<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

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

                                    FORM 10-Q

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



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

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


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


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



9162 Eton Avenue, Chatsworth CA.                                           91311
(Address of principal executive offices)                              (Zip Code)

                         Telephone Number: 818-709-1244




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



                     Yes  [X]                         No   [ ]


The number of shares of Common Stock of the registrant outstanding as of
November 5, 1999 was 9,172,607.


<PAGE>   2

                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.


                               INDEX TO FORM 10-Q

                 Three and Nine Months Ended September 30, 1999




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

                 ITEM 1 - Consolidated Financial Statements

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

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

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

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

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

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

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



      PART 2 -   OTHER INFORMATION

                 ITEM 1 - Legal Proceedings........................................20

                 ITEM 6 - Exhibits and Reports on Form 8-K

                    (a) Exhibits...................................................20

                    (b) Reports on Form 8-K........................................20



      SIGNATURE  ..................................................................21
</TABLE>


                                       2
<PAGE>   3

PART 1 - FINANCIAL INFORMATION

ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS


                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS

<TABLE>
<CAPTION>
                                                                            At December 31,   At September 30,
                                                                                 1998               1999
                                                                             ------------       ------------
                                                                                          (unaudited)
<S>                                                                          <C>                <C>
Current assets:
 Cash and cash equivalents                                                   $    389,495       $  1,068,751
 Accounts receivable, net of allowance for doubtful
  accounts of $271,544 in 1998 and $412,977 in 1999                             5,615,799          5,906,481
 Inventories                                                                    4,503,446          3,570,899
 Prepaid expenses and other current assets                                        251,483            405,708
 Deferred tax asset                                                               942,589            942,589
                                                                             ------------       ------------
    Total current assets                                                       11,702,812         11,894,428

 Property and equipment, at cost, net of accumulated depreciation
  of $5,140,169 in 1998 and $5,796,096 in 1999                                  2,004,661          1,492,146
 Purchased intangibles, net of accumulated amortization                         7,512,100            266,968
 Software development costs, net of accumulated amortization of
  $1,558,597 in 1998 and $1,762,987 in 1999                                     1,097,907            428,629
 Deferred tax asset                                                             7,914,129         10,655,655
 Other assets                                                                   1,875,475            851,713
                                                                             ------------       ------------
    Total assets                                                             $ 32,107,084       $ 25,589,539
                                                                             ============       ============

                              LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
 Short-term borrowings                                                       $    464,769       $    259,818
 Current portion of long-term debt                                              1,742,027          2,142,027
 Accounts payable                                                               2,871,613          2,692,799
 Accrued expenses                                                               2,259,802          2,925,213
 Deferred income - service contracts and other                                    794,688            995,990
                                                                             ------------       ------------
    Total current liabilities                                                   8,132,899          9,015,847

 Subordinated note payable                                                      7,000,000          7,000,000
 Deferred income - service contracts and other liabilities                        274,798            544,195
 Notes payable, long-term portion                                               1,700,000                 --
                                                                             ------------       ------------
    Total liabilities                                                          17,107,697         16,560,042

Commitments and contingencies

Shareholders' equity:
 Preferred stock, $.01 par value; Authorized: 3,000,000 shares;
  Convertible Series A shares issued and outstanding: 1998
  and 1999 - 3,000 ($3,000,000 liquidation preference)                                 30                 30
  Callable Series B shares issued and outstanding: 1998-none
  1999-198,000 ($594,000 liquidation value)                                            --              1,980
 Common stock, $.01 par value; Authorized: 15,600,000 shares,
   shares issued and outstanding: 1998 - 6,432,875 and 1999 - 7,172,607            64,328             71,723
 Additional paid-in capital                                                    38,134,290         39,437,496
 Unearned compensation                                                           (204,294)          (129,832)
 Foreign currency translation adjustment                                           47,510             38,464
 Accumulated deficit                                                          (23,042,477)       (30,390,364)
                                                                             ------------       ------------
    Total shareholders' equity                                                 14,999,387          9,029,497
                                                                             ------------       ------------
    Total liabilities and shareholders' equity                               $ 32,107,084       $ 25,589,539
                                                                             ============       ============
</TABLE>

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


                                       3
<PAGE>   4

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


<TABLE>
<CAPTION>
                                                      For the three months ended September 30,
                                                      ----------------------------------------
                                                                1998            1999
                                                            ------------    ------------
<S>                                                         <C>             <C>
Sales of IVD systems                                        $  2,505,429    $  2,569,523
Sales of IVD supplies and services                             3,189,095       3,742,727
Sales of small instruments and supplies                        1,099,339       1,204,555
Royalties and licensing revenues                                 343,740         125,733
                                                            ------------    ------------

Net revenues                                                   7,137,603       7,642,538
                                                            ------------    ------------

Cost of goods - IVD systems                                    1,374,907       1,786,266
Cost of goods - IVD supplies and services                      1,489,849       1,784,771
Cost of goods - small instruments and supplies                   600,331         651,702
                                                            ------------    ------------

Cost of goods sold                                             3,465,087       4,222,739
                                                            ------------    ------------

Gross margin                                                   3,672,516       3,419,799

Marketing and selling                                          1,479,292       1,160,699
General and administrative                                       926,520       1,292,583
Research and development, net                                    565,970         312,086
Amortization of intangibles                                      290,497         280,645
Unusual charges                                                   38,254       8,492,354
                                                            ------------    ------------

Total operating expenses                                       3,300,533      11,538,367

Operating income (loss)                                          371,983      (8,118,568)

Other income (expense):
 Interest income                                                   7,557           9,067
 Interest expense                                               (311,975)       (246,746)
 Other income                                                     79,802          40,492
                                                            ------------    ------------

Income (loss) before provision (benefit) for income taxes        147,367      (8,315,755)

Provision (benefit) for income taxes                              53,319      (2,406,680)
                                                            ------------    ------------

Net income (loss)                                           $     94,048    $ (5,909,075)
                                                            ============    ============

Net income (loss) per common share - basic                  $        .01    $       (.85)
                                                            ============    ============
Net income (loss) per common share --diluted                $        .01    $       (.85)
                                                            ============    ============


Weighted average number of common shares - basic               6,316,706       6,928,353
                                                            ============    ============

Weighted average number of common shares and common
  share equivalents outstanding for the period - diluted       7,794,539       6,928,353
                                                            ============    ============
</TABLE>


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


                                       4
<PAGE>   5

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

<TABLE>
<CAPTION>
                                                      For the nine months ended September 30,
                                                      ---------------------------------------
                                                                1998            1999
                                                            ------------    ------------
<S>                                                         <C>             <C>
Sales of IVD systems                                        $  7,691,193    $  7,391,258
Sales of IVD supplies and services                             9,114,971      10,548,816
Sales of small instruments and supplies                        3,196,620       3,462,640
Royalty and license revenue                                      434,490         227,980
                                                            ------------    ------------

Net revenues                                                  20,437,274      21,630,694
                                                            ------------    ------------

Cost of goods - IVD systems                                    4,439,617       4,683,060
Cost of goods - IVD supplies and services                      4,356,474       4,884,802
Cost of goods - sales of small instruments and supplies        1,765,149       1,877,461
                                                            ------------    ------------

Cost of goods sold                                            10,561,240      11,445,323
                                                            ------------    ------------

Gross margin                                                   9,876,034      10,185,371

Marketing and selling                                          3,965,782       3,791,089
General and administrative                                     2,686,630       3,189,624
Research and development, net                                  1,638,873       1,106,191
Intangibles amortization                                         869,989         862,500
Litigation settlement and unusual charges                        124,842      10,535,627
                                                            ------------    ------------

Total operating expenses                                       9,286,116      19,485,031

Operating income (loss)                                          589,918      (9,299,660)

Other income (expense):
 Interest income                                                  34,116          26,914
 Interest expense                                               (871,422)       (790,822)
 Other income                                                     65,733           8,955
                                                            ------------    ------------

Loss before benefit for income taxes                            (181,655)    (10,054,613)

Benefit for income taxes                                         (68,419)     (2,706,726)
                                                            ------------    ------------

Net loss                                                    $   (113,236)   $ (7,347,887)
                                                            ============    ============

Net loss per common share - basic                           $       (.02)   $      (1.11)
                                                            ============    ============

Net loss per common share - diluted                         $       (.02)   $      (1.11)
                                                            ============    ============

Weighted average number of common share - basic                6,289,045       6,619,032
                                                            ============    ============

Weighted average number of common shares and common
   share equivalents outstanding for the period - diluted      6,289,045       6,619,032
                                                            ============    ============
</TABLE>


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


                                       5
<PAGE>   6

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

<TABLE>
<CAPTION>
                                                                     For the nine months ended September 30,
                                                                     ---------------------------------------
                                                                                1998          1999
                                                                            -----------    -----------
<S>                                                                         <C>            <C>
Cash flow from operating activities:
  Net loss                                                                  $  (113,236)   $(7,347,887)
    Adjustments to reconcile net loss to net cash provided by operations:
     Deferred tax benefit                                                      (207,279)    (2,741,526)
     Depreciation and amortization                                            1,882,232      1,747,989
     Provision for impairment of certain assets                                      --      8,160,978
     Common stock and stock option compensation amortization                    195,897        147,193
     Gain on sale of equipment previously under an operating lease                   --        (87,158)
     Litigation settlement payable in equity securities                              --      1,520,371
     Allowance for doubtful accounts                                              3,965        141,433
    Changes in assets and liabilities:
     Accounts receivable - trade and other                                     (420,407)      (644,749)
     Service contracts, net                                                      70,530        310,879
     Inventories                                                               (926,428)       924,600
     Prepaid expenses and other current assets                                  (68,579)      (159,187)
     Other assets                                                              (312,297)       (12,776)
     Accounts payable                                                            84,694       (158,335)
     Accrued expenses                                                           328,260        716,263
     Deferred income and other liabilities                                      114,905             --
                                                                            -----------    -----------
Net cash provided by operating activities                                       632,257      2,518,088
                                                                            -----------    -----------

Cash flow from investing activities:
    Acquisition of property and equipment                                      (612,219)      (183,215)
    Software development costs                                                 (315,445)      (302,092)
    Sale of equipment previously under an operating lease                            --        125,000
    Adjustment to cost of business acquired                                     167,790             --
                                                                            -----------    -----------
Net cash used by investing activities                                          (759,874)      (360,307)
                                                                            -----------    -----------

Cash flow from financing activities:
    Borrowings under credit facility                                          4,360,000      8,168,891
    Repayments of credit facility                                            (4,110,000)    (8,373,842)
    Repayment of notes payable                                               (1,107,350)    (1,309,224)
    Issuance of common stock and warrant for cash                               202,835         56,081
    Deferred stock or debt issuance costs                                      (175,298)            --
                                                                            -----------    -----------
Net cash used by financing activities                                          (829,813)    (1,458,094)
                                                                            -----------    -----------

Effect of foreign currency fluctuation on cash and cash equivalents                 648        (20,431)
Net increase in cash and cash equivalents                                      (956,782)       679,256
Cash and cash equivalents at beginning of period                              1,470,861        389,495
                                                                            -----------    -----------
Cash and cash equivalents at end of period                                  $   514,079    $ 1,068,751
                                                                            ===========    ===========

Supplemental schedule of non-cash investing and financing activities:
    Issuance of common stock in exchange for services                       $   103,135    $    72,731
    Capital lease obligation incurred                                            70,000             --
    Issuance of common stock in satisfaction of liabilities                      31,336          7,650

Supplemental disclosure of cash flow information:
    Cash paid for interest                                                      813,547        742,661
    Cash paid for income taxes                                                  176,180         44,771
</TABLE>

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


                                       6
<PAGE>   7

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




<TABLE>
<CAPTION>

                                             For the three months ended September 30,
                                             ----------------------------------------
                                                        1998            1999
                                                    -----------     -----------
<S>                                                 <C>             <C>
Net income (loss)                                   $    94,048     $(5,909,075)

    Other comprehensive income (loss),
    foreign currency translation adjustment               5,632         (17,243)
                                                    -----------     -----------

Comprehensive income (loss)                         $    99,680     $(5,926,318)
                                                    ===========     ===========
</TABLE>


<TABLE>
<CAPTION>
                                              For the nine months ended September 30,
                                              ---------------------------------------
                                                        1998            1999
                                                    -----------     -----------
<S>                                                 <C>             <C>
Net loss                                            $  (113,236)    $(7,347,887)

    Other comprehensive income (loss),
    Foreign currency translation adjustment              13,425          (9,046)
                                                    -----------     -----------

Comprehensive loss                                  $   (99,811)    $(7,356,933)
                                                    ===========     ===========
</TABLE>

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


                                       7
<PAGE>   8

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

1.  FORMATION AND BUSINESS OF THE COMPANY.

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

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

Basis of Presentation of Unaudited Interim Financial Statements:

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

Use of Estimates:

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

Principles of Consolidation:

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

Reclassifications:

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

3.  COMPREHENSIVE INCOME.

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

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

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

<TABLE>
<S>                                                <C>
                   Beginning balance               $ 47,510
                   Current period change             (9,046)
                                                   --------
                   Ending balance                  $ 38,464
                                                   ========
</TABLE>

4.  INVENTORIES.

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

<TABLE>
<CAPTION>
                                         At December 31, 1998  At September 30, 1999
                                         --------------------  ---------------------
<S>                                                <C>                    <C>
Finished goods                                     $1,647,028             $1,315,632
Work-in-process                                       432,569                847,382
Raw materials, parts and sub-assemblies             2,423,849              1,407,885
                                                   ----------             ----------
                                                   $4,503,446             $3,570,899
                                                   ==========             ==========
</TABLE>

5.  PURCHASED INTANGIBLES.

    Purchased intangibles, at cost, consist of the following:


                                       8
<PAGE>   9

<TABLE>
<CAPTION>
                                      At December 31, 1998    At September 30, 1999
                                      --------------------    ---------------------
<S>                                            <C>                      <C>
Goodwill                                       $   383,108              $   383,108
International distribution channel               5,403,938                       --
Acquired technology and know-how                 3,960,904                       --
                                               -----------              -----------
                                                 9,747,950                  383,108
Less accumulated amortization                   (2,235,850)                (116,140)
                                               -----------              -----------
Total                                          $ 7,512,100              $   266,968
                                               ===========              ===========
</TABLE>

    The Company acquired most of these intangibles in connection with the 1996
acquisition of its genetic analysis business which is currently operated through
Perceptive Scientific Instruments, Inc, a wholly-owned subsidiary. Following the
recent transition to a new chief executive officer, the Company reviewed the
recoverability of these assets as part of an overall reassessment of its
business. Based primarily upon this segment's continued losses and generally
weakened market, the Company revised its forecasted cash flows (undiscounted and
without interest charges) from this business segment and determined that they
would be negative and insufficient to recover the cost of these intangible
assets. As a result, the Company wrote-off the remaining unamortized amount of
these intangible assets by recording a $6,556,847 charge to earnings in the
current quarter as an impairment loss. This charge is included under unusual
expenses.


6.  SHORT-TERM BORROWINGS AND NOTES PAYABLE.

    At September 30, 1999, the outstanding amount under the credit facility with
Foothill Capital Corporation consists of $2.0 million outstanding under a $3.6
million term loan and $259,818 outstanding under a $4.0 million revolving line
of credit. Borrowings under the line of credit are limited to a percentage of
eligible accounts receivable. The Company had approximately $1.7 million
available under the line of credit at September 30, 1999. The term loan bears
interest at the lender's prime rate (8.25% on September 30, 1999) plus 3.0% and
is payable in monthly installments of $100,000. The revolving credit line bears
interest at the lender's prime rate plus 1.0%. The credit facility is subject to
minimum interest charges, prepayment penalties and customary fees, is
collateralized by a first priority lien on all assets of the Company and matures
in 2001. It also contains financial covenants based primarily on tangible net
worth and cash flows and imposes restrictions on acquisitions, capital
expenditures and cash dividends. At the end of the third quarter, the Company
was not in compliance with one of the financial covenants of the credit
facility. The lender subsequently waived the noncompliance. Under the terms of
the loan agreement, this covenant will become stricter in the fourth quarter,
and the Company does not anticipate that it will be in compliance with the new
requirements. The Company plans to renegotiate the financial covenants with the
lender during the fourth quarter. Until those negotiations are completed, the
Company has reclassified $800,000 of the outstanding balance on the term loan
from long-term debt to short-term. There can be no assurance that the
negotiations will be successful.

    On September 30, 1999, the Company had outstanding notes payable in the
aggregate amount of $142,027 from the repurchase of common stock and warrants
from an affiliate of Roche Diagnostics, a former strategic partner in 1996. The
notes bear interest at the rate of 8%, and the principal is due in bi-monthly
installments of $100,000.

7.  CAPITAL STOCK.

Stock Issuances:

    During the nine months ended September 30, 1999, the Company (i) issued
options to purchase 460,250 shares of common stock under the Company's stock
option plans and (ii) cancelled options to purchase 97,300 shares of common
stock. At September 30, 1999, options to purchase 1,863,951 shares of common
stock were issued and outstanding under the Company's stock options plans. The
outstanding options expire by the end of 2009. The exercise price for these
options ranges from $0.69 to $4.5 per share. At September 30, 1999, there were
12,217 shares of common stock available for the granting of future options under
the Company's stock option plans.

    During the quarter ended September 30, 1999, the Company issued 150,000
options at $1-1/16 subject to the adoption of a new stock option plan. If the
Company is unable to obtain shareholder approval of these options within twelve
months, a stock appreciation right will be issued retroactive to the original
issue date with the same exercise price, duration and vesting as the original
option. The Company is accounting for these options as stock appreciation rights
until shareholder approval is obtained. No compensation expense relating to
these options was recognized in the current quarter due to the market value of
the common stock being below the exercise price at September 30, 1999.

    During the quarter ended September 30, 1999, the Company successfully
completed a tender offer for the common stock of Poly UA Systems, Inc., a
Company-sponsored research and development entity. In exchange for the tendered
shares and a release of claims, the Company issued to the tendering stockholders
a total of 594,000 shares of common stock, 198,000 shares of a new Series B
Callable Preferred Stock and Series G Warrants to purchase an additional 594,000
shares of the Common Stock. The Series B shares have a liquidation preference of
$3 per share (or an aggregate liquidation preference of $594,000). The
"callable" feature entitles the Company to convert the preferred stock at any
time into a number shares of common stock equal to the liquidation value divided
by the market price of the common stock at the time of conversion (subject to a
minimum value of $2.00 per share of common stock). The preferred stock will
automatically convert under the same formula on August 3, 2002 if not converted
sooner by the Company. The Series B


                                       9
<PAGE>   10

Callable Preferred Stock is non-voting, is not entitled to any preferred
dividends and is not subject to any mandatory or optional redemption provisions.
The Company may not pay cash dividends on the common stock or repurchase any
shares of the common stock without the written consent of the holders of a
majority of the Series B Callable Preferred Stock.

    On October 1, 1999 the Series A preferred stockholder converted its $3
million investment in the 3,000 shares of the company's Series A convertible
preferred stock into 2 million shares of common stock.

Warrants:

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

<TABLE>
<CAPTION>
           Number of Shares      Per Share Price           Expiration Date
           ----------------      ---------------           ---------------
<S>                              <C>                       <C>
                     50,000                $3.875          January 15, 2000
                    298,633                 4.00           March 29, 2000
                     25,000                 4.375          June 1, 2000
                     25,000                 4.0625         July 1, 2000
                    123,000                 7.80           September 28, 2000
                    875,000                 3.56           July 31, 2001
                     84,270                 3.56           December 31, 2001
                     10,000                 4.31           May 15, 2002
                    297,000                 2.00           August 6, 2002
                    297,000                 1.00           August 6, 2002
</TABLE>



8.  COMMITMENTS AND CONTINGENCIES.

        In October 1996, the Company was awarded $132,500 from the arbitration
against Digital Imaging Technologies, Inc. (DITI), the former owner of its
Perceptive Scientific Instruments genetic analysis business. The arbitration was
conducted under the auspices of the American Arbitration Association. The
arbitration panel found that while certain representations, warranties and
covenants in the purchase agreement for the transaction had been breached by
DITI, for the most part these did not result in damage to the Company.

9.  RESEARCH AND DEVELOPMENT GRANTS AND CONTRACTS.

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

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

<TABLE>
<CAPTION>
                   Three Months Ended September 30,    Nine Months Ended September 30,
                                1998           1999                 1998          1999
                           ---------      ---------            ---------     ---------
<S>                        <C>            <C>                  <C>           <C>
Reimbursements             $ 216,514      $ 171,212            $ 792,264     $ 384,891
Costs                        209,971        149,235              846,356       391,685
                           ---------      ---------            ---------     ---------
Net costs
(reimbursements)           $  (6,543)     $ (21,977)           $  54,092     $   6,794
                           =========      =========            =========     =========
</TABLE>

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

10. UNUSUAL CHARGES.

    The results of operations for the nine month period ended September 30, 1999
include litigation settlement and other unusual charges totaling $10,535,627.
These charges primarily consist of (1) the write-off of intangible assets
acquired with the genetic analysis business ($6,556,847), (2) the settlement
expense recorded in connection with the tender offer for Poly U/A Systems, Inc.
($1,669,104), (3) the cost of the arbitration with DITI ($501,714), (4) the
write-off of deferred warrant costs for technology rights from Poly U/A Systems
($807,244) and (5) the write-off of costs related to The White IRIS leukocyte
differential analyzer program ($796,887). Of the total charges, $8,492,354 were
recorded in the three month period ended September 30, 1999. The amounts in the
prior year relate primarily to the recently completed arbitration matter with
DITI.

    In September 1995, the Company and Poly U/A Systems Inc., a
Company-sponsored research and development entity ("Poly UA"), entered into a
joint development project for the development of several new products to enhance
automated urinalysis using the Company's technology. As part of the terms of the
project, the Company issued warrants to purchase 512,000 shares of its common
stock in exchange for rights to certain technology and began amortizing the


                                       10
<PAGE>   11

cost of these warrants. During the fall of 1998, the Company decided not to
exercise a previously negotiated $5.1 million option to acquire the remaining
rights to the technology through an acquisition of Poly UA. The Company later
acquired 77% of the Poly UA common stock from certain stockholders, primarily to
avoid litigation, in exchange for a package of Company securities. In connection
with this transaction, the Company recorded litigation settlement expense of
$1,520,371 in the first quarter of 1999 and $148,733 in subsequent quarters.

    Following a recent transition to a new chief executive officer, the Company
conducted a reassessment of its business and developed a new, near-term business
plan. The technology rights acquired in 1995 from Poly UA for warrants are not
used in the new business plan. As a result, the Company wrote-off the remaining
unamortized cost of the warrants ($807,244) in the third quarter of 1999
(included in unusual expenses).

    Similarly, the Company elected not to include The White IRIS leukocyte
analyzer in its new, near-term business plan and therefore wrote off in the
third quarter $796,887 of capitalized software development costs (included in
unusual expenses) and $128,615 of inventory related to The White IRIS (included
in IVD systems cost of goods sold).

11. INCOME TAXES.

    The income tax benefit for the nine-month period ended September 30, 1999
was $2,706,726 as compared to an income tax benefit of $68,419 for the
comparable period last year. The income tax benefit for the three-month period
ended September 30, 1999 totaled $2,406,680, as compared to a provision of
$53,319 in the prior year. The income tax benefit differs from the federal
statutory rate due primarily to state income taxes, unutilized foreign losses,
permanent differences between income reported for financial statement and income
tax purposes and a $500,000 increase in the tax valuation allowance, for net
operating loss carryforwards expiring in the near term which management has
determined may not be realizable.

    Realization of deferred tax assets associated with net operating losses
("NOL") and tax credit carryforwards is dependent upon generating sufficient
taxable income prior to their expiration. Management believes that there is a
risk that certain of these NOL and tax credit carryforwards may expire unused
and accordingly, has established a valuation reserve against them. Although
realization is not assured for the remaining deferred tax assets, management
believes it is more likely than not that they will be realized through future
taxable income or alternative tax strategies. However, the net deferred tax
assets could be reduced in the near term if management's estimates of taxable
income during the carryforward period are significantly reduced or alternative
tax strategies are not available. The Company will continue to review its
valuation allowances and make adjustments, if necessary. Also, although a
valuation allowance has been provided against a portion of its NOL's, should the
Company undergo an ownership change as defined in Section 382 of the Internal
Revenue Code, the Company's NOL generated prior to the ownership change would be
subject to an annual limitation. If this occurs, a further adjustment of the
valuation allowance would be necessary.

12. EARNINGS PER SHARE (EPS).

    The computation of per share amounts for the three and nine months ended
September 30, 1999 is based on the average number of common shares outstanding
for the period. Options and warrants to purchase 3,948,854 and 2,853,404 shares
of common stock outstanding during the three and nine months ended September 30,
1999 and three and nine months ended September 30, 1998, respectively, were not
considered in the computation of diluted EPS because their inclusion would be
antidilutive. Preferred stock convertible into 2,000,000 and 1,477,833 common
shares was also not considered in the computation of diluted EPS for the three
and nine months ended September 30, 1999 and the nine months ended September 30,
1998, respectively, because their inclusion would also be antidilutive.
Preferred stock convertible into 1,477,833 common shares was considered in the
computation of earnings per share for the three months ended September 30, 1998.

13. SEGMENT AND GEOGRAPHIC INFORMATION.

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

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

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

Three Months Ended September 30, 1999:

<TABLE>
<CAPTION>
                                                                              Small      Unallocated
                                                          Genetic        Laboratory        Corporate
                                     Urinalysis          Analysis           Devices         Expenses             Total
                                    -----------       -----------        ----------      -----------       -----------
<S>                                  <C>                 <C>             <C>             <C>                <C>
Revenues                             $5,455,697          $982,286        $1,204,555               --        $7,642,538
Interest income                          $7,162            $1,133              $772               --            $9,067
</TABLE>


                                       11
<PAGE>   12

<TABLE>
<S>                                  <C>                 <C>             <C>             <C>                <C>
Interest expense                         $1,254          $245,492                --               --          $246,746
Depreciation, amortization and       $1,852,229        $6,843,115           $30,252          $12,110        $8,737,706
write-offs
Unusual charges                      $1,604,131        $6,557,847                --         $330,376        $8,492,354
Segment profit (loss)                 $(357,536)      $(7,254,687)         $255,113        $(958,645)      $(8,315,755)
Segment assets                      $10,612,493        $1,525,115        $1,840,152      $11,611,779       $25,589,539
Additions to long-lived assets         $141,625           $32,541           $14,999               --          $189,165
</TABLE>

Three Months Ended September 30, 1998:

<TABLE>
<CAPTION>
                                                                             Small      Unallocated
                                                         Genetic        Laboratory        Corporate
                                     Urinalysis         Analysis           Devices         Expenses             Total
                                    -----------      -----------       -----------      -----------       -----------
<S>                                  <C>              <C>               <C>             <C>                <C>
Revenues                             $4,322,023       $1,481,241        $1,334,339               --        $7,137,603
Interest income                          $5,061             $740            $1,756               --            $7,557
Interest expense                         $1,443         $310,532                --               --          $311,975
Depreciation, amortization and
write-offs                             $275,296         $356,793           $43,278           14,194          $689,561

Unusual charges                              --               --                --          $38,254           $38,254
Segment profit (loss)                  $789,306        $(669,501)         $431,986        $(404,424)         $147,367
Segment assets                      $11,801,339      $10,254,467        $1,843,911       $8,827,695       $32,727,412
Additions to long-lived assets         $276,931         $127,323                --               --          $404,254
</TABLE>


Nine Months Ended September 30, 1999:

<TABLE>
<CAPTION>
                                                                             Small      Unallocated
                                                         Genetic        Laboratory        Corporate
                                     Urinalysis         Analysis           Devices         Expenses             Total
                                    -----------      -----------       -----------      -----------       -----------
<S>                                  <C>              <C>               <C>             <C>                <C>
Revenues                            $14,804,250       $3,363,804        $3,462,640               --       $21,630,694
Interest income                         $22,592           $2,331            $1,991               --           $26,914
Interest expense                         $3,977         $786,845                --               --          $790,822
Depreciation, amortization and
write-offs                           $2,376,496       $7,534,103          $111,111          $34,450       $10,056,160
Unusual charges                      $1,604,131       $6,557,847                --       $2,373,649       $10,535,627
Segment profit (loss)                $1,870,527      $(8,652,556)         $732,026      $(4,004,610)     $(10,054,613)
Additions to long-lived assets         $320,191         $129,327           $35,789               --          $485,307
</TABLE>


Nine Months Ended September 30, 1998:

<TABLE>
<CAPTION>
                                                                             Small      Unallocated
                                                         Genetic        Laboratory        Corporate
                                     Urinalysis         Analysis           Devices         Expenses             Total
                                    -----------      -----------       -----------      -----------       -----------
<S>                                  <C>              <C>               <C>             <C>                <C>
Revenues                            $12,698,660       $4,306,994        $3,431,620               --       $20,437,274
Interest income                         $16,878           $4,211           $13,027               --           $34,116
Interest expense                         $3,682         $867,740                --               --          $871,422
Depreciation, amortization and
write-offs                             $778,753       $1,121,112          $129,036          $49,228        $2,078,129

Unusual charges                              --               --                --         $124,842          $124,842
Segment profit (loss)                $2,223,007      $(2,067,926)         $849,533      $(1,186,269)        $(181,655)
Additions to long-lived assets         $587,001         $299,172           $41,491               --          $927,664
</TABLE>


                                       12
<PAGE>   13

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

<TABLE>
<CAPTION>
                Three Months Ended September 30,   Nine Months Ended September 30,
                            1998            1999              1998            1999
                     -----------     -----------       -----------     -----------
<S>                   <C>             <C>              <C>             <C>
Sales:
  United States       $6,393,260      $7,293,057       $17,850,804     $19,971,443

  United Kingdom         744,343         349,481         2,586,470       1,659,251
                     -----------     -----------       -----------     -----------

                      $7,137,603      $7,642,538       $20,437,274     $21,630,694
                     ===========     ===========       ===========     ===========
</TABLE>

The following is long-lived assets information by geographic area:

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

          United States                $7,777,769             $2,946,598

          United Kingdom                4,712,374                 92,858
                                      -----------            -----------

                                      $12,490,143             $3,039,456
                                      ===========            ===========
</TABLE>

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

OVERVIEW

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

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

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

<TABLE>
<CAPTION>
                                                  Three Months Ended September 30,       Nine Months Ended September 30,
                                                           1998               1999               1998               1999
                                                     ----------         ----------         ----------         ----------
<S>                                                    <C>                <C>              <C>                <C>
Research and development expense, net                  $566,000           $312,000         $1,639,000         $1,106,000
Capitalized software development costs                  100,000            100,000            315,000            302,000
Reimbursed costs for research and
  development grants and contracts                      216,000            171,000            792,000            385,000
                                                     ----------         ----------         ----------         ----------
       Total product technology expenditures           $882,000           $583,000         $2,746,000         $1,793,000
                                                     ==========         ==========         ==========         ==========
</TABLE>


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


                                       13
<PAGE>   14

    On July 26, 1999, the Company successfully completed a tender offer for the
common stock of Poly UA Systems, Inc. ("Poly UA"), a Company-sponsored research
and development entity. In exchange for the tendered shares and a release of
claims, the Company issued to the tendering stockholders a total of 594,000
shares of its Common Stock, 198,000 shares of a new Series B Callable Preferred
Stock and Series G Warrants to purchase an additional
594,000 shares of the Common Stock. As a result, Poly UA became a majority-owned
subsidiary of the Company, with the Company owning 77% of the equity of Poly UA
and the non-tendering stockholders retaining 23% of the equity. The Company also
filed a Form S-3 Registration Statement to permit public resales of the shares
of common stock issued to the tendering Poly UA stockholders as well as any
shares of common stock subsequently issued to them upon conversion of the Series
B Callable Preferred Stock and exercise of the Series G Warrants.

    The Company made the tender offer primarily to avoid litigation and does not
have any immediate plans to continue the business of Poly UA or to provide any
additional funding to Poly UA. However, the Company may elect to acquire the
remaining equity at a later date through a subsequent transaction such as a
merger. Since the Company views this transaction primarily as a settlement to
avoid litigation, the Company recorded a litigation settlement expense of $1.5
million in the first quarter of 1999 for the tender offer.

    On October 1, 1999, the Thermo Amex Convertible Growth Fund converted all
3,000 outstanding shares of Series A Convertible Preferred Stock into 2,000,000
shares of common stock at a conversion price of $1.50 per share.

RESULTS OF OPERATIONS

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

    Net revenues for the quarter ended September 30, 1999 increased to $7.6
million, as compared to $7.1 million in the same period last year, an increase
of $505,000 or 7%. Sales of IVD systems increased to $2.6 million from $2.5
million, an increase of $64,000 or 3% from the comparable period last year.
Revenues from sales of The Yellow IRIS family of urinalysis workstations
increased to $1.7 million from $1.2 million, an increase of $545,000 or 46%.
This increase is primarily due to higher sales to international distributors,
partially offset by lower domestic sales. Revenues from sales of the PowerGene
line of genetic analyzers decreased to $844,000 from $1.3 million, or a decrease
of $481,000 or 36%. The decrease relates primarily to decreased average selling
prices. Sales of IVD system supplies and services increased to $3.7 million from
$3.2 million, an increase of $554,000 or 17% over the comparable period last
year, primarily due to the larger installed base of The Yellow IRIS IVD imaging
systems and increased prices. Sales of small instruments and supplies increased
to $1.2 million, as compared to $1.1 million in the same period last year, an
increase of $105,000 or 10%.

    Revenues from the urinalysis segment totaled $5.5 million in the current
quarter as compared to $4.3 million in the same quarter of last year, an
increase of $1,134,000 or 26%. This growth is the result of increased The Yellow
IRIS system sales and sales of system supplies and services described above.
Genetic analysis segment revenues decreased as described above to $1.0 million
in the current quarter as compared to $1.5 million in the same quarter last
year. Revenues from the small laboratory devices segment decreased to $1.2
million in the current quarter, as compared to $1.3 million in the same period
last year, primarily due to nonrecurring royalty fees earned in the prior year.

    Cost of goods for IVD systems increased as a percentage of sales of IVD
imaging systems to 70% in the current quarter from 55% for the comparable period
last year. The decrease is primarily due to a higher portion of sales of The
Yellow IRIS urinalysis workstations having lower margins to international
distributors and write-off of The White IRIS inventory. Cost of goods for IVD
imaging system supplies and services as a percentage of sales of such products
increased to 48% in the current period as compared to 47% for the same period
last year. The increase is primarily due to a higher portion of the supplies and
service revenues having lower gross margins to international distributors. This
increase was partially offset by higher margins on service sales. Cost of goods
for small instruments and supplies as a percentage of sales of small instruments
and supplies totaled 54% for the current quarter compared to 55% for the
comparable period last year. The decrease is due to a change in sales mix. The
net result of these changes was an decreased aggregate gross margin of 45% in
the current quarter as compared to 51% in the same quarter last year.

    Cost of goods sold as a percentage of revenues from the urinalysis segment
totaled 54% this quarter as compared to 49% in the same quarter of last year.
The increase results primarily from the higher portion of sales having lower
margins to international distributors and the write-off of The White IRIS
inventory. Cost of goods sold as a percentage of revenues from the genetic
analysis segment totaled 50% this quarter, as compared to 49% in the same
quarter of last year and results from lower gross margins on system sales and
higher service expenses. Cost of goods for small laboratory devices as a
percentage of revenues totaled 54% in the current period, as compared to 45% in
the same quarter of last year. The increase is due nonrecurring royalty revenue
received in the prior year.

    Marketing and selling expenses totaled $1.2 million in the current quarter
as compared to $1.5 million for the same period last year, or a decrease of
$319,000 or 22%. Decreased marketing and selling expenses related to the
PowerGene genetic analyzers and to a lesser extent expenses associated with The
Yellow IRIS urinalysis workstations caused the decline. As a percentage of net
revenues these expenses totaled 15% in the current quarter as compared to 21% in
the same quarter last year.


                                       14
<PAGE>   15

    General and administrative expenses increased to $1.3 million in the current
quarter as compared to $927,000 for the comparable period last year, an increase
of $366,000 or 40%. This increase is primarily due to higher management
incentives, expenses associated with the Office of the Chief Executive and the
Board of Directors and an increased provision for doubtful accounts at the
genetic analysis division. General and administrative expenses as a percentage
of net revenues increased to 17% in the current year from 13% in the prior year.

    Net research and development expenses decreased to $312,000 for the current
quarter from $566,000 in the prior year, a decrease of $254,000 or 45%. Net
research and development expenses decreased as a percentage of revenues from 8%
to 4%. Reimbursements under joint development programs decreased to $171,000
from $217,000. Total product technology expenditures, including capitalized
software development costs and reimbursed costs under research and development
grants and contracts, decreased to $583,000 from $882,000, a decrease of
$299,000 or 34% as compared to the comparable period last year. The decline in
total product technology expenditures relates to decreased spending on The
Yellow IRIS and PowerGene families of products.

    Intangibles amortization expense is comparable to the prior year. However,
as a result of the write-offs described below, this expense will be
significantly less in future periods.

    Unusual expenses in the current quarter totaled $8.5 million, as compared to
$38,000 last year. The increase is primarily attributable to the write-off of
the remaining net book value of intangibles related to the PSI acquisition ($6.6
million), write-off of deferred warrant costs ($807,000) and write-off of the
deferred software development costs associated with The White IRIS ($797,000).

    The net result of the above-described changes is an operating loss of $8.1
million for the quarter ended September 30, 1999 as compared to an operating
income of $372,000 for the same quarter last year. Excluding the unusual charges
in both periods and The White IRIS inventory write-off in the 1999 period,
operating income totaled $502,000 for the current quarter as compared to an
operating income of $410,000 in the same quarter of the prior year.

    Interest expense decreased to $247,000 for the current quarter from $312,000
for the comparable period last year due to decreased indebtedness, partially
offset by the effect of increased rates on the credit facility.

    For the quarter ended September 30, 1999, the urinalysis segment loss
totaled $358,000 as compared to a $789,000 profit in the same period last year,
a decrease of $1.1 million. This decrease results from the write-off of The
White IRIS inventory and software development costs ($926,000) and the Poly UA
deferred warrants costs ($807,000). Excluding these items, urinalysis segment
profits increased to $1.4 million, and the improvement is attributable to
increased revenues and lower operating expenses. Losses for the genetic analysis
segment totaled $7.3 million in the current quarter as compared to losses of
$670,000 in the same period last year. The increased loss is attributable to the
write-off of the intangibles associated with the PSI acquisition ($6.6 million).
Excluding this item, this segment's loss increased to $697,000, as compared to
$670,000 last year. This increased loss results from decreased sales and gross
profits offset by lower operating and interest expenses. Small laboratory
devices segment profits totaled $255,000 in the current quarter as compared to
$432,000 in the same period last year. The decrease results from a nonrecurring
license fee earned in the prior year of $235,000. If this fee income is excluded
from the prior year segment, segment profit totaled $197,000, compared to
$255,000 in the current quarter. The increase results from increased product
sales and margins. Unallocated corporate expenses totaled $959,000 in the
current period as compared to $404,000 in the comparable period last year, an
increase of $555,000. This increase is primarily due to the higher legal and
related expenses associated with the recently completed DITI arbitration and the
Poly U/A settlement, and higher expenses for management incentives, the Office
of the Chief Executive, the Board of Directors and the retirement of the former
chief executive officer.

    The income tax benefit for the quarter ended September 30, 1999 was $2.4
million, as compared to an income tax provision of $53,000 for the comparable
period in 1998. The difference between the effective tax rate and federal
statutory rate relates primarily to unutilized foreign losses and permanent
differences between income reported for financial and income tax purposes and a
$500,000 increase in the valuation allowance. The Company increased the
valuation allowance for net operating losses expiring in the near term.

    The above factors contributed to a net loss of $5.9 million or $0.85 per
diluted share for the quarter ended September 30, 1999 as compared to a net
income of $94,000 or $0.01 per diluted share for the quarter ended September 30,
1998. Excluding unusual expenses and the write-off of The White IRIS inventory,
net of income taxes and the increase of the deferred income taxes valuation
allowance, the third quarter net income for 1999 would have totaled $82,000 (or
$0.01 per diluted share) as compared to a net income of $119,000 (or $0.02 per
diluted share) for the same period last year.

    COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO NINE MONTHS ENDED
SEPTEMBER 30, 1998

    Net revenues for the nine months ended September 30, 1999 increased to $21.6
million from $20.4 million, an increase of $1.2 million or 6% over the
comparable period last year. Sales of IVD imaging systems decreased to $7.4
million from $7.7 million, a decrease of $300,000 or 4% from the comparable
period last year. Revenues from sales of The Yellow IRIS family of urinalysis
workstations increased to $4.5 million, as compared to $3.8 million in the prior
year, an increase of $654,000 or


                                       15
<PAGE>   16

17%. The increase is due primarily to higher sales to international
distributors. This increase was offset by lower sales of the PowerGene line of
genetic analyzers. Revenues from PowerGene genetic analyzer sales decreased to
$2.9 million, as compared to $3.9 million in the prior year, a decrease of
$954,000, or 25%, primarily due to lower average selling prices. Sales of IVD
imaging system supplies and services increased to $10.5 million from $9.1
million, an increase of $1.4 million or 16% over the comparable period last
year, primarily due to the larger installed base of The Yellow IRIS IVD imaging
systems. Sales of small instruments and supplies increased to $3.5 million from
$3.2 million, an increase of $266,000 or 8%.

    Revenues from the urinalysis segment totaled $14.8 million in the current
period as compared to $12.7 million in the same period of last year, an increase
of $2.1 million or 17%. This growth is due to increased sales of The Yellow IRIS
family of workstations and increased sales of related system supplies and
services to the growing installed base. Genetic analysis segment revenues
decreased due to the decline in genetic analyzer revenues described above.
Revenues from small laboratory devices increased to $3.5 million in the current
period, as compared to $3.4 million in the same period last year, an increase of
$31,000. If the non-recurring royalty fee earned from the prior year is
excluded, sales increased $266,000. This growth is primarily due to increased
sales of instruments and consumables to a larger installed base.

    Cost of goods for IVD systems increased as a percentage of sales of IVD
imaging systems to 63% for the current period from 58% for the comparable period
last year. The increase is primarily attributable to slightly lower margins
realized on the PowerGene units, an increase in proportion of sales of The
Yellow IRIS urinalysis workstations having lower margins to international
distributors and the write-off of the The White IRIS inventory. Cost of goods
for IVD imaging system supplies and services as a percentage of sales of such
products decreased to 46% for the current period as compared to 48% for the same
period last year. This decrease is due to increased revenues while related
expenses decreased, and a one-time credit received from a vendor for returned
materials. Cost of goods for small instruments and supplies as a percentage of
sales of small instruments and supplies totaled 54% for the current quarter
compared to 55% for the comparable period last year due to a change in the sales
mix. The net result of these changes was a decrease in aggregate gross margin to
47% for the nine months ended September 30, 1999, as compared to 48% in the
comparable period last year.

    Cost of goods sold as a percentage of revenues from the urinalysis segment
totaled 51% this period, as compared to 52% in the same period last year. This
decrease results from increased urinalysis supplies and services revenues along
with lower associated expenses, a one time credit from a vendor for returned
materials partially offset by lower margins on system sales and the write-off of
The White IRIS inventory. Cost of goods sold as a percentage of revenues from
the genetic analysis segment totaled 55% this quarter, as compared to 52% in the
same period of last year. This increase is primarily the result of slightly
lower system margins and higher services expenses. Cost of goods for small
instrument devices as a percentage of revenues totaled 54% in the current
period, as compared to 51% in the same period last year due to the nonrecurring
royalty fees received in the prior year.

    Marketing and selling expenses totaled $3.8 million in the current period,
as compared to $4.0 million last year. Decreased marketing and selling expenses
related to the PowerGene genetic analyzers, partially offset increased expenses
associated with The Yellow IRIS urinalysis workstation. Marketing and selling
expenses as a percentage of net revenues declined to 18% in the current period
as compared to 19% in the comparable period last year.

    General and administrative expenses increased to $3.2 million this period
from $2.7 million, an increase of $503,000 or 19% from the comparable period
last year. This increase is primarily due to higher liability insurance and
management incentives and increased expenses associated with the Office of the
Chief Executive and the Board of Directors, partially offset by decreased
expenses associated with the genetic analyzer division. General and
administrative expenses as a percentage of net revenues totaled 15% in the
current period as compared to 13% in the same period last year.

    Net research and development expenses decreased to $1.1 million for the nine
months ended September 30, 1999, as compared to $1.6 million in the same period
last year. Net research and development expenses decreased as a percentage of
revenues from 8% to 5%. Reimbursements under joint development programs
decreased to $385,000 from $792,000. Total product technology expenditures,
including capitalized software development costs and reimbursed costs under
research and development grants and contracts, decreased to $1.8 million from
$2.7 million, a decrease of $953,000 or 35% as compared to the comparable period
last year. The decline in total product technology expenditures is due to
decreased spending on The Yellow IRIS and PowerGene families of products.

    The results of operations for the nine months ended September 30, 1999
include litigation settlement and other unusual legal expenses of $10.5 million
as compared to $125,000 in the prior year. The increase primarily relates to the
write-off of the remaining unamortized cost of intangibles related to the PSI
acquisition ($6.6 million), write-off of deferred warrant costs ($807,000),
write-off of the deferred software development costs associated with The White
IRIS ($797,000), settlement with Poly U/A ($1.7 million) and legal and other
expenses relating to the recently completed DITI arbitration totaled ($502,000).
The prior year expenses related to the DITII arbitration.

    The net result of the above described changes is an operating loss of $9.3
million for the nine months ended September 30, 1999 as compared to an operating
income of $590,000 in the same period last year. Excluding the litigation
settlement and other unusual charges and the write-off of The White IRIS,
operating income totaled $1.4 million for the first nine months of 1999 as
compared to $715,000 for the same period last year.


                                       16
<PAGE>   17

    Interest expense decreased to $791,000 in the current period from $871,000
for the comparable period last year due to reduced indebtedness, partially
offset by the effect of increased interest rates on the credit facility.

    For the nine months ended September 30, 1999, urinalysis segment profits
decreased to $1.9 million as compared to $2.2 million in the same period last
year. This decrease results from the write-off of The White IRIS inventory and
software development costs ($926,000) and the deferred warrants costs
($807,000). Excluding these items, urinalysis segment profits increased to $3.6
million, and is attributable to higher revenues described above and lower
operating expenses. Losses for the genetic analysis segment totaled $8.7 million
in the current period as compared to $2.1 million in the same period last year.
The increased loss is due to the write-off of the intangibles associated with
the PSI acquisition ($6.6 million). Excluding this item, this segment's loss
totaled $2.1 million and is comparable to last year. Segment profits from the
small laboratory devices segment totaled $732,000 in the current period as
compared to $850,000 last year. The decrease results from the nonrecurring
license fee earned in the prior year. Excluding this fee, segment profit for
last year totaled $614,000 as compared to this years $732,000. The increase
results from increased product sales and gross profits. Unallocated corporate
expenses totaled $4.0 million in the current period as compared to $1.2 million
last year. The increase is due primarily to the recently completed arbitration
with DITI, the settlement with Poly U/A and expenses associated with the Office
of the Chief Executive.

    The income tax benefit for the nine months ended September 30, 1999 totaled
$2.7 million, as compared to an income tax benefit of $68,000 for the comparable
period in 1998.

    The above factors contributed to a net loss of $7.3 million or $1.11 per
share for the nine months ended September 30, 1999 as compared to a net loss of
$113,000 or $0.02 per share for the nine months ended September 30, 1998.
Excluding the unusual expenses and the write-off of The White IRIS inventory,
net of income taxes, other unusual expenses, related tax benefits, and the
increase of the deferred income taxes valuation allowance, the Company would
have had net income of $191,000 or $0.02 per diluted share in the current period
and net loss of $35,000, or $0.01 per share in the prior period.

LIQUIDITY AND CAPITAL RESOURCES

    Cash and cash equivalents increased to $1.1 million at September 30, 1999
from $389,000 at December 31, 1998. The increase is due to the cash provided by
operations in excess of amounts used by investing and financing activities. Cash
provided by operations for the nine months ended September 30, 1999 increased to
$2.5 million from $632,000 for the comparable period last year. This increase is
primarily due to the decrease in inventory levels, improved operations
(excluding unusual noncash write-offs) and increased accrued liabilities.

    Cash used by investing activities totaled $360,000 for the nine months ended
September 30, 1999, as compared to $760,000 in the prior year. The decrease is
primarily due to the decline in expenditures for property and equipment, offset
by the proceeds from the sale of The Yellow IRIS urinalysis workstations
previously subject to an operating lease.

    The credit facility with Foothill Capital Corporation, a Wells Fargo
company, consists of a $3.6 million term loan and a $4.0 million revolving line
of credit. Borrowings under the line of credit are limited to a percentage of
eligible accounts receivable and are subject to a combined limit of $7.0 million
for the total credit facility. The term loan bears interest at the lender's
prime rate (8.25% on September 30, 1999) plus 3.0% and is payable in 36 equal
monthly installments. The revolving line of credit bears interest at the
lender's prime rate plus 1.0%. The credit facility is subject to minimum
interest charges, prepayment penalties and customary fees, is collateralized by
a first priority lien on all the assets of the Company and matures in 2001. It
also contains financial covenants based primarily on tangible net worth and cash
flow and imposes restrictions on acquisitions, capital expenditures and cash
dividends.

    At the end of the third quarter, the Company was not in compliance with one
of the financial covenants of the credit facility. The lender subsequently
waived the noncompliance. Under the terms of the loan agreement, this covenant
will become stricter in the fourth quarter, and the Company does not anticipate
that it will be in compliance with the new requirements. The Company believes
that it can renegotiate this financial covenant with the lender to a level which
the Company believes it can achieve. Until those negotiations are completed, the
Company has reclassified $800,000 of the outstanding balance on the term loan
from long-term debt to short-term. There can be no assurance that the
negotiations will be successful.

    Net cash used by financing activities totaled $1.5 million and consisted
primarily of principal payments made on the term loan described above and notes
payable due to a former strategic partner (discussed below), partially offset by
net proceeds from borrowings on the revolving line of credit. As of September
30, 1999, the Company had $2.0 million outstanding under the term loan and
$260,000 outstanding under the revolving line of credit and $1.7 million
available under the revolving credit line for future borrowings.

    As of September 30, 1999, the Company also had outstanding notes payable in
the aggregate amount of $142,000 from the repurchase of common stock and
warrants from a former strategic partner in 1996. The notes bear interest at the
rate of 8.0%, and principal is due in bi-monthly installments of $100,000.

    The Company has reduced its outstanding debt by $1.3 million in the first
nine months of 1999 and has scheduled principal payments totaling $1.3 million
during the next twelve months.


                                       17
<PAGE>   18

    The Company believes that its current cash on hand, together with cash
generated from operations and cash available under the credit facility, will be
sufficient to fund normal operations and pay principal and interest on
outstanding debt obligations for the next twelve months. This assumes the
Company successfully renegotiates the financial covenants of the credit facility
with the lender.

    The Company issued 198,000 shares of Series B Callable Preferred Stock
during the third quarter in connection with the tender offer for Poly UA
Systems. See "--Overview." These shares have a liquidation preference of $3 per
share (or an aggregate liquidation preference of $594,000). The "callable"
feature entitles the Company to convert the preferred stock at any time into a
number shares of common stock equal to the liquidation value divided by the
market price of the common stock at the time of conversion (subject to a minimum
value of $2.00 per share of common stock). The preferred stock will
automatically convert under the same formula on August 3, 2002 if not converted
sooner by the Company. Based on the average closing price of $1.16 for the
five-day period ending September 30, 1999, the call price would be the $2.00
minimum, and the Company could convert the Series B Callable Preferred Stock
into 297,000 shares of common stock. The Series B Callable Preferred Stock is
non-voting, is not entitled to any preferred dividends and is not subject to any
mandatory or optional redemption provisions. The Company may not pay cash
dividends on the common stock or repurchase any shares of the common stock
without the written consent of the holders of a majority of the Series B
Callable Preferred Stock.

NET OPERATING LOSS CARRYFORWARDS

    At September 30, 1999, the Company had federal net operating loss
carryforwards of approximately $18.1 million. If substantially all of the
Company's outstanding options and warrants, including the warrants issued in the
Poly UA transaction, are exercised on or before December 31, 1999, these
transactions in combination with other prior stock issuances during the past
three years would constitute a "change of ownership" under Section 382 of the
Internal Revenue Code. The Company notes that most of the 2.08 million warrants
are currently out-of-the money with exercise prices ranging from $1.00 to $7.80
per share. Section 382 imposes an annual limitation on the utilization of net
operating loss carryforwards based on a statutory rate of return (usually the
applicable federal rate) and the value of the corporation at the time of the
change of ownership. Depending on the market price of the Company's common stock
at the time a change of ownership occurs, the resulting limitations imposed by
Section 382 could trigger a substantial write down in the Company's deferred tax
assets and a corresponding charge to earnings in the relevant quarter.

YEAR 2000 PROBLEM

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

    State of Readiness

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

    The Company has focused most of its Y2K efforts on internal systems because
it believes this area could be its primary source of Y2K problems. The Company's
internal computer systems are the foundation for its business operations and
include such critical functions as order entry, shipping, purchasing, inventory
control, manufacturing, accounts receivable, accounts payable and the general
ledger. The Company completed a review of these critical systems and determined
that they were not Y2K compliant. In response, the Company replaced system
hardware that was not Y2K compliant and purchased and installed certified
third-party software updates. It then successfully completed simulation testing
of the upgraded systems in early September 1999. Testing included verification
that non-compliant hardware had been replaced. The Company completed its review
of all other internal systems that contained date sensitive information and did
not uncover a risk of material adverse effect on its operations from Y2K
problems in this area.

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


                                       18
<PAGE>   19

IRIS field service engineer. No upgrade is being offered for the IRIScribe
Interface Computer and customers have been advised to disconnect their IRIScribe
from the workstation prior to December 31, 1999.

    The Company has completed a review of outside vendor's products that
interface with the Company's and has determined that the Company's products need
no further modification to interface with the products of these vendors. The
Company has taken steps to ensure that inventory levels of vendor products are
sufficient to provide continued operation into the Year 2000. Alternate sources
of some products are being evaluated. The Company completed the process of
identifying any potential Y2K problems from other outside vendors whose systems
interface with the Company's internal systems.

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

    Costs to Address the Y2K Issue

    Costs to address the Y2K problem include hardware, software, and
implementation costs paid to outside consultants are estimated at $190,000. To
date, the Company has incurred approximately $175,000, the majority of which has
been expensed. The Company estimates that the cost to complete its Y2K work at
less than $10,000 to complete installation of Y2K software upgrades on its
customers IVD imaging systems.

    Risks Presented by the Year 2000 Issue

    To date, the Company has not identified any Y2K problem that it believes
could materially adversely affect the Company or for which a suitable solution
cannot be timely implemented. However, as the review of its interfaces with
other outside vendors progresses and the verification and validation of changes
made to the urinalysis segment's unattended IVD imaging systems is completed, it
is possible that Y2K problems may be identified that could result in a material
adverse effect on its operations.

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

    Contingency Plans

    The Company has identified contingency plans and is currently implementing
them. Where a vendor's compliance status could affect the Company's ability to
produce products, efforts are underway to increase inventory levels to support
production activities into the Year 2000. Finished product inventory levels are
being reviewed and production schedules adjusted to assure finished product
availability. The Company has determined that standing consumables orders for
the urinalysis workstation customers will be shipped by the close of business on
December 27, 1999. The Company is monitoring customer activity with regard to
the installation of Y2K compliant software, scheduling of service for hardware
upgrades and disconnection of the obsolete IRIScribe software. The small
instruments segment is monitoring the Y2K compliance of its distributors in an
effort to ensure product availability into the Year 2000. Critical date
generated by internal systems will be backed up prior to the close of business
on December 31, 1999. The Company will perform a physical equipment survey of
its internal system workstations that have been added since the completion of
remediation testing to ensure that theses systems are Y2K compliant. Third party
operating system and application software Y2K patches release after the
completion of remediation testing will be downloaded onto the system prior to
the end of business on December 31, 1999. Service policies will remain unchanged
throughout the transition to the Year 2000. The Company will continue to assess
its Y2K risks and identify additional contingency plans if it identifies
additional Y2K problems that pose significant risks to its business operations.

INFLATION

    The Company does not foresee any material impact on its operations from
inflation.


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<PAGE>   20

FORWARD-LOOKING STATEMENTS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

PART 2 - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

    In October 1996, the Company was awarded $132,500 from the arbitration
against Digital Imaging Technologies, Inc. (DITI), the former owner of its
Perceptive Scientific Instruments genetic analysis business. The arbitration was
conducted under the auspices of the American Arbitration Association. The
arbitration panel found that while certain representations, warranties and
covenants in the purchase agreement for the transaction had been breached by
DITI, for the most part these did not result in damage to the Company. See
"Legal Proceedings" in the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 for historical information on the arbitration.

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

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

    (a)    Exhibits

<TABLE>
<CAPTION>
    No.        Description
    ---        -----------
<S>            <C>
    3.1(a) --  Certificate of Incorporation, as amended (1)
    3.1(b) --  Certificate of Designations of Series A Convertible Preferred Stock (2)
    3.1(c) --  Certificate of Designations of Series B Callable Preferred Stock (3)
    3.2    --  Restated Bylaws (4)
    4.1    --  Specimen of Common Stock Certificate (5)
    4.2    --  Certificate of Designations of Series A Convertible Preferred Stock (2)
    4.3    --  Certificate of Designations of Series B Callable Preferred Stock (3)
    10.1   --  Letter Agreement dated August 26, 1999 between the Company and John A. O'Malley
    10.2   --  Letter  Agreement  dated  September  10,  1999  between the Company and Fred H. Deindoerfer
    27     --  Financial Data Schedule
</TABLE>
-------------------

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

(1)  Current Report on Form 8-K dated August 13, 1987 and its Quarterly Report
     on Form 10-Q for the quarter ended September 30, 1993.

(2)  Current Report on Form 8-K dated January 15, 1997.

(3)  Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.

(4)  Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.

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

    (b)    Reports on Form 8-K

    During the quarter ended September 30, 1999, the Company filed two reports
on Form 8-K. The first report is dated October 15, 1999 and reported the results
of the Company's arbitration with Digital Imaging Technologies, Inc. See "Legal
Proceedings". The second report is also dated October 15, 1999 and reported the
voluntary conversion of all outstanding Series A preferred shares into common
shares of the Company.


                                       20
<PAGE>   21

                                    SIGNATURE

    Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in Chatsworth, California, on November
15, 1999 .


                                    INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.



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


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