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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2008

or



| ̈ | Transition Report Pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | -------------------------------------------------------------------------------------

For the transition period from  to
.

Commission file number 1-11181





IRIS INTERNATIONAL, INC.

(Exact name of registrant as specified in its
charter)







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



|                                                                               
|-------------------------------------------------------------------------------
|9172 Eton Avenue                                                               
|Chatsworth, California 91311 (Address of principal executive offices, zip code)
|                                                                               
|(818) 709-1244                                                                 
|(Registrants telephone number, including area code)                           





Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    Yes   ̈    No  x

As of October 29, 2008, the issuer had 18,485,902 shares of common stock issued and outstanding.









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IRIS INTERNATIONAL, INC.

INDEX TO FORM 10-Q



|           |  |                                                                                                          |  |     
|---------- |  | -------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                          |  | Page
|PART I     |  | FINANCIAL INFORMATION                                                                                    |  |     
|           |  |                                                                                                         
|Item 1.    |  | Financial Statements                                                                                     |  | 3   
|           |  |                                                                                                         
|           |  | Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007                   |  | 3   
|           |  |                                                                                                         
|           |  | Consolidated Statements of Operations for the three months ended September 30, 2008 and 2007 (unaudited) |  | 4   
|           |  |                                                                                                         
|           |  | Consolidated Statements of Operations for the nine months ended September 30, 2008 and 2007 (unaudited)  |  | 5   
|           |  |                                                                                                         
|           |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)  |  | 6   
|           |  |                                                                                                         
|           |  | Notes to Consolidated Financial Statements                                                               |  | 7   
|           |  |                                                                                                         
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                    |  | 17  
|           |  |                                                                                                         
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                               |  | 24  
|           |  |                                                                                                         
|Item 4.    |  | Controls and Procedures                                                                                  |  | 25  
|           |  |                                                                                                         
|PART II    |  | OTHER INFORMATION                                                                                        |  | 26  
|           |  |                                                                                                         
|Item 1A.   |  | Risk Factors                                                                                             |  | 26  
|           |  |                                                                                                         
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                              |  | 26  
|           |  |                                                                                                         
|Item 6.    |  | Exhibits                                                                                                 |  | 26  
|           | 
|Signatures |  | 27                                                                                                      



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PART I: FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

IRIS INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)



|                                                                                                                     |  |                   |        |   |                  |   |        |  
|-------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                                                     |  | September 30,2008 |        |   | December 31,2007 |  
|                                                                                                                     |  | (unaudited)       |        |   |                  |  
|Assets                                                                                                               |  |                   |        |   |                  |   |        |  
|                                                                                                                     |  |                  
|Current assets:                                                                                                      |  |                   |        |   |                  |   |        |  
|Cash and cash equivalents                                                                                            |  | $                 | 30,103 |   |                  | $ | 28,145 |  
|Short-term investment in marketable securities                                                                       |  |                   | 300    |   |                  |   | 300    |  
|Accounts receivable, net of allowance for doubtful accounts and sales returns of $443 and $436                       |  |                   | 14,873 |   |                  |   | 16,075 |  
|Inventories                                                                                                          |  |                   | 11,614 |   |                  |   | 9,886  |  
|                                                                                                                     |  |                  
|Prepaid expenses and other current assets                                                                            |  |                   | 811    |   |                  |   | 707    |  
|Investment in sales-type leases                                                                                      |  |                   | 3,045  |   |                  |   | 2,660  |  
|Deferred tax asset                                                                                                   |  |                   | 3,368  |   |                  |   | 3,368  |  
|                                                                                                                     |  |                   |        |   |                  |   |        |  
|Total current assets                                                                                                 |  |                   | 64,114 |   |                  |   | 61,141 |  
|                                                                                                                     |  |                   |        |   |                  |   |        |  
|Property and equipment, net                                                                                          |  |                   | 8,909  |   |                  |   | 8,661  |  
|Goodwill                                                                                                             |  |                   | 2,450  |   |                  |   | 2,450  |  
|Core Technology, net                                                                                                 |  |                   | 1,567  |   |                  |   | 1,634  |  
|Software development costs, net of accumulated amortization of $2,619 and $2,322                                     |  |                   | 2,172  |   |                  |   | 1,764  |  
|Deferred tax asset                                                                                                   |  |                   | 3,740  |   |                  |   | 3,568  |  
|Investment in sales-type leases                                                                                      |  |                   | 6,244  |   |                  |   | 6,613  |  
|Other assets                                                                                                         |  |                   | 638    |   |                  |   | 559    |  
|                                                                                                                     |  |                   |        |   |                  |   |        |  
|Total assets                                                                                                         |  | $                 | 89,834 |   |                  | $ | 86,390 |  
|                                                                                                                     |  |                   |        |   |                  |   |        |  
|                                                                                                                     |  |                  
|Liabilities and Stockholders Equity                                                                                 |  |                   |        |   |                  |   |        |  
|                                                                                                                     |  |                  
|Current liabilities:                                                                                                 |  |                   |        |   |                  |   |        |  
|Accounts payable                                                                                                     |  | $                 | 4,231  |   |                  | $ | 4,289  |  
|Accrued expenses                                                                                                     |  |                   | 6,196  |   |                  |   | 5,713  |  
|Deferred service contract revenue                                                                                    |  |                   | 1,822  |   |                  |   | 1,454  |  
|                                                                                                                     |  |                   |        |   |                  |   |        |  
|Total current liabilities                                                                                            |  |                   | 12,249 |   |                  |   | 11,456 |  
|                                                                                                                     |  |                   |        |   |                  |   |        |  
|                                                                                                                     |  |                  
|Commitments and contingencies                                                                                        |  |                   |        |   |                  |   |        |  
|                                                                                                                     |  |                  
|Shareholders equity:                                                                                                |  |                   |        |   |                  |   |        |  
|Common stock, $.01 par value; Authorized: 50 million shares; issued and outstanding: 18,480 shares and 18,601 shares |  |                   | 185    |   |                  |   | 186    |  
|Preferred Stock, $.01 par value; authorized 1 million shares: Callable Series C shares issued and outstanding: none  |  |                   |       |   |                  |   |       |  
|Additional paid-in capital                                                                                           |  |                   | 85,437 |   |                  |   | 84,289 |  
|Other comprehensive income                                                                                           |  |                   | 187    |   |                  |   | 345    |  
|Accumulated deficit                                                                                                  |  |                   | (8,224 | ) |                  |   | (9,886 | )
|                                                                                                                     |  |                   |        |   |                  |   |        |  
|Total shareholders equity                                                                                           |  |                   | 77,585 |   |                  |   | 74,934 |  
|                                                                                                                     |  |                   |        |   |                  |   |        |  
|Total liabilities and shareholders equity                                                                           |  | $                 | 89,834 |   |                  | $ | 86,390 |  
|                                                                                                                     |  |                   |        |   |                  |   |        |  

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



3



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IRIS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited  in thousands, except for per share data)



|                                                               |  |                                         |        |   |      |   |        |  
|-------------------------------------------------------------- |  | --------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                               |  | For the three monthsended September 30, |       
|                                                               |  | 2008                                    |        |   | 2007 |  
|Sales of IVD instruments                                       |  | $                                       | 8,335  |   |      | $ | 7,484  |  
|Sales of IVD consumables and service                           |  |                                         | 11,537 |   |      |   | 9,835  |  
|Sales of sample processing instruments and supplies            |  |                                         | 3,552  |   |      |   | 3,244  |  
|                                                               |  |                                         |        |   |      |   |        |  
|Total revenues(1)                                              |  |                                         | 23,424 |   |      |   | 20,563 |  
|                                                               |  |                                         |        |   |      |   |        |  
|Cost of goods - IVD instruments                                |  |                                         | 4,876  |   |      |   | 3,997  |  
|Cost of goods - IVD consumable and supplies                    |  |                                         | 4,916  |   |      |   | 4,214  |  
|Cost of goods - sample processing instruments and supplies     |  |                                         | 1,830  |   |      |   | 1,585  |  
|                                                               |  |                                         |        |   |      |   |        |  
|Total cost of goods sold                                       |  |                                         | 11,622 |   |      |   | 9,796  |  
|                                                               |  |                                         |        |   |      |   |        |  
|Gross profit                                                   |  |                                         | 11,802 |   |      |   | 10,767 |  
|                                                               |  |                                         |        |   |      |   |        |  
|Marketing and selling                                          |  |                                         | 4,152  |   |      |   | 3,590  |  
|General and administrative                                     |  |                                         | 2,736  |   |      |   | 2,725  |  
|Research and development, net                                  |  |                                         | 2,754  |   |      |   | 2,355  |  
|                                                               |  |                                         |        |   |      |   |        |  
|Total operating expenses                                       |  |                                         | 9,642  |   |      |   | 8,670  |  
|                                                               |  |                                         |        |   |      |   |        |  
|Operating income                                               |  |                                         | 2,160  |   |      |   | 2,097  |  
|Other income (expense):                                        |  |                                         |        |   |      |   |        |  
|Interest income                                                |  |                                         | 276    |   |      |   | 402    |  
|Interest expense                                               |  |                                         | (3     | ) |      |   | (5     | )
|Other income (expense)                                         |  |                                         | (51    | ) |      |   | (9     | )
|                                                               |  |                                         |        |   |      |   |        |  
|Income before provision for income taxes                       |  |                                         | 2,382  |   |      |   | 2,485  |  
|Provision for income taxes                                     |  |                                         | 764    |   |      |   | 867    |  
|                                                               |  |                                         |        |   |      |   |        |  
|Net income                                                     |  | $                                       | 1,618  |   |      | $ | 1,618  |  
|                                                               |  |                                         |        |   |      |   |        |  
|Basic net income per share                                     |  | $                                       | 0.09   |   |      | $ | 0.09   |  
|                                                               |  |                                         |        |   |      |   |        |  
|Diluted net income per share                                   |  | $                                       | 0.09   |   |      | $ | 0.09   |  
|                                                               |  |                                         |        |   |      |   |        |  
|Weighted average number of common shares outstanding  basic   |  |                                         | 18,205 |   |      |   | 18,260 |  
|                                                               |  |                                         |        |   |      |   |        |  
|Weighted average number of common shares outstanding  diluted |  |                                         | 18,793 |   |      |   | 18,977 |  
|                                                               |  |                                         |        |   |      |   |        |  



|(1) | The consolidated revenues include reclassification of freight revenue from cost of goods and marketing and selling expenses in accordance with EITF 00-10. The reclassification in
consolidated revenues amounted to $372,000 for the three months ended September 30, 2007. For the three months ended September 30, 2008, the freight revenue amounted to $259,000. See reclassification note in Note 2 of the Notes to the
Consolidated Financial Statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



4



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IRIS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited  in thousands, except for per share data)



|                                                           |  |                                        |        |   |      |   |        |  
|---------------------------------------------------------- |  | -------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                           |  | For the nine monthsended September 30, |       
|                                                           |  | 2008                                   |        |   | 2007 |  
|Sales of IVD instruments                                   |  | $                                      | 24,091 |   |      | $ | 24,628 |  
|Sales of IVD consumables and service                       |  |                                        | 34,319 |   |      |   | 28,795 |  
|Sales of sample processing instruments and supplies        |  |                                        | 10,405 |   |      |   | 9,000  |  
|                                                           |  |                                        |        |   |      |   |        |  
|Total revenues(1)                                          |  |                                        | 68,815 |   |      |   | 62,423 |  
|                                                           |  |                                        |        |   |      |   |        |  
|Cost of goods - IVD instruments                            |  |                                        | 13,133 |   |      |   | 13,015 |  
|Cost of goods - IVD consumable and supplies                |  |                                        | 14,747 |   |      |   | 13,426 |  
|Cost of goods - sample processing instruments and supplies |  |                                        | 5,187  |   |      |   | 4,441  |  
|                                                           |  |                                        |        |   |      |   |        |  
|Total cost of goods sold                                   |  |                                        | 33,067 |   |      |   | 30,882 |  
|                                                           |  |                                        |        |   |      |   |        |  
|Gross profit                                               |  |                                        | 35,748 |   |      |   | 31,541 |  
|                                                           |  |                                        |        |   |      |   |        |  
|Marketing and selling                                      |  |                                        | 11,898 |   |      |   | 9,950  |  
|General and administrative                                 |  |                                        | 8,378  |   |      |   | 7,403  |  
|Research and development, net                              |  |                                        | 8,010  |   |      |   | 7,791  |  
|                                                           |  |                                        |        |   |      |   |        |  
|Total operating expenses                                   |  |                                        | 28,286 |   |      |   | 25,144 |  
|                                                           |  |                                        |        |   |      |   |        |  
|Operating income                                           |  |                                        | 7,462  |   |      |   | 6,397  |  
|Other income (expense):                                    |  |                                        |        |   |      |   |        |  
|Interest income                                            |  |                                        | 871    |   |      |   | 1,125  |  
|Interest expense                                           |  |                                        | (7     | ) |      |   | (8     | )
|Other income (expense)                                     |  |                                        | (16    | ) |      |   | (34    | )
|                                                           |  |                                        |        |   |      |   |        |  
|Income before provision for income taxes                   |  |                                        | 8,310  |   |      |   | 7,480  |  
|Provision for income taxes                                 |  |                                        | 2,663  |   |      |   | 2,607  |  
|                                                           |  |                                        |        |   |      |   |        |  
|Net income                                                 |  | $                                      | 5,647  |   |      | $ | 4,873  |  
|                                                           |  |                                        |        |   |      |   |        |  
|Basic net income per share                                 |  | $                                      | 0.31   |   |      | $ | 0.27   |  
|                                                           |  |                                        |        |   |      |   |        |  
|Diluted net income per share                               |  | $                                      | 0.30   |   |      | $ | 0.26   |  
|                                                           |  |                                        |        |   |      |   |        |  
|Basic  average shares outstanding                         |  |                                        | 18,333 |   |      |   | 18,124 |  
|                                                           |  |                                        |        |   |      |   |        |  
|Diluted  average shares outstanding                       |  |                                        | 18,876 |   |      |   | 18,723 |  
|                                                           |  |                                        |        |   |      |   |        |  



|(1) | The consolidated revenues include reclassification of freight revenue from cost of goods and marketing and selling expenses in accordance with EITF 00-10. The reclassification in
consolidated revenues amounted to $1,133,000 for the nine months ended September 30, 2007. For the nine months ended September 30, 2008, the freight revenue amounted to $748,000. See reclassification note in Note 2 of the Notes to the
Consolidated Financial Statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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IRIS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited  in thousands)



|                                                                                                                                                                                                       |  |                                        |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                                                                                                       |  | For the nine monthsended September 30, |       
|                                                                                                                                                                                                       |  | 2008                                   |        |   | 2007 |  
|Cash flows from operating activities:                                                                                                                                                                  |  |                                        |        |   |      |   |        |  
|Net income                                                                                                                                                                                             |  | $                                      | 5,647  |   |      | $ | 4,873  |  
|Adjustments to reconcile net income to net cash provided by operations:                                                                                                                                |  |                                        |        |   |      |   |        |  
|Deferred taxes                                                                                                                                                                                         |  |                                        | 684    |   |      |   | 2,486  |  
|Tax benefit from stock option exercises                                                                                                                                                                |  |                                        | (856   | ) |      |   | (1,368 | )
|Depreciation and amortization                                                                                                                                                                          |  |                                        | 2,383  |   |      |   | 1,884  |  
|Loss on disposal of fixed assets                                                                                                                                                                       |  |                                        | 104    |   |      |   |       |  
|Common stock and stock based compensation                                                                                                                                                              |  |                                        | 1,773  |   |      |   | 1,007  |  
|Changes in assets and liabilities:                                                                                                                                                                     |  |                                        |        |   |      |   |        |  
|Accounts receivable, net                                                                                                                                                                               |  |                                        | 1,202  |   |      |   | (3,171 | )
|Inventories                                                                                                                                                                                            |  |                                        | (1,728 | ) |      |   | (2,124 | )
|Prepaid expenses and other current assets                                                                                                                                                              |  |                                        | (668   | ) |      |   | (392   | )
|Investment in sales-type leases                                                                                                                                                                        |  |                                        | (16    | ) |      |   | (549   | )
|Other assets                                                                                                                                                                                           |  |                                        | (78    | ) |      |   |       |  
|Accounts payable and accrued expenses                                                                                                                                                                  |  |                                        | (230   | ) |      |   | (1,616 | )
|Deferred service contract revenue                                                                                                                                                                      |  |                                        | 368    |   |      |   | (391   | )
|                                                                                                                                                                                                       |  |                                        |        |   |      |   |        |  
|Net cash provided by operating activities                                                                                                                                                              |  |                                        | 8,585  |   |      |   | 639    |  
|                                                                                                                                                                                                       |  |                                        |        |   |      |   |        |  
|Cash flows from investing activities:                                                                                                                                                                  |  |                                        |        |   |      |   |        |  
|Acquisition of property and equipment                                                                                                                                                                  |  |                                        | (2,150 | ) |      |   | (2,947 | )
|Software development costs                                                                                                                                                                             |  |                                        | (926   | ) |      |   | (703   | )
|Sale of investment held for sale                                                                                                                                                                       |  |                                        |       |   |      |   | 132    |  
|                                                                                                                                                                                                       |  |                                        |        |   |      |   |        |  
|Net cash used in investing activities                                                                                                                                                                  |  |                                        | (3,076 | ) |      |   | (3,518 | )
|                                                                                                                                                                                                       |  |                                        |        |   |      |   |        |  
|Cash flows from financing activities:                                                                                                                                                                  |  |                                        |        |   |      |   |        |  
|Issuance of common stock and warrants for cash                                                                                                                                                         |  |                                        | 1,499  |   |      |   | 1,957  |  
|Repurchase of common stock                                                                                                                                                                             |  |                                        | (5,748 | ) |      |   |       |  
|Tax benefit from stock option exercises                                                                                                                                                                |  |                                        | 856    |   |      |   | 1,368  |  
|                                                                                                                                                                                                       |  |                                        |        |   |      |   |        |  
|Net cash (used in) provided by financing activities                                                                                                                                                    |  |                                        | (3,393 | ) |      |   | 3,325  |  
|                                                                                                                                                                                                       |  |                                        |        |   |      |   |        |  
|Effect of exchange rate changes on cash and cash equivalents                                                                                                                                           |  |                                        | (158   | ) |      |   | 172    |  
|                                                                                                                                                                                                       |  |                                        |        |   |      |   |        |  
|Net increase in cash and cash equivalents                                                                                                                                                              |  |                                        | 1,958  |   |      |   | 618    |  
|Cash and cash equivalents at beginning of period                                                                                                                                                       |  |                                        | 28,145 |   |      |   | 23,159 |  
|                                                                                                                                                                                                       |  |                                        |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                                                                                                                                             |  | $                                      | 30,103 |   |      | $ | 23,777 |  
|                                                                                                                                                                                                       |  |                                        |        |   |      |   |        |  
|Supplemental disclosure of cash flow information:                                                                                                                                                      |  |                                        |        |   |      |   |        |  
|Cash paid for income taxes                                                                                                                                                                             |  |                                        | 1,872  |   |      |   | 733    |  
|Cash paid for interest                                                                                                                                                                                 |  |                                        | 7      |   |      |   | 8      |  
|In September 2008, 130,000 stock options were exercised as net cashless exercise and therefore no cash was received upon exercise. The number
of shares of Company common stock issued totaled 62,081. |  |                                        |        |   |      |   |        |  

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



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IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. | Company History
|-- | ---------------

IRIS International, Inc. was
incorporated in California in 1979 and reincorporated in 1987 in Delaware. The Company designs, develops, manufactures and markets in vitro diagnostic, or IVD products, including IVD imaging systems based on patented and proprietary neural
network-based Automated Particle Recognition (APR) software to enable high-speed digital processing to classify and display images and describe the morphology of microscopic particles, urine chemistry analyzers and related chemistry test
strips and accessories, molecular diagnostics assays based on the Companys Nucleic Acid Detection Immuno-Assay (NADiA) technology, as well as special purpose centrifuges and other small instruments for automating microscopic procedures and DNA
processing performed in clinical laboratories.



|2. | Interim Financial Reporting
|-- | ---------------------------

Basis of
Presentation  The financial statements have been prepared in accordance with the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended, and do not include all of the information and note disclosures required
by accounting principles generally accepted in the United States (GAAP). These financial statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes contained in the Companys Annual
Report on Form 10-K for the year ended December 31, 2007.

The Consolidated Financial Statements included herein are unaudited,
but in the opinion of management, such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to summarize fairly the Companys financial position and results of operations for the interim
period. The results reported in these Consolidated Financial Statements should not be taken as indicative of results that may be expected for the entire year.

Use of Estimates  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The significant estimates in the preparation of the consolidated financial
statements relate to the assessment of the carrying allowance for doubtful accounts, inventory reserves, the useful lives, fair value and recoverability of carrying value of long-lived and intangible assets, including goodwill, estimated provisions
for warranty costs, laboratory information system implementations, currency hedges for foreign currency forwards and deferred tax assets. Actual results and outcomes may differ from managements estimates and assumptions.

Reclassifications  The Company reclassified shipping and handling fees and costs from cost of good sold into revenue based on the guidance
of EITF-00-10, Accounting for Shipping and Handling Fees and Costs. Freight revenue and costs were allocated to IVD instruments, IVD consumables and service, and sample processing instruments and supplies based on actual shipping and handling
fees and costs incurred for the periods.

The accompanying 2007 consolidated statements of operations contain certain EITF-00-10 freight
reclassifications to conform to the presentation used in the current year.



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IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued



|                                                                               |  |                                            |     |                                           |   |      
|------------------------------------------------------------------------------ |  | ------------------------------------------ | --- | ----------------------------------------- | - | -----
|(in thousands)                                                                 |  | For the threemonths endedSeptember 30,2007 |     | For the ninemonths endedSeptember 30,2007
|                                                                               |  |                                           
|Revenues  Freight revenue reclassification from cost of goods                 |  |                                            |     |                                           |   |      
|Freight revenue reclass to sales of IVD instruments                            |  | $                                          | 5   |                                           | $ | 13   
|Freight revenue reclass to sales of IVD consumables and service                |  |                                            | 343 |                                           |   | 1,048
|Freight revenue reclass to sales of sample processing instruments and supplies |  |                                            | 24  |                                           |   | 72   
|                                                                               |  |                                            |     |                                           |   |      
|Total freight revenue reclass to revenues                                      |  | $                                          | 372 |                                           | $ | 1,133
|                                                                               |  |                                            |     |                                           |   |      
|Net effect of freight reclassification on operating income                     |  | $                                          |    |                                           | $ |     
|                                                                               |  |                                            |     |                                           |   |      

Earnings Per Share  The Company computes and presents earnings per share in
accordance with SFAS No. 128, Earnings per share. Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing
net income by the weighted average number of common shares and common stock equivalents outstanding, calculated on the treasury stock method for options and warrants using the average market prices during the period. The weighted average number of
outstanding antidilutive common stock options and warrants excluded from the computation of diluted net income per common share for the three and nine month periods ended September 30, 2008 were 356,000 and 516,000, respectively. The
weighted average number of outstanding antidilutive common stock options and warrants excluded from the computation of diluted net income per common share for the three and nine month periods ended September 30, 2007 were 359,000 and
576,000, respectively. A reconciliation of the shares used in the basic and diluted earnings per common share is as follows:



|                                    |  |                                        |  |                                       |  |        |  |       
|----------------------------------- |  | -------------------------------------- |  | ------------------------------------- |  | ------ |  | ------
|                                    |  | For the threemonths endedSeptember 30, |  | For the ninemonths endedSeptember 30,
|(in thousands)                      |  | 2008                                   |  | 2007                                  |  | 2008   |  | 2007  
|                                    |  |                                        |  |                                      
|Basic weighted shares outstanding   |  | 18,205                                 |  | 18,260                                |  | 18,333 |  | 18,124
|Dilutive stock options & warrants   |  | 588                                    |  | 717                                   |  | 543    |  | 599   
|                                    |  |                                        |  |                                       |  |        |  |       
|Diluted weighted shares outstanding |  | 18,793                                 |  | 18,977                                |  | 18,876 |  | 18,723
|                                    |  |                                        |  |                                       |  |        |  |       

Foreign Currency Hedge  The Company conducts business in certain foreign markets,
primarily in the European Union and Asia. To mitigate the potential impact of adverse fluctuations in the U.S. Dollar exchange rate for these currencies, we periodically purchase foreign currency forward contracts. We do not speculate in these
hedging instruments in order to profit from foreign currency exchanges; nor do we enter into trades for which there are no underlying exposures.

Under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities,we document all relationships between hedging instruments and hedged items,
as well as its risk management objective for undertaking these hedging transactions. This process includes relating the forward contracts that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet
or to specific firm commitments or forecasted transactions. We also formally assess, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the
hedged of the hedged items.



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IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued



During the first three quarters of 2008, we entered into such contracts for Euros and Japanese Yen
totaling $404,000 and $7.1 million, respectively. As of September 30, 2008, our remaining foreign currency forward contracts are for Japanese Yen and total $2.0 million, which we will utilize for future purchases from our Japanese IVD supplier.
As of September 30, 2008, the notional amount in Japanese Yen under our foreign currency forward contracts totaled 64.5 million yen. All outstanding foreign currency forward contracts are marked to market at the end of each fiscal period.
Our realized gain or loss with respect to foreign currency fluctuations will depend on the foreign currency exchange rate changes and other factors in effect as the contracts mature. The net fair value of all these contracts as of September 30,
2008 was $(148,000). Losses and gains on the underlying transactions being hedged would largely offset any gains and losses on the fair value of foreign currency forward contracts.



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

Inventories consist of the following:



|                                        |  |                   |        |                  |   |      
|--------------------------------------- |  | ----------------- | ------ | ---------------- | - | -----
|(in thousands)                          |  | September 30,2008 |        | December 31,2007
|                                        |  |                  
|Finished goods                          |  | $                 | 3,068  |                  | $ | 3,237
|Work-in-process                         |  |                   | 456    |                  |   | 324  
|Raw materials, parts and sub-assemblies |  |                   | 8,090  |                  |   | 6,325
|                                        |  |                   |        |                  |   |      
|Inventories                             |  | $                 | 11,614 |                  | $ | 9,886
|                                        |  |                   |        |                  |   |      



|4. | Short-Term Investment in Marketable Securities
|-- | ----------------------------------------------

Our
investment in marketable securities is composed of a $300,000 auction rate security which is tied to short-term interest rates that are periodically reset through an auction process. The auction process resets the applicable interest rates at
prescribed calendar intervals and is intended to provide liquidity to the holders of auction rate securities by matching buyers and sellers in a market context, enabling the holders to gain immediate liquidity by selling such securities at par, or
rolling over their investment. If there is an imbalance between buyers and sellers, there is a risk of a failed auction. During the first nine months of 2008, auctions relating to those types of auction rate securities have failed. An auction
failure is not a default. As of September 30, 2008, our investment was carried at par value as we believe the investment approximated full value based upon comparable and similar investments. In October 2008, Citigroup Inc. reached an agreement
with state and federal regulators to buy back at par value all auction rate securities from its retail customers. Due to this settlement, our brokerage company announced that beginning on January 15, 2009, they will purchase our auction rate
security at par value. Currently, we do intend to liquidate this investment at fair value and no impairment charge is required. Nevertheless, as market conditions continue to evolve we may take an impairment charge in the future, which may be
significant.



|5. | Bank Loan Agreement
|-- | -------------------

The Company renewed its credit
facility with a commercial bank in May 2008. The credit facility consists of a $6.5 million revolving line of credit for working capital and a $10.0 million line of credit for acquisitions and product opportunities. The credit facility has variable
interest rates, which will change from time to time based on changes to either the LIBOR rate or the lenders prime rate. Borrowings under the credit facility are secured by all of our assets and mature in June 2010 and June 2015, respectively.



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IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued



As of September 30, 2008 and December 31, 2007, there were no borrowings under the credit
facility. The Company, however, is subject to certain financial and non-financial covenants under the credit facility with the bank and as of September 30, 2008, the Company was in compliance with these covenants.



|6. | Income Taxes
|-- | ------------

On a quarterly basis, the Company
estimates the effective tax rate for the full fiscal year and records a quarterly income tax provision based on the anticipated rate. As the year progresses, the Company refines its estimate based on the facts and circumstances by each tax
jurisdiction. The effective tax rate for both the three and nine months ended September 30, 2008 was 32%. The effective tax rate for both the three and nine months ended September 30, 2007 was 35%.

The Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty
in Income Taxes-an Interpretation of FASB Statement 109 (FIN 48), on January 1, 2007.

The Company will recognize
potential interest and penalties related to income tax positions as a component of the provision for income taxes in the consolidated statements of income in any future periods in which the Company must record a liability. Since the Company has not
recorded a liability at September 30, 2008, there is no impact on the Companys effective tax rate.



|7. | Stock-Based Compensation
|-- | ------------------------

The Company accounts for
option and warrants using the provisions of Statement of Financial Accounting Standards No. 123R (SFAS 123R), Share-Based Payment, which requires compensation costs related to share-based transactions, including
employee stock options, to be recognized in the financial statements based on fair value. Share-based compensation expense for the three and nine months ended September 30, 2008 and 2007 includes share-based compensation expense as follows:



|                                     |  |                                        |      |   |                                       |   |      |      |  |   |       |   |  |   |       |  
|------------------------------------ |  | -------------------------------------- | ---- | - | ------------------------------------- | - | ---- | ---- |  | - | ----- | - |  | - | ----- | -
|                                     |  | For the threemonths endedSeptember 30, |      |   | For the ninemonths endedSeptember 30, |  
|(in thousands)                       |  | 2008                                   |      |   | 2007                                  |   |      | 2008 |  |   | 2007  |  
|                                     |  |                                        |      |  
|Cost of goods sold                   |  | $                                      | 89   |   |                                       | $ | 72   |      |  | $ | 253   |   |  | $ | 204   |  
|Marketing and selling                |  |                                        | 112  |   |                                       |   | 67   |      |  |   | 286   |   |  |   | 134   |  
|General and administrative           |  |                                        | 331  |   |                                       |   | 194  |      |  |   | 859   |   |  |   | 367   |  
|Research and development             |  |                                        | 143  |   |                                       |   | 111  |      |  |   | 397   |   |  |   | 302   |  
|                                     |  |                                        |      |   |                                       |   |      |      |  |   |       |   |  |   |       |  
|Stock-based compensation             |  |                                        | 675  |   |                                       |   | 444  |      |  |   | 1,795 |   |  |   | 1,007 |  
|Income tax benefit                   |  |                                        | (270 | ) |                                       |   | (178 | )    |  |   | (718  | ) |  |   | (403  | )
|                                     |  |                                        |      |   |                                       |   |      |      |  |   |       |   |  |   |       |  
|Stock-based compensation, net of tax |  | $                                      | 405  |   |                                       | $ | 266  |      |  | $ | 1,077 |   |  | $ | 604   |  
|                                     |  |                                        |      |   |                                       |   |      |      |  |   |       |   |  |   |       |  



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##### Table of Contents

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued



Stock Options

Stock option activity during the nine months ended September 30, 2008 is as follows:



|                                             |  |        |   |  |                                       |       |                                         |           |                         |   |       
|-------------------------------------------- |  | ------ | - |  | ------------------------------------- | ----- | --------------------------------------- | --------- | ----------------------- | - | ------
|                                             |  |        |   | 
|(in thousands, except for per share amounts) |  | Shares |   |  | WeightedAverageExercisePrice PerShare |       | WeightedAverageRemainingContractualTerm |           | AggregateIntrinsicValue
|                                             |  |        |   | 
|Outstanding at January 1, 2008               |  | 1,861  |   |  | $                                     | 11.62 |                                         | 3.2 years |                         | $ | 16,086
|Granted                                      |  | 488    |   |  | $                                     | 13.08 |                                         |           |                         |   |       
|Exercised                                    |  | (315   | ) |  | $                                     | 4.74  |                                         |           |                         |   |       
|Canceled or expired                          |  | (20    | ) |  | $                                     | 11.47 |                                         |           |                         |   |       
|                                             |  |        |   |  |                                       |       |                                         |           |                         |   |       
|Outstanding at September 30, 2008            |  | 2,014  |   |  | $                                     | 13.06 |                                         | 3.4 years |                         | $ | 11,500
|                                             |  |        |   |  |                                       |       |                                         |           |                         |   |       
|Exercisable at September 30, 2008            |  | 1,102  |   |  | $                                     | 12.53 |                                         | 3.0 years |                         | $ | 7,333 
|                                             |  |        |   |  |                                       |       |                                         |           |                         |   |       

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the
difference between our closing stock price on September 30, 2008 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders, had all option holders exercised their options on
September 30, 2008. Total intrinsic value of options exercised during the nine months ended September 30, 2008 amounted to $3,682,000. As of September 30, 2008, total unrecognized stock-based compensation expense related to unvested
stock options was $3,371,000.

The Compensation Committee of the Companys board of directors determines the exercise price of
options. Payment of the exercise price may be made either in cash or with a cashless exercise feature. The options generally vest over either three or four years and expire either five or ten years from the date of grant. The fair value of each
option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:



|                        |  |                                        |   |  |      |  
|----------------------- |  | -------------------------------------- | - |  | ---- | -
|                        |  | For the threemonths endedSeptember 30, |  
|                        |  | 2008                                   |   |  | 2007 |  
|Risk free interest rate |  | 3.1                                    | % |  | 4.7  | %
|Expected lives (years)  |  | 3.0                                    |   |  | 3.0  |  
|Expected volatility     |  | 46                                     | % |  | 46   | %
|Expected dividend yield |  |                                       |   |  |     |  

The expected volatilities are based on the historical volatility of our stock. The observation is
made on a weekly basis. The expected terms of the stock options are based on the average vesting period on a basis consistent with the historical experience for similar option grants. The risk-free rate is consistent with the expected terms of the
stock options and based on the U.S. Treasury yield curve in effect at the time of grant. The Company estimates forfeitures rates based on historical data.



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##### Table of Contents

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued



A summary of our unvested stock options during the nine months ended September 30, 2008 is
presented below:



|                                               |  |        |   |  |                                              |      
|---------------------------------------------- |  | ------ | - |  | -------------------------------------------- | -----
|(In thousands except for fair value per share) |  | Shares |   |  | WeightedAverageGrant DateFair ValuePer Share
|                                               |  |       
|Unvested options at January 1, 2008            |  | 715    |   |  | $                                            | 14.49
|Granted                                        |  | 488    |   |  | $                                            | 13.08
|Vested during period                           |  | (277   | ) |  | $                                            | 14.64
|Forfeited or expired                           |  | (15    | ) |  | $                                            | 14.26
|                                               |  |        |   |  |                                              |      
|Unvested options at September 30, 2008         |  | 911    |   |  | $                                            | 13.70
|                                               |  |        |   |  |                                              |      

Restricted Shares

The Company began awarding restricted shares of its common stock in 2006. Restricted shares
currently vest 25% after one year and 61/4% quarterly thereafter for employee recipients while outside directors vest 25% each
quarter making them fully vested after one year. Unvested restricted shares are forfeited if the recipients employment terminates for any reason other than death, disability or special circumstances as determined by the Compensation Committee
of the Companys board of directors. Restricted shares activity during the nine months ended September 30, 2008 was as follows:



|                                                |  |        |   |  |                                              |      
|----------------------------------------------- |  | ------ | - |  | -------------------------------------------- | -----
|                                                |  |       
|(in thousands, except for fair value per share) |  | Shares |   |  | WeightedAverageGrant DateFair ValuePer Share
|                                                |  |       
|Unvested shares at January 1, 2008              |  | 136    |   |  | $                                            | 14.64
|Granted                                         |  | 123    |   |  | $                                            | 13.22
|Vested during period                            |  | (43    | ) |  | $                                            | 16.04
|Forfeited during period                         |  | (4     | ) |  | $                                            | 13.77
|                                                |  |        |   |  |                                              |      
|Unvested shares at September 30, 2008           |  | 212    |   |  | $                                            | 13.54
|                                                |  |        |   |  |                                              |      

Fair value of our restricted shares is based on our closing stock price on the date of grant. As
of September 30, 2008, total unrecognized stock-based compensation expense related to non-vested restricted share grants was $2,369,000 which is expected to be recognized over the remaining weighted average period of approximately 3.0 years.



|8. | Capital Stock  Warrants
|-- | ------------------------

At
September 30, 2008, there were outstanding and exercisable warrants to purchase 74,300 shares at a price of $7.80 per share. These warrants are exercisable and will expire on April 23, 2009. During the nine months ended September 30,
2008, no warrants were issued, exercised, cancelled or expired.



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##### Table of Contents

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued



|9. | Common Stock Repurchase Plan
|-- | ----------------------------

On March 3,
2008, the Companys board of directors authorized a share repurchase and retirement plan of up to $15.0 million of the Companys common stock over a 12-month period. From March 3, 2008 through June 30, 2008, we repurchased
492,068 shares of our common stock for approximately $5,748,000. On July 25, 2008, the Companys board of directors terminated the share repurchase and retirement plan. All shares repurchased by us were cancelled and became authorized but
unissued shares of common stock.

On September 11, 2008, the Companys Chief Executive Officer exercised a stock option to
purchase an aggregate of 130,000 shares of common with an exercise price of $4.34 per share, on a net issue basis in a transaction approved by the compensation committee of the Companys board of directors. The Company issued 62,081 shares of
common stock to its Chief Executive Officer, and retained 67,919 shares of common stock with an aggregate market value of $1,219,000 based on the last closing price of the common stock immediately prior to exercise of $17.95 per share. Of this
amount, $564,000 was applied in payment of the aggregate exercise price of the stock options and $655,000 was applied in payment of payroll taxes arising from the option exercise. These options had a term expiring on November 18, 2008.



|10. | Contingencies
|--- | -------------

Litigation

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

Guarantees

The Company enters into indemnification provisions under (i) agreements with other companies in the ordinary course of business, typically with
business partners, contractors, customers and landlords, and (ii) agreements with investors. Under such provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified
party as a result of the Companys activities or, in some cases, as a result of the indemnified partys activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by the
Company with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. In addition, in some cases, the Company agrees to reimburse employees for certain expenses and to
provide salary continuation during short-term disability. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to
defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no recorded liabilities for these agreements as of
September 30, 2008.



|11. | Segments and Geographic Information
|--- | -----------------------------------

The
Companys operations are organized on the basis of products and related services and under SFAS No. 131, the Company operates in two segments: (i) IVD and (ii) sample processing.



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##### Table of Contents

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued



The IVD segment designs, develops, manufactures, markets and distributes in-vitro diagnostic systems
based on patented and proprietary technology for automating microscopic and clinical chemistry procedures for urinalysis. The segment also provides ongoing sales of supplies and services necessary for the operation of installed urinalysis
workstations. In the United States, these products are mostly sold through a direct sales and service force. Internationally, these products are sold and serviced through distributors, with the exception of France and Puerto Rico. The segment also
includes the operations of the Iris Molecular Diagnostics, or IMD, subsidiary.

The sample processing segment designs, develops,
manufactures and markets a variety of bench top centrifuges, small instruments and supplies. These products are used primarily for manual specimen preparation and dedicated applications in coagulation, cytology, hematology, urinalysis and DNA
processing. 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 in the Companys Annual Report on Form 10-K. We evaluate the performance of our segments and allocate resources to them based on earnings before income taxes, excluding
corporate charges.



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##### Table of Contents

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued



The table below present information about reported segments for the three and nine months ended
September 30, 2008 and 2007:



|                                        |  |     |        |            |   |             |  |   |        |   |  |   |        |    
|--------------------------------------- |  | --- | ------ | ---------- | - | ----------- |  | - | ------ | - |  | - | ------ | ---
|                                        |  |     |        |            |   | Unallocated |  |   |        |  
|                                        |  |     |        | Sample     |   | Corporate   |  |   |        |  
|(In thousands)                          |  | IVD |        | Processing |   | Expenses    |  |   | Total  |  
|                                        |  |    
|For the three months September 30, 2008 |  |     |        |            |   |             |  |  
|                                        |  |     |        |           
|Revenues                                |  | $   | 19,872 |            | $ | 3,552       |  | $ |       |   |  | $ | 23,424 |    
|Interest income                         |  |     | 276    |            |   |            |  |   |       |   |  |   | 276    |    
|Interest expense                        |  |     | 3      |            |   |            |  |   |       |   |  |   | 3      |    
|Depreciation and amortization           |  |     | 749    |            |   | 65          |  |   | 4      |   |  |   | 818    |    
|Segment pre-tax profit                  |  |     | 2,459  |            |   | 922         |  |   | (999   | ) |  |   | 2,382  |    
|Segment assets                          |  |     | 61,095 |            |   | 21,631      |  |   | 7,108  |   |  |   | 89,834 |    
|Investment in long-lived assets         |  |     | 24,673 |            |   | 352         |  |   |       |   |  |   | 25,025 |    
|                                        |  |     |        |           
|For the three months September 30, 2007 |  |     |        |            |   |             |  |   |        |   |  |   |        |    
|                                        |  |     |        |           
|Revenues                                |  | $   | 17,319 |            | $ | 3,244       |  | $ |       |   |  | $ | 20,563 | (1)
|Interest income                         |  |     | 402    |            |   |            |  |   |       |   |  |   | 402    |    
|Interest expense                        |  |     | 5      |            |   |            |  |   |       |   |  |   | 5      |    
|Depreciation and amortization           |  |     | 558    |            |   | 68          |  |   | 4      |   |  |   | 630    |    
|Segment pre-tax profit                  |  |     | 3,212  |            |   | 770         |  |   | (1,497 | ) |  |   | 2,485  |    
|Segment assets                          |  |     | 56,452 |            |   | 18,000      |  |   | 6,688  |   |  |   | 81,140 |    
|Investment in long-lived assets         |  |     | 21,240 |            |   | 472         |  |   |       |   |  |   | 21,712 |    
|                                        |  |     |        |           
|For the nine months September 30, 2008  |  |     |        |            |   |             |  |   |        |   |  |   |        |    
|                                        |  |     |        |           
|Revenues                                |  | $   | 58,410 |            | $ | 10,405      |  | $ |       |   |  | $ | 68,815 |    
|Interest income                         |  |     | 871    |            |   |            |  |   |       |   |  |   | 871    |    
|Interest expense                        |  |     | 7      |            |   |            |  |   |       |   |  |   | 7      |    
|Depreciation and amortization           |  |     | 2,177  |            |   | 194         |  |   | 12     |   |  |   | 2,383  |    
|Segment pre-tax profit                  |  |     | 8,161  |            |   | 2,810       |  |   | (2,661 | ) |  |   | 8,310  |    
|Segment assets                          |  |     | 61,095 |            |   | 21,631      |  |   | 7,108  |   |  |   | 89,834 |    
|Investment in long-lived assets         |  |     | 24,673 |            |   | 352         |  |   |       |   |  |   | 25,025 |    
|                                        |  |     |        |           
|For the nine months September 30, 2007  |  |     |        |            |   |             |  |   |        |   |  |   |        |    
|                                        |  |     |        |           
|Revenues                                |  | $   | 53,423 |            | $ | 9,000       |  | $ |       |   |  | $ | 62,423 | (1)
|Interest income                         |  |     | 1,125  |            |   |            |  |   |       |   |  |   | 1,125  |    
|Interest expense                        |  |     | 8      |            |   |            |  |   |       |   |  |   | 8      |    
|Depreciation and amortization           |  |     | 1,668  |            |   | 204         |  |   | 12     |   |  |   | 1,884  |    
|Segment pre-tax profit                  |  |     | 9,097  |            |   | 2,030       |  |   | (3,647 | ) |  |   | 7,480  |    
|Segment assets                          |  |     | 56,452 |            |   | 18,000      |  |   | 6,688  |   |  |   | 81,140 |    
|Investment in long-lived assets         |  |     | 21,240 |            |   | 472         |  |   |       |   |  |   | 21,712 |    



|(1) | The consolidated revenues include reclassification of freight revenue from cost of goods and marketing and selling expenses in accordance with EITF 00-10. The reclassification in
consolidated revenues amounted to $372,000 and $1,133,000 for the three and nine months ended September 30, 2007, respectively. For the three and nine months ended September 30, 2008, the freight revenue amounted to $259,000 and $748,000,
respectively. See reclassification note in Note 2 of the Notes to the Consolidated Financial Statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued



The Company ships products from two locations in the United States and one location in Germany.
Substantially all long-lived assets are located in the United States. Sales to international customers amounted to approximately $21.9 million and $18.6 million during the nine months ended September 30, 2008 and 2007, respectively.

Segment assets attributed to corporate unallocated expenses are deferred taxes. Long-lived assets include property and equipment, intangible assets,
long-term portion of inventory and other long-term assets. Deferred income tax is excluded from long-lived assets.



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##### Table of Contents

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

Overview

IRIS International, Inc. (the Company) consists of three operating units in two
business segments as determined in accordance with SFAS 131. Our in-vitro diagnostics, or IVD, segment also called Iris Diagnostics Division, designs, manufactures and markets IVD systems, consumables and supplies for urinalysis and body fluids.
With the acquisition of Leucadia Technologies we created our Iris Molecular Diagnostics, or IMD, subsidiary in April 2006, whose operations are included as part of the Iris Diagnostics Division. Our Sample Processing segment markets small
centrifuges and other processing equipment and accessories for rapid specimen processing.

The initial applications for our technology have
been in the urinalysis market and we are the leading worldwide provider of urine microscopy systems, with an installed base of over 2,000 systems in over 50 countries. We generate revenues primarily from: sales of IVD instruments, IVD consumables
and service and sample processing instruments and supplies. Revenues from IVD instruments include sales of urine microscopy and chemistry analyzers manufactured by us and a fully automated urine chemistry analyzer sold in the United States through a
distribution relationship with a Japanese manufacturer. We sell the urine microscopy analyzers and the iChem100, our semi-automated chemistry analyzer on a global basis and we launched our fully automated urine chemistry analyzer, iChem
VELOCITY, to the international market and recognized commercial revenue from its sale internationally in September 2008. We will continue to distribute the Japanese manufacturers fully automated chemistry analyzer domestically in 2009
but we plan to transition to sales in the United States of our iChem VELOCITY in 2009. Our IVD consumables include products such as chemical reagents and urine test strips. Service revenues are derived primarily from annual service contracts
purchased by our domestic customers usually after the initial year of sale, which is covered by product warranty, while international customers purchase spare parts as service is provided by our distributors. Once the analyzers are installed, we
generate recurring revenue from sales of consumables. Consumable and service revenue should continue to expand as the installed base of related instruments increases. Revenue is also generated from sales of sample processing instruments and related
supplies, which primarily consist of centrifuge systems, DNA processing workstations and blood analysis products.

Domestic sales of our
urinalysis systems are direct to the customer through our sales force. International sales, with the exception of France and Puerto Rico where sales are direct to end use customers, are through independent distributors. International sales
represented 32% of consolidated revenues during the first nine months of 2008 as compared to 31% during the first nine months of 2007. Since international sales are made through independent distributors, gross profit margin is lower than domestic
sales of the same products, but we incur minimal sales and marketing costs for such sales. Our Sample Processing products are sold worldwide primarily through distributors.

We have introduced a new commercial name, NADiA ProsVue, to clearly differentiate our NADiA PSA assay from routine screening PSA assays. We met
with the U.S. Food and Drug Administration (FDA), to review the NADiA ProsVue Pre-Investigational Device Exemption submission and have reached an agreement in principle on the product claim and clinical surrogates to be used in a
clinical study. We currently anticipate initiating the first part of this clinical study during the fourth quarter of 2008 and it is our expectation that the clinical study will take approximately two months to complete. We plan to submit a new
510(k) application to the FDA, seeking clearance of prognostic claim for indentifying patients with low-risk of prostate cancer recurrence post-prostatectomy, some time in the first quarter of 2009.

During the second quarter of 2007, we closed the operations of our Advanced Digital Imaging Research subsidiary, or ADIR, whose costs had previously been
substantially covered by government sponsored grants. While the closing of ADIR resulted in a one-time charge of approximately $163,000 in the second quarter of 2007, it has resulted in a reduction in research and development expenses of $380,000
for the nine months ended September 30, 2008.



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Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and our discussion and analysis of our financial condition and results of operations
require us to make judgments, assumptions, and estimates that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions we
believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We regularly discuss with our audit committee the basis of our estimates. Actual results
may differ from these estimates and such differences may be material.

A description of our critical accounting policies that represent the
more significant judgments and estimates used in the preparation of our financial statements was provided in the Managements Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for
the year ended December 31, 2007. There have been no material changes in theses critical accounting policies since December 31, 2007.

Results
of Operations

The following table summarizes results of operations data for the periods indicated. The percentages in the table are
based on total revenues with the exception of percentages for gross profit margins, which are computed on related revenue, and income taxes, which are based on income before income taxes.



|                                           |  |                                 |        |                                |      |      |   |        |  |      |  |   |        |      |      |  |   |        |  |     
|------------------------------------------ |  | ------------------------------- | ------ | ------------------------------ | ---- | ---- | - | ------ |  | ---- |  | - | ------ | ---- | ---- |  | - | ------ |  | ----
|                                           |  | Three months endedSeptember 30, |        | Nine months endedSeptember 30,
|(in thousands)                             |  | 2008                            |        |                                |      | 2007 |   |        |  | 2008 |  |   |        | 2007 |      | 
|Revenues(1)                                |  |                                 |        |                                |      |      |   |        |  |      |  |   |        |      |      |  |   |        |  |     
|IVD instruments                            |  | $                               | 8,335  |                                | 36%  |      | $ | 7,484  |  | 36%  |  | $ | 24,091 |      | 35%  |  | $ | 24,628 |  | 39% 
|IVD consumables and service                |  |                                 | 11,537 |                                | 49%  |      |   | 9,835  |  | 48%  |  |   | 34,319 |      | 50%  |  |   | 28,795 |  | 46% 
|Sample Processing instruments and supplies |  |                                 | 3,552  |                                | 15%  |      |   | 3,244  |  | 16%  |  |   | 10,405 |      | 15%  |  |   | 9,000  |  | 15% 
|                                           |  |                                 |        |                                |      |      |   |        |  |      |  |   |        |      |      |  |   |        |  |     
|Total revenues                             |  |                                 | 23,424 |                                | 100% |      |   | 20,563 |  | 100% |  |   | 68,815 |      | 100% |  |   | 62,423 |  | 100%
|                                           |  |                                 |        |                                |      |      |   |        |  |      |  |   |        |      |      |  |   |        |  |     
|Gross profit(2)                            |  |                                 |        |                                |      |      |   |        |  |      |  |   |        |      |      |  |   |        |  |     
|IVD instruments                            |  |                                 | 3,459  |                                | 41%  |      |   | 3,487  |  | 47%  |  |   | 10,958 |      | 45%  |  |   | 11,613 |  | 47% 
|IVD consumable and service                 |  |                                 | 6,621  |                                | 57%  |      |   | 5,621  |  | 57%  |  |   | 19,572 |      | 57%  |  |   | 15,369 |  | 53% 
|Sample Processing instruments and supplies |  |                                 | 1,722  |                                | 48%  |      |   | 1,659  |  | 51%  |  |   | 5,218  |      | 50%  |  |   | 4,559  |  | 51% 
|                                           |  |                                 |        |                                |      |      |   |        |  |      |  |   |        |      |      |  |   |        |  |     
|Gross profit                               |  |                                 | 11,802 |                                | 50%  |      |   | 10,767 |  | 52%  |  |   | 35,748 |      | 52%  |  |   | 31,541 |  | 51% 
|                                           |  |                                 |        |                                |      |      |   |        |  |      |  |   |        |      |      |  |   |        |  |     
|Operating expenses                         |  |                                 |        |                                |      |      |   |        |  |      |  |   |        |      |      |  |   |        |  |     
|Marketing and selling                      |  |                                 | 4,152  |                                | 17%  |      |   | 3,590  |  | 17%  |  |   | 11,898 |      | 17%  |  |   | 9,950  |  | 16% 
|General and administrative                 |  |                                 | 2,736  |                                | 12%  |      |   | 2,725  |  | 13%  |  |   | 8,378  |      | 12%  |  |   | 7,403  |  | 12% 
|Research and development, net              |  |                                 | 2,754  |                                | 12%  |      |   | 2,355  |  | 12%  |  |   | 8,010  |      | 12%  |  |   | 7,791  |  | 12% 
|                                           |  |                                 |        |                                |      |      |   |        |  |      |  |   |        |      |      |  |   |        |  |     
|Total operating expenses                   |  |                                 | 9,642  |                                | 41%  |      |   | 8,670  |  | 42%  |  |   | 28,286 |      | 41%  |  |   | 25,144 |  | 40% 
|                                           |  |                                 |        |                                |      |      |   |        |  |      |  |   |        |      |      |  |   |        |  |     
|Operating income                           |  |                                 | 2,160  |                                | 9%   |      |   | 2,097  |  | 10%  |  |   | 7,462  |      | 11%  |  |   | 6,397  |  | 10% 
|Other income (expense)                     |  |                                 | 222    |                                | 1%   |      |   | 388    |  | 2%   |  |   | 848    |      | 1%   |  |   | 1,083  |  | 2%  
|                                           |  |                                 |        |                                |      |      |   |        |  |      |  |   |        |      |      |  |   |        |  |     
|Income before income taxes                 |  |                                 | 2,382  |                                | 10%  |      |   | 2,485  |  | 12%  |  |   | 8,310  |      | 12%  |  |   | 7,480  |  | 12% 
|Income taxes(3)                            |  |                                 | 764    |                                | 32%  |      |   | 867    |  | 35%  |  |   | 2,663  |      | 32%  |  |   | 2,607  |  | 35% 
|                                           |  |                                 |        |                                |      |      |   |        |  |      |  |   |        |      |      |  |   |        |  |     
|Net income                                 |  | $                               | 1,618  |                                | 7%   |      | $ | 1,618  |  | 8%   |  | $ | 5,647  |      | 8%   |  | $ | 4,873  |  | 8%  
|                                           |  |                                 |        |                                |      |      |   |        |  |      |  |   |        |      |      |  |   |        |  |     



|(1) | The consolidated revenues include reclassification of freight revenue from cost of goods and marketing and selling expenses in accordance with EITF 00-10. The reclassification in
consolidated revenues amounted to $259,000 and $372,00 for the three months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008 and 2007, the freight revenue amounted to $748,000 and $1,133,000,
respectively. See reclassification note in Note 2 of the Notes to the Consolidated Financial Statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Gross profit margin percentages are based on the related sales of each category.
|--- | --------------------------------------------------------------------------------

|(3) | Income tax percentage is computed based on the relationship of income taxes to income before income taxes.
|--- | ----------------------------------------------------------------------------------------------------------

Comparison of Three Months Ended September 30, 2008 to 2007

Consolidated revenues for the three months ended September 30, 2008 increased by 14% over the prior year quarter. Revenues in the IVD urinalysis segment increased 15% to $19.9 million in the third quarter of 2008
from $17.0 million in the prior year quarter. Sales of IVD instruments increased 11% to $8.3 million in the third quarter of 2008 from $7.5 million in the prior year quarter, primarily due to over $1.0 million of incremental international revenue
with the launch of the iChem VELOCITY and iRICELL integrated urinalysis workstation.

Revenues from IVD consumables and service
increased to $11.5 million in the 2008 third quarter as compared to $9.8 million in the prior year quarter. The 17% increase was driven almost entirely by strong demand for our consumable products as a result of our growing installed base of
instruments. Revenues from sample processing instruments and supplies during the third quarter of 2008 also experienced an increase to $3.6 million, a 9% increase as compared to $3.2 million for the same period a year ago. The increase was due to
strong sales of the new StatSpin Express 4 centrifuge partially offset by a decline in the Express 2 and Express 3 centrifuge models. International revenue represented 30% of the 2008 consolidated third quarter revenue versus 27% in the same period
a year ago.

Overall gross profit margins decreased to 50% during the third quarter of 2008 from 52% during the third quarter of 2007. The
quarters gross margin decrease resulted from an increase in the provision for obsolete inventory of $150,000 as we have experienced a faster than expected replacement of Legacy systems in 2008, unfavorable impact of foreign currency
denominated in Japanese Yen of $175,000 and higher manufacturing costs associated with learning curves and small quantity procurement in the initial manufacturing batches of our new iChem VELOCITY automated urine chemistry analyzer of $125,000. The
gross profit margin of our IVD instruments was 41% and 47% during the third quarter of 2008 and 2007, respectively. The gross margin of our IVD consumables and services was 57% for both the third quarter of 2008 and the third quarter of 2007.
Continued strong reagent shipments and slightly improved gross margins in our service area were offset by unfavorable impact of foreign currency exchange rate due primarily to purchased strips denominated in Japanese yen and unfavorable Euro
currency variances associated with operating our German manufacturing facility. Gross profit margin for our sample processing segment decreased to 48% during the third quarter of 2008 from 51% during the third quarter of 2007 as a result of product
mix with the new Express 4 drawing slightly lower margins than previous versions of the product.

Marketing and selling expenses totaled
$4.2 million, or 17% of revenues, during the third quarter of 2008 as compared to $3.6 million, or 17% of revenues during the third quarter of 2007. The increase includes additional personnel and related costs of $490,000 and $82,000 related to
travel, trade shows, iChem VELOCITY launch-related expenses and the initiation of NADiA ProsVue market development activities. The increase in personnel and related costs is the result of our previous investments to enhance our sales and marketing
support in order to meet the needs of our growing business. We expect to continue to invest in these areas to strengthen our global presence and support for the anticipated launches of our extensive product pipeline.

General and administrative expenses remained consistent and amounted to $2.7 million, or 12% and 13% of revenue during the third quarters ended 2008 and
2007, respectively.

Research and development expense for the third quarters in 2008 and 2007 amounted to $2.8 million and $2.4 million,
respectively, or 12% of revenues in both quarters. During the current quarter, the increase was primarily attributable to $440,000 in personnel related costs and $130,000 in clinical development related expenses as we continue to invest heavily in
research and development for the continued development of our diagnostics product pipeline, including our NADiA platform. This amount was partially offset by a $160,000 reduction in prototype and research materials related to the iChem VELOCITY and
outside consulting expenses incurred in the third quarter of 2007.



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Interest income decreased during the third quarter of 2008 to $276,000 from $402,000 during the third
quarter of 2007, as a result of the lower interest rate environment.

Income tax expense during the third quarter of 2008 amounted to 32%
of pre-tax income as compared to 35% during the prior year quarter. We have deferred tax assets relating to tax loss carry forwards and research and development tax credits.

Comparison of Nine Months Ended September 30, 2008 to 2007

Consolidated revenues for the nine
months ended September 30, 2008 increased by 10% over the prior year period. Revenues in the IVD urinalysis segment increased 9% to $58.4 million in 2008 from $53.4 million in the prior year period. Sales of IVD instruments decreased to $24.1
million from $24.6 million during the prior year period. The decrease in instrument sales is mostly due to two large domestic customer orders during the nine months ended September 30, 2007, partially offset by over $1.0 million of incremental
international revenue with the launch of the iChem VELOCITY and iRICELL integrated urinalysis workstation during the third quarter of 2008. International revenues accounted for approximately 32% of consolidated revenue during the nine months
ended September 30, 2008 compared to 34% during the prior year. IVD consumables and service revenue increased to $34.3 million from $28.8 million, an increase of $5.5 million or 19% over the prior year, primarily due to record consumable
shipments to support our larger installed base of instruments. Revenues during the first nine months from the sample processing segment increased to $10.4 million from $9.0 million, an increase of $1.4 million or 16% over the prior year, primarily
due to strong sales of Express 4 centrifuges.

Overall gross profit margins for the first nine months increased to 52% during the current
year period compared to 51% for the 2007 period. The gross profit margin of our IVD instruments decreased to 45% in 2008 compared to 47% during the prior year. The decrease is a result of the unfavorable impact of foreign currency denominated in
Japanese Yen and lower margins associated with learning curves and small quantity procurement in the initial manufacturing batches of our new iChem VELOCITY automated urine chemistry analyzer. The gross margin of our IVD consumables and services
increased to 57% during the first nine months of 2008 compared to 53% during the prior year period, primarily due to record demand for consumables and slight improvements in service profitability, despite an unfavorable foreign currency exchange
variance. Gross profit margin for our sample processing laboratory instrument and supply segment decreased to 50% in 2008 from 51% in 2007, primarily due to product mix.

Marketing and selling expenses totaled $11.9 million, or 17% of revenue, for the first nine months, as compared to $10.0 million, or 16% of revenue, in the same period of 2007. The increase includes additional
personnel and related costs of $1.6 million; $185,000 related to travel, trade shows and iChem VELOCITY launch-related charges; and higher fees paid to group purchasing organizations (GPOs) of $119,000. The increase in personnel and
related costs is the result of our previous investments to enhance our sales and marketing support in order to meet the needs of our growing business and the initiation of NADiA ProsVue (formerly NADiA PSA) market development activities. We expect
to continue to invest in these areas to strengthen our global presence and support for the anticipated launches of our extensive product pipeline.

General and administrative expenses increased during the first nine months to $8.4 million compared to $7.4 million in the prior year. The increase includes additional personnel and related cost of $100,000, stock-based compensation expense
of $510,000, and other corporate operating expenses of $270,000.



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Research and development expense amounted to $8.0 million during the first nine months of 2008 compared
to $7.8 million in the same period in the prior year. During the first nine months of 2008, payroll and related costs increased by $920,000 and clinical development related expenses increased by $300,000 offset by a reduction of prototype and
research materials related to the iChem VELOCITY of $600,000 and $380,000 savings related to the closing of our ADIR imaging subsidiary in the second quarter of 2007.

Interest income for the first nine months of 2008 and 2007 amounted to $871,000 and $1.1 million respectively, as a result of the lower interest rates.

Income tax expense during the nine months of 2008 amounted to 32% of pre-tax income as compared to 35% during the prior year period. We have deferred tax
assets relating to tax loss carry forwards and research and development tax credits.

Off-Balance Sheet Arrangements

At September 30, 2008 and 2007, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any
financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

We conduct business in certain
foreign markets, primarily in the European Union and Asia. To mitigate the potential impact of adverse fluctuations in the U.S. Dollar exchange rate for these currencies, we periodically purchase foreign currency forward contracts. During the
first three quarters of 2008, we entered into such contracts for Euros and Japanese Yen totaling $404,000 and $7.1 million, respectively. As of September 30, 2008, our remaining foreign currency forward contracts are for Japanese Yen and total
$2.0 million, which we will utilize for future purchases from our Japanese IVD supplier. As of September 30, 2008, the notional amount in Japanese Yen under our foreign currency forward contracts totaled 64.5 million Yen. All outstanding
foreign currency forward contracts are marked to market at the end of each fiscal period. Our realized gain or loss with respect to foreign currency fluctuations will depend on the foreign currency exchange rate changes and other factors in effect
as the contracts mature. The net fair value of all these contracts as of September 30, 2008 was $(148,000). Losses and gains on the underlying transactions being hedged would largely offset any gains and losses on the fair value of foreign
currency forward contracts.

Liquidity and Capital Resources

Our primary source of liquidity is cash from operations, which depends heavily on sales of our IVD instruments, consumables and service, as well as sales of sample processing instruments and supplies. At
September 30, 2008, our cash and cash equivalents amounted to $30.1 million compared to $28.1 million at December 31, 2007.

Operating Cash Flows.Cash provided by operations for the nine months ended September 30, 2008 improved to $8.6 million compared to cash provided by operations of $639,000 during the prior year nine month period. In addition to
a net income increase of $774,000, our improvement includes non-cash items consisting of higher depreciation and amortization of $499,000, and stock-based compensation expense of $766,000 and tax benefits from stock option exercises of $512,000. In
addition, we experienced a $4.4 million reduction in accounts receivable, $396,000 reduction in inventories, $533,000 reduction in investment in sales-type leases, an increase of $1.4 million in accounts payable and accrued expenses and a $759,000
increase in deferred service contract revenue. The sources of cash were partially offset by a decrease of deferred taxes of $1.8 million.

The number of days sales in accounts receivable decreased to 59 days at the end of the first nine months compared to 74 days for the prior year nine months. The number of days sales in accounts receivable varies and extends due to the fact
that our customers are subject to reimbursement delays attributed to government and third party payer compliance and regulation issues.



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Our cash flow has been favorably affected by tax loss carry forwards. As of December 31, 2007, we
had, net of valuation allowances, federal net operating loss carry forwards of approximately $2.1 million, which expire in various years through 2025. We also have federal and state tax credit carry forwards of $2.4 million and $2.3, respectively,
net of valuation allowances. We continue to realize tax deductions from the exercise of certain stock options. During the nine months ended September 30, 2008, we realized tax deductions of approximately $1.8 million relating to this item.
During the three months ended September 30, 2008, we paid federal and state taxes of $825,000 and $223,000, respectively. During the nine months ended September 30, 2008, we paid federal and state taxes of $1,445,000 and $427,000,
respectively.

Investing Activities.Cash used in investing activities totaled $3.1 million for the nine months ended
September 30, 2008, a $442,000 decrease over the prior year period primarily as a result of decreases in purchases of property and equipment of $797,000 in the first nine months of 2008 with partial offsets of capitalization of software
development costs of $223,000 and purchases of short-term marketable securities in the prior period totaling $132,000.

Financing
Activities.Cash used in financing activities totaled $3.4 million during the first nine months of 2008, which includes the repurchase of common stock totaling $5.7 million and a reduction in tax deduction benefits from the exercise of stock
options of $512,000 and the issuance of common stock of $458,000 over the prior first nine months of 2007.

We currently have a credit
facility with a commercial bank, which was renewed in May 2008, consisting of a $6.5 million revolving line of credit for working capital and a $10.0 million line of credit for acquisitions and product opportunities. The credit facility has variable
interest rates, which will change from time to time based on changes to either the LIBOR rate or the lenders prime rate. As of September 30, 2008, there were no borrowings under the new credit facility. We are subject to certain financial
and non-financial covenants under the credit facility with the bank and as of September 30, 2008, we were in compliance with these covenants.

In November 2007, we filed with the Securities and Exchange Commission a shelf registration statement on Form S-3, which allows us to sell up to $125.0 million in common stock, preferred stock or debt securities from time to time. In
December 2007, the shelf registration statement was declared effective. As of September 30, 2008, no securities had been issued pursuant to this registration statement.

In March 2008, our board of directors authorized a share repurchase and retirement plan of up to $15 million of our common stock over a 12-month period.
Through June 30, 2008, we had repurchased 492,068 shares of common stock for approximately $5,748,000 under the plan. Subsequent to June 30, 2008, we have not repurchased additional common stock. On July 25, 2008, our board of
directors terminated the share repurchase and retirement plan.

On September 11, 2008, our Chief Executive Officer exercised a stock
option to purchase an aggregate of 130,000 shares of common with an exercise price of $4.34 per share, on a net issue basis in a transaction approved by the compensation committee of our board of directors. We issued 62,081 shares of common stock to
our Chief Executive Officer, and retained 67,919 shares of common stock with an aggregate market value of $1,219,000 based on the last closing price of our common stock immediately prior to exercise of $17.95 per share. Of this amount, $564,000 was
applied in payment of the aggregate exercise price of the stock options and $655,000 was applied in payment of payroll taxes arising from the option exercise. These options had a term expiring on November 18, 2008.

We believe that our current cash on hand, together with cash generated from operations and cash available under the credit facility with the bank will be
sufficient to fund normal operations. However, additional funding may be required to fund expansion of our business. There is no assurance that such funding will be available, on terms acceptable to us.



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Recent Accounting Pronouncements

In March 2008, the Financial Accounting Standards Board or FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, which amends SFAS No. 133. The
statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entitys derivative instruments and hedging activities and their effects on the entitys financial position, financial
performance, and cash flows. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Currently, we have purchased foreign currency forward contracts to hedge
foreign currency cash flows and plan to adopt the provisions of SFAS No. 161 on our consolidated financial statements in 2009.

In
December 2007, the Financial Accounting Standards Board, or FASB issued SFAS No. 141 (revised 2007), Business Combinations, which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions,
but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the
capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for us beginning July 1, 2009 and will apply prospectively to business
combinations completed on or after that date.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of
equity separate from the parents equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest
will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS
No. 160 is effective for us beginning July 1, 2009 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. Currently, there is no impact of the adoption of SFAS No. 160
on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, or SFAS 159. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The accounting results in the financial instrument being marked to
fair value every reporting period with the gain/loss from a change in fair value recorded in the income statement. SFAS No. 159 is effective for us on January 1, 2008. The adoption of SFAS 159 does not have a material impact to our
consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or
SFAS 157. SFAS 157 establishes a framework for measuring fair value in accordance with generally accepted accounting principles, clarifies the definition of fair value within that framework and expands disclosures about fair value
measurements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, except for the measurement of share-based payments. SFAS 157 was effective for the Company on January 1, 2008.
However, in February 2008, the FASB released FASB Staff Position (FSP) SFAS No. 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our
consolidated financial statements other than the disclosures required by SFAS No. 107, Disclosures about Fair Value of Financial Instruments in our Annual Report on From 10-K for the year ended December 31, 2008. The
adoption of SFAS 157 for nonfinancial assets and nonfinancial liabilities, effective January 1, 2009, is not expected to have a material impact on our consolidated financial statements.



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|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Market Risk

Our business is exposed to various market risks, including changes in interest rates and foreign currency
exchange rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates. We do not invest in derivatives, foreign currency forward contracts or other
financial instruments for trading or speculative purposes. We had no debt at June 30, 2008, and thus were not subject to market risk for changes in interest rates on debt obligations. We are subject to market risk for changes in interest rates
on our short-term investment portfolio. We invest our excess cash in certificates of deposit and other short-term investments, and the market value of these investments fluctuate based on changes in interest rates.

Foreign Currencies

The Company conducts business in
certain foreign markets, primarily in the European Union and Asia. Our primary exposure to foreign currency risk relates to investments in foreign subsidiaries that transact business in a functional currency other than the U.S. Dollar,
primarily the Euro. We are subject to certain foreign currency risks in the importation of goods from Japan and as a result of commercial operations in Europe and Asia. Our purchases from a major Japanese IVD supplier are denominated in Japanese
Yen. These components represent a significant portion of our material costs. All of our sales are denominated in U.S. Dollars with the exception of France, where sales are denominated in Euros. Fluctuations in the U.S. Dollar exchange rate for
Japanese Yen and Euros could result in increased costs for our key components and increased costs for commercial operations in Europe.

To
mitigate the potential impact of adverse fluctuations in the U.S. Dollar exchange rate for these currencies, we periodically purchase foreign currency forward contracts. During the first three quarters of 2008, we entered into such contracts
for Euros and Japanese Yen totaling $404,000 and $7.1 million, respectively. As of September 30, 2008, our remaining foreign currency forward contracts are for Japanese Yen and total $2.0 million, which we will utilize for future purchases from
our Japanese IVD supplier. As of September 30, 2008, the notional amount in Japanese Yen under our foreign currency forward contracts totaled 64.5 million yen. All outstanding foreign currency forward contracts are marked to market at the
end of each fiscal period. Our realized gain or loss with respect to foreign currency fluctuations will depend on the foreign currency exchange rate changes and other factors in effect as the contracts mature.

The net fair value of all these contracts as of September 30, 2008 was $(148,000). We estimated the sensitivity of the fair value of all foreign
currency forward contracts to a hypothetical 10% strengthening and 10% weakening of the spot exchange rates for the U.S. Dollar against the foreign currencies at September 30, 2008. The analysis showed that a 10% strengthening of the
U.S. Dollar would result in a gain from a fair value change of $330,000 and a 10% weakening of the U.S. Dollar would result in a loss from a fair value change of $87,000 in these instruments. Losses and gains on the underlying transactions
being hedged would largely offset any gains and losses on the fair value of foreign currency forward contracts. These offsetting gains and losses are not reflected in the above analysis.



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##### Table of Contents

|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

We maintain disclosure controls and procedures, as defined by paragraph (e) of Rules 13a-15(f) or 15d-15(f) of the
Exchange Act of 1934, as amended, designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the SEC and to approve, summarize and disclose this information within the time periods
specified in the rules of the SEC. Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining these procedures, and, as required by the rules of the SEC, evaluate their effectiveness. Our Chief Executive
Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2008, the end of the period covered by this report, and based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

Changes in Internal Controls over Financial Reporting

There was no change in our internal control over financial reporting during the quarter ended September 30, 2008 that materially
affected, or is reasonable likely to materially affect, our internal control over financial reporting.



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##### Table of Contents

PART II: OTHER INFORMATION



|Item 1A. | Risk Factors
|-------- | ------------

This Quarterly Report on Form 10-Q
contains forward-looking statements, which are subject to a variety of risks and uncertainties. Other actual results could differ materially from those anticipated in those forward-looking statements as a result of various factors, including those
set forth below and in our Annual Report of Form 10-K for the year ended December 31, 2007.

Risk Factors relating to our business and
common stock are contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007. Except as set forth below, there have been no material changes to such risk factors during the nine months ended
September 30, 2008.

Adverse conditions in the global economy and disruption of financial markets could negatively impact our
customers and therefore our results of operations.

An economic downturn in the businesses or geographic areas in which we sell our
products could reduce demand for these products and result in a decrease in sales volume that could have a negative impact on our results of operations. Volatility and disruption of financial markets could limit our customers ability to obtain
adequate financing or credit to purchase and pay for our products in a timely manner, or to maintain operations, and result in a decrease in sales volume that could have a negative impact on our results of operations.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

On March 3, 2008, our board of directors authorized a share repurchase and retirement plan of up to $15 million of our common stock over a 12-month period. From March 3, 2008 through June 30, 2008, we repurchased 492,068
shares of our common stock for approximately $5,748,000. On July 25, 2008, our board of directors terminated the share repurchase and retirement plan. All shares repurchased by us were cancelled and became authorized but unissued shares of
common stock.



|Item 6. | Exhibits
|------- | --------



|              |  |                                                                                                                     |  |                  
|------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | -----------------
|ExhibitNumber |  | Description                                                                                                         |  | ReferenceDocument
|10.1          |  | Change in Terms Agreement, dated May 1, 2008, by and between Iris International, Inc. and California Bank and Trust |  | (1)              
|              |  |                                                                                                                    
|10.2          |  | Change in Terms Agreement, dated May 1, 2008, by and between Iris International, Inc. and California Bank and Trust |  | (1)              
|              |  |                                                                                                                    
|31.1          |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer                  |  | *                
|              |  |                                                                                                                    
|31.2          |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer                  |  | *                
|              |  |                                                                                                                    
|32.1          |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer                  |  | *                
|              |  |                                                                                                                    
|32.2          |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer                  |  | *                



|(1) | Incorporated by reference to Exhibits 10.1 and 10.2, respectively, to our Current Report on Form 8-K/A, as filed on July 14, 2008.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|* | Filed herewith.
|- | ---------------



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SIGNATURES

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: October 30, 2008 |  | IRIS INTERNATIONAL, INC.
|                       |  |                         
|                       |  | By:                      |  | /s/ César M. García                                           
|                       |  |                          |  | César M. García                                               
|                       |  |                          |  | President and Chief Executive Officer                         
|                       |  |                         
|                       |  | By:                      |  | /s/ Peter L. Donato                                           
|                       |  |                          |  | Peter L. Donato                                               
|                       |  |                          |  | Chief Financial Officer                                       
|                       |  |                          |  | (Principal Financial Officer and Principal Accounting Officer)



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