Companys credit
facility consist of $492,000 under the first term loan and $1.5 million under
the revolving line of credit. An additional $2.8 million was available under
the line of credit at that date. No amounts were owed under the second term
loan at March 31, 2002 as that loan has not yet been funded and drawn on by the
Company.

At March 31, 2002, the outstanding principal balance on the unsecured
Subordinated Note Payable was $2.8 million. The note is payable in monthly
installments of approximately $97,000 plus interest on the unpaid balance. The
note bears interest at the prime rate (4.75% on March 31, 2002) plus 2.0% and
matures on July 31, 2004.

6. Capital Stock.

Stock Issuances:

During the three
months ended March 31, 2002, the Company (i) issued
100,000 shares of common stock from the exercise of warrants, (ii) issued
options to purchase 148,000 shares of common stock under the Companys stock
option plans and (iii) cancelled options to purchase 56,967 shares of common
stock. Options for 9,833 shares of common stock were exercised during the
period. At March 31, 2002, options to purchase 2,409,547 shares of common
stock were issued and outstanding under the Companys stock options plans. The
outstanding options expire by the end of 2012. The exercise price for these
options ranges from $0.69 to $4.38 per share. At March 31, 2002, there were
470,547 shares of common stock available for the granting of future options
under the Companys stock option plans.

7



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Warrants:

As of March 31, 2002, the following warrants to purchase common stock were
outstanding and exercisable:

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

7. Income Taxes.

The income tax provision for the three month period ended March 31, 2002
was $219,915 as compared to $240,444 for the comparable period last year. The
income tax provision differs from the federal statutory rate due primarily to
state income taxes and permanent differences between income reported for
financial statement and income tax purposes.

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 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. Should the Company
undergo an ownership change as defined in Section 382 of the Internal Revenue
Code, the Companys NOL generated prior to the ownership change would be
subject to an annual limitation. If this occurred, a further adjustment of the
valuation allowance would be necessary.

8. Earnings Per Share (EPS).

The computation of per share amounts for the three months ended March 31,
2002 and 2001 is based on the average number of common shares outstanding for
the period. Options and warrants to purchase 360,400 and 1,669,903 shares of
common stock outstanding during the three months ended March 31, 2002 and three
months ended March 31, 2001, respectively, were not considered in the
computation of diluted EPS because their inclusion would have been
antidilutive.

The following is a reconciliation of shares used in computing basic and
diluted earnings per share amounts for the three months ended March 31, 2002
and 2001.

|                                            |                 |  |            |         |      |  |            |         | 
|------------------------------------------- | --------------- |  | ---------- | ------- | ---- |  | ---------- | ------- | 
|                                            |                 |  | 2002       |         | 2001
|                                            |                 |  |            |         |     
|Weighted average number of shares  basic   |                 |  | 10,327,979 |         |      |  | 9,800,064  |        
|Effects of Dilutive Securities              |                 |  |            |         |      |  |            |        
|                                            | Options         |  |            | 527,893 |      |  |            | 303,765 | 
|                                            | Warrants        |  |            | 268,056 |      |  |            | 147,279 | 
|                                            | Preferred Stock |  |            | 251,020 |      |  |            | 306,000 | 
|                                            |                 |  |            |         |      |  |            |        
|Weighted average number of shares  diluted |                 |  | 11,374,948 |         |      |  | 10,557,108 |        
|                                            |                 |  |            |         |      |  |            |        

9. Segment and Geographic Information.

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

The urinalysis segment designs, develops, manufactures and markets IVD
imaging systems based on patented and proprietary AIM technology for automating
microscopic procedures for urinalysis. The segment also provides ongoing sales
of supplies and service necessary for the operation of installed urinalysis
workstations. In

8



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the United States, these products are sold through our direct sales force;
internationally, these products are sold through distributors.

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

The accounting policies of the segments are the same as those described in
the Summary of Significant Accounting Policies included in the Companys
report on Form 10-K for the year ended December 31, 2001. 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-month periods ended March 31, 2002 and 2001:

Three Months Ended March 31, 2002:

|                                |  |            |            |         |  |            |           |             |  |   |           |   |  |   |            | 
|------------------------------- |  | ---------- | ---------- | ------- |  | ---------- | --------- | ----------- |  | - | --------- | - |  | - | ---------- | 
|                                |  |            |            |         |  | Small      |           | Unallocated |  |   |           |  
|                                |  |            |            |         |  | Laboratory |           | Corporate   |  |   |           |  
|                                |  | Urinalysis |            | Devices |  | Expenses   |           | Total      
|                                |  |            |            |         |  |            |           |            
|Revenues                        |  | $          | 5,206,269  |         |  | $          | 1,534,957 |             |  |   |          |   |  | $ | 6,741,226  | 
|Interest income                 |  | $          | 14,886     |         |  | $          | 264       |             |  |   |          |   |  | $ | 15,150     | 
|Interest expense                |  | $          | 1,564      |         |  |            |          |             |  | $ | 179,608   |   |  | $ | 181,172    | 
|Depreciation and amortization   |  | $          | 237,700    |         |  | $          | 20,764    |             |  | $ | 16,712    |   |  | $ | 275,176    | 
|Segment profit (loss)           |  | $          | 867,231    |         |  | $          | 428,608   |             |  | $ | (746,051  | ) |  | $ | 549,788    | 
|Segment assets                  |  | $          | 15,646,673 |         |  | $          | 2,299,764 |             |  | $ | 8,680,336 |   |  | $ | 26,626,773 | 
|Investment in long-lived assets |  | $          | 530,870    |         |  | $          | 7,989     |             |  |   |          |   |  | $ | 538,859    | 

Three Months Ended March 31, 2001:

|                                |  |            |            |         |  |            |           |             |  |   |           |   |  |   |            | 
|------------------------------- |  | ---------- | ---------- | ------- |  | ---------- | --------- | ----------- |  | - | --------- | - |  | - | ---------- | 
|                                |  |            |            |         |  | Small      |           | Unallocated |  |   |           |  
|                                |  |            |            |         |  | Laboratory |           | Corporate   |  |   |           |  
|                                |  | Urinalysis |            | Devices |  | Expenses   |           | Total      
|                                |  |            |            |         |  |            |           |            
|Revenues                        |  | $          | 5,595,661  |         |  | $          | 1,682,163 |             |  |   |          |   |  | $ | 7,277,824  | 
|Interest income                 |  | $          | 51,990     |         |  |            |          |             |  |   |          |   |  | $ | 51,990     | 
|Interest expense                |  | $          | 1,956      |         |  |            |          |             |  | $ | 226,681   |   |  | $ | 228,637    | 
|Depreciation and amortization   |  | $          | 215,649    |         |  | $          | 31,214    |             |  | $ | 59,826    |   |  | $ | 306,689    | 
|Segment profit (loss)           |  | $          | 936,906    |         |  | $          | 477,104   |             |  | $ | (812,900  | ) |  | $ | 601,110    | 
|Segment assets                  |  | $          | 16,062,436 |         |  | $          | 2,376,762 |             |  | $ | 9,338,391 |   |  | $ | 27,777,589 | 
|Investment in long-lived assets |  | $          | 321,518    |         |  | $          | 23,027    |             |  |   |          |   |  | $ | 344,545    | 

Long-lived assets were all located in the United States and totaled
$3,961,300 at March 31, 2002 and $3,620,018 at December 31, 2001.




Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations

Overview

We generate revenues primarily from sales of our urinalysis workstation,
an in vitrodiagnostic, or IVD, imaging system based on our patented and
proprietary AIM technology, and the related supplies and service required to
operate this workstation. We also earn revenues from sales of ancillary lines
of small laboratory instruments and supplies.

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The nature of our business requires that we make significant investments
in research and development for new products and enhancements to existing
products. We fund our research and development primarily from internal
sources, but we also receive partial funding from time to time under grants
from the National Institute of Health and joint development projects with third
parties.

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

|                                                                   |  |                              |           |      |  |   |           | 
|------------------------------------------------------------------ |  | ---------------------------- | --------- | ---- |  | - | --------- | 
|                                                                   |  | Three Months Ended March 31,
|                                                                   |  |                             
|                                                                   |  | 2002                         |           | 2001
|                                                                   |  |                              |           |     
|Research and development expense, net                              |  | $                            | 1,010,000 |      |  | $ | 1,167,000 | 
|Capitalized software development costs                             |  |                              | 289,000   |      |  |   | 140,000   | 
|Reimbursed costs for research and
development grants and contracts |  |                              | 290,000   |      |  |   | 282,000   | 
|                                                                   |  |                              |           |      |  |   |           | 
|Total product technology expenditures                              |  | $                            | 1,589,000 |      |  | $ | 1,589,000 | 
|                                                                   |  |                              |           |      |  |   |           | 

Results of Operations

Comparison of Quarter Ended March 31, 2002 to Quarter Ended March 31, 2001

Net revenues for the quarter ended March 31, 2002 decreased to $6.7
million from $7.3 million, a decrease of $537,000, or 7% over the same period
last year. Sales of IVD imaging systems decreased to $1.1 million from $1.7
million, a decrease of $536,000 or 32% from the same period last year. The
decrease is due to lower instrument sales primarily to international
distributors, but also domestically, as the Company positions itself for
transition to its next generation operating platform. Sales of IVD imaging
system supplies and services increased to $4.0 million from $3.9 million, an
increase of $122,000 or 3% over the same period last year, primarily due to the
larger installed base of urinalysis work stations. Sales of small instruments
and supplies decreased $147,000 to $1.5 million, a decrease of 9%. The decline
is due primarily to decreased sales of small instruments. Royalties and
licensing revenues increased to $80,000 from $56,000 in the comparable period
from the prior year.

Revenues from the urinalysis segment totaled $5.2 million in the current
period as compared to $5.6 million in the comparable period last year, a
decrease of $389,000 or 7%. This reduction is due to decreased instrument
sales, as explained in the preceding paragraph. We plan to introduce a
significantly upgraded model of our urinalysis workstation on a new operating
platform later this year pending clearance from the Food and Drug
Administration. The failure to make a successful and timely transition to the
upgraded model would have a material and adverse affect on workstation sales,
and, consequently, our liquidity. This is an inherent risk in any major upgrade
to products in our industry. Revenues from the small laboratory devices segment
decreased $149,000 from the comparable period last year to $1.5 million. This
decline is due primarily to decreased sales of small instruments.

Cost of goods for IVD systems as a percentage of sales of IVD imaging
systems totaled 60% in the current period as compared to 61% in the comparable
period from last year. Cost of goods for IVD imaging system supplies and
services as a percentage of sales of such products was 38% for the current
period as compared to 39% in the same period last year. Cost of goods for
small instruments and supplies as a percentage of sales of small instruments
and supplies totaled 47% for the current period, as compared to 49% in the
first quarter of last year. This decrease is due primarily to a change in
product mix. The aggregate gross margin totaled 57% for the quarter ended March
31, 2002 as compared to 54% in the comparable period of the prior year.

Cost of goods sold as a percentage of revenues from the urinalysis segment
totaled 42%, as compared to 45% in the first quarter of last year. Cost of
goods for small laboratory devices as a percentage of revenues totaled 47% in
the current period, as compared to 49% in the first quarter of the prior year.
This decrease is due primarily to a change in product mix.

Marketing and selling expenses totaled $905,000, compared to $930,000 for
the comparable period of last year, a decrease of $25,000, or 3%. Marketing
and selling expenses as a percentage of net revenues were 13% in the quarter
ended March 31, 2002, unchanged from the same period last year.

General and administrative expenses were $1.2 million, an increase of
$144,000, or 14% from the comparable period in the prior year. This increase
is due primarily to the addition of senior management. General and

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administrative expenses for the period as a percentage of net revenue were 17%
as compared to 14% in the same period in the prior year.

Net research and development expenses decreased to $1.0 million for the
quarter ended March 31, 2002, as compared to $1.2 million in the first quarter
of last year, a decrease of $156,000 or 13%. Net research and development
expenses as a percentage of revenues decreased to 15% in the quarter ended
March 31, 2002 from 16% in the comparable period of the prior year. Total
product technology expenditures, including capitalized software development
costs and reimbursed costs under research and development grants and contracts,
was unchanged from the prior year at $1.6 million. The continued high level of
total product technology expenditures is due primarily to a major project begun
in 1999 to improve our urinalysis workstation product line. We believe that
this project is important to maintaining our competitive position in the
urinalysis market; failure to complete this project on schedule could have a
material and adverse effect on our business. We expect our net research and
development expenses will continue at current levels during 2002.

Amortization of intangible assets is lower in the current quarter than in
the year ago quarter. This is due to the fact that the balance in the current
quarter includes only the amortization of patents, whereas the year ago amounts
also included the amortization of acquired intangible assets. The Company
ceased amortization of acquired intangible assets in 2002 in accordance with
SFAS 142.

Operating income for the quarter ended March 31, 2002 decreased to
$716,000 as compared to $777,000 in the comparable quarter of the prior year,
principally as a result of lower sales volume.

Interest expense decreased to $181,000 in the quarter ended March 31, 2002
from $229,000 in the comparable quarter of the prior year as a result of lower
interest rates on the revised credit facility associated with the change in
bankers, and reduced indebtedness.

For the quarter ended
March 31, 2002, urinalysis segment profits decreased
to $867,000 from $937,000 in the comparable quarter of the prior year. This
decrease is attributable to lower sales volume in the current quarter. Segment
profits for the small laboratory devices segment totaled $429,000, as compared
to $477,000 in the comparable quarter of the prior year. The decrease results
from lower sales volume in that segment. Unallocated corporate expenses
totaled $746,000 in the current period as compared to $813,000 in the same
period last year. The decrease was primarily due to reduced charges incurred
for legal services.

The income tax provision for the quarter ended March 31, 2002 totaled
$220,000, as compared to $240,000 in the quarter ended March 31, 2001. The
decrease reflects the decreased taxable income experienced by the Company in
2002.

Net income decreased to $330,000, or $0.03 per diluted share, for the
quarter ended March 31, 2002, as compared to $361,000, or $0.03 per diluted
share, for the same period of the prior year.

Liquidity and Capital Resources

Cash and cash equivalents decreased to $1.8 million at March 31, 2002 from
$2.3 million at December 31, 2001. Cash flow provided by operations for the
three months ended March 31, 2002 increased to $588,000 from $86,000 for the
comparable period last year. This increase is due primarily to payments of
lower accrued bonuses in the current year than in the prior year. Our primary
source of liquidity is cash from operations, which depends heavily on sales of
our urinalysis workstations. We plan to introduce a significantly upgraded
model on a new operating platform later this year pending clearance from the
Food and Drug Administration. The failure to make a successful and timely
transition to the upgraded model would have a material and adverse affect on
workstation sales, and, consequently, our liquidity. This is an inherent risk
in any major upgrade to products in our industry.

Cash used by investing activities totaled $539,000 for the three months
ended March 31, 2002, as compared to $345,000 in the same period last year.
The increase is primarily due to the increase in expenditures for property and
equipment as part of our efforts to upgrade our facilities, as well as
increased software development costs under our research and development
program.

Net cash used by financing activities totaled $563,000 and consisted
primarily of principal payments made on the subordinated note, and net
principal payments made on the term loans and revolving line of credit under
our credit facility, partially offset by funds received from the exercise of
stock options and warrants. As of March 31, 2002, we owed $492,000 on the term
loan and $1.5 million on the revolving line of credit and were eligible to
borrow an additional $2.8 million under the revolving credit line.

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In February 2002, we refinanced our existing credit facility and replaced
it with a new $8.0 million credit facility with California Bank and Trust. The
new facility consists of a $500,000 term loan, a $1.0 million term loan and a
$6.5 million revolving line of credit. The $500,000 term loan is payable in 60
equal monthly installments. The $1.0 million term loan carries interest only
for the first 12 months, followed by 48 months of equal principal payments plus
interest. The $6.5 million credit line matures in June 2004. Borrowings under
the line of credit are limited to a percentage of eligible receivables and
inventory. The entire credit facility bears interest at the lenders prime
rate, or LIBOR rate plus 2.0%.

We began a major project in 1999 to improve our urinalysis workstation
product line. As a result, we expect continuing high levels of research and
development expenditures in 2002. We plan to continue to fund this project
with cash generated from operations.

We reduced our outstanding debt by approximately $700,000 in the first
three months of 2002 and, after considering the effect of the refinancing
discussed above, we have scheduled principal payments totaling $1.3 million
during the next twelve months. We believe that our current cash on hand,
together with cash generated from operations and cash available under the
credit facility will be sufficient to fund normal operations and pay principal
and interest on outstanding debt for at least a year.

Shareholder Rights Plan

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

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to our valuation of inventory and our allowance for
uncollectable accounts receivable. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following
critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements:



| |  |  | Inventory is evaluated on a continual basis and reserve adjustments
are made based on managements estimate of future sales value, if any,
of specific inventory items. Reserve adjustments are made for the
difference between the cost of the inventory and the estimated market
value and charged to operations in the period in which the facts that
give rise to the adjustments become known.                                                                                                                
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Accounts receivable balances are evaluated on a continual basis and
allowances are provided for potentially uncollectable accounts based on
managements estimate of the collectability of customer accounts. If the
financial condition of a customer were to deteriorate, resulting in an
impairment of their ability to make payments, an additional allowance
may be required. Allowance adjustments are charged to operations in the
period in which the facts that give rise to the adjustments become
known.

Net deferred tax assets are evaluated on a continual basis. The carrying
value of the Companys net deferred tax assets assumes that the Company will be
able to generate sufficient future taxable income in certain tax jurisdictions,
based on estimates and assumptions. If these estimates and related assumptions
change in the future, the Company may be required to record additional
valuation allowances against its deferred tax assets resulting in additional
income tax expense in the Companys consolidated statement of operations.
Management evaluates the realizability of the deferred tax assets quarterly and
assesses the need for additional valuation allowances quarterly.

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Recent Accounting Pronouncements

Recent accounting pronouncements are discussed in Note 2 to the interim
financial statements on page 6.

Inflation

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

Healthcare Reform Policies

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

Forward-Looking Statements

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



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

We have attempted to identify additional significant uncertainties and
other factors affecting forward-looking statements in Exhibit 99 to our 2001
Annual Report on Form 10-K. Stockholders should understand that the
uncertainties and other factors identified in this Quarterly Report and in
Exhibit 99 to the Annual Report are not a comprehensive list of all the
uncertainties and other factors which may affect forward-looking statements.
We do not undertake any obligation to update or revise any forward-looking
statements or the list of uncertainties and other factors which could affect
those statements.




Item 3. Quantitative And Qualitative Disclosures About Market Risk.

There was no material change in the Companys exposure to market risk on
March 31, 2002 as compared to its market risk exposure on December 31, 2001.
See Managements Discussion and Analysis of Financial Condition and Results of
Operations  Market Risk in our Annual Report on Form 10-K for the year ended
December 31, 2001.

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PART II
OTHER INFORMATION




Item 1. Legal Proceedings.

We are not presently involved in any litigation.




Item 6. Exhibits And Reports On Form 8-K.




(a)  Exhibits

|        |  |                                                                                 |  |           |    |  
|------- |  | ------------------------------------------------------------------------------- |  | --------- | -- | -
|Exhibit |  |                                                                                 |  | Reference
|Number  |  | Description                                                                     |  | Document 
|        |  |                                                                                 |  |          
|3.1(a)  |  | Certificate of Incorporation, as amended                                        |  |           | (1 | )
|3.1(b)  |  | Certificate of Designations of Series A Convertible Preferred Stock             |  |           | (2 | )
|3.1(c)  |  | Certificate of Designations of Series B Callable Preferred Stock                |  |           | (3 | )
|3.1(d)  |  | Certificate of Designations, Preferences and Rights of Series C
Preferred Stock |  |           | (4 | )
|3.1(e)  |  | Certificate of Amendment of Certificate of Incorporation                        |  |           |    |  
|3.2     |  | Restated Bylaws                                                                 |  |           | (5 | )
|4.1     |  | Specimen of Common Stock Certificate                                            |  |           | (6 | )
|4.2     |  | Certificate of Designations of Series A Convertible Preferred Stock             |  |           | (2 | )
|4.3     |  | Certificate of Designations of Series B Callable Preferred Stock                |  |           | (3 | )
|4.4     |  | Certificate of Designations, Preferences and Rights of Series C
Preferred Stock |  |           | (4 | )

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



| | (1) |  | Current Report on Form 8-K dated August 13, 1987 and Quarterly Report
on Form 10-Q for the quarter ended September 30, 1993.     
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Current Report on Form 8-K dated January 15, 1997.                                                                               
|
| | (3) |  | Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.                                                               
|
| | (4) |  | Current Report on Form 8-K dated January 26, 2000.                                                                               
|
| | (5) |  | Quarterly Report on Form 10-Q for the quarter ended September 30,
1994.                                                          
|
| | (6) |  | Registration Statement on Form S-3, as filed with the Securities and
Exchange Commission on March 27, 1996 (File No. 333-002001).




(b)  Reports on Form 8-K

The Company did not file any reports on Form 8-K during the quarter ended
March 31, 2002.




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.

Date: May 8, 2002

| |                                                                          |                 
| | ------------------------------------------------------------------------ | ----------------
| | INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.                              
|
| | By:                                                                      | /s/   John Caloz
| |                                                                         
| | John Caloz
Corporate Vice President, Finance
And Chief Financial Officer

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