##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
  WASHINGTON, D.C. 20549

FORM 10-Q

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

|                                                 |  |                                           
|------------------------------------------------ |  | ------------------------------------------
|For the quarter ended 
            June 30, 2001 |  | Commission File No.
            No. 1-9767

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.(Exact Name of Registrant as Specified in Its Charter)

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

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

Registrants Telephone Number: (818) 709-1244

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

The registrant had 9,985,959 shares of common stock outstanding as of July
31, 2001.





---

TABLE OF CONTENTS



|                             |                                                                                               |                                                 |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION
|                             | Item 1. Consolidated Financial Statements                                                    
|                             |                                                                                               | CONSOLIDATED BALANCE SHEETS                    
|                             |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS          
|                             |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS          
|                             |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS          
|                             |                                                                                               | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|                             |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     
|                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                             | Item 3. Quantitative And Qualitative Disclosures About Market Risk.                          
|PART II OTHER INFORMATION   
|                             | Item 1. Legal Proceedings.                                                                   
|                             | Item 4. Submission of Matters to a Vote of Security Holders.                                 
|                             | Item 6. Exhibits And Reports On Form 8-K.                                                    
|SIGNATURE                   
|EXHIBIT INDEX               
|EXHIBIT 3.1(E)              



---



##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

INDEX TO FORM 10-Q

Three and Six Months Ended June 30, 2001

|                                         |           |                                                                                                                     |                                                           |    |    |      |  | 
|---------------------------------------- | --------- | ------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | -- | -- | ---- |  | 
|                                         |           |                                                                                                                     |                                                           |    |    | Page
|                                         |           |                                                                                                                     |                                                           |    |    |     
|PART I
           FINANCIAL INFORMATION |           |                                                                                                                     |                                                           |   
|                                        
|                                        
|                                        
|                                        
|                                         |           | Item 1
          - Consolidated Financial Statements                                                                |                                                           |    |    |     
|                                        
|                                        
|                                        
|                                        
|                                         |           |                                                                                                                     | Consolidated
          Balance Sheets                     |    |    | 2    | 
|                                        
|                                        
|                                        
|                                        
|                                         |           |                                                                                                                     | Consolidated
          Statements of Operations           |    |    | 3    | 
|                                        
|                                        
|                                        
|                                        
|                                         |           |                                                                                                                     | Consolidated
          Statements of Cash Flows           |    |    | 7    | 
|                                        
|                                        
|                                        
|                                        
|                                         |           |                                                                                                                     | Consolidated
          Statements of Comprehensive Income |    |    | 9    | 
|                                        
|                                        
|                                        
|                                        
|                                         |           |                                                                                                                     | Notes
          to Consolidated Financial Statements      |    |    | 10   | 
|                                        
|                                        
|                                        
|                                        
|                                         |           | Item 2
          - Managements Discussion and Analysis of 
          Financial Condition and Results of Operations |                                                           |    | 16 |     
|                                        
|                                        
|                                        
|                                        
|                                         |           | Item 3
          - Quantitative and Qualitative Disclosure About Market Risk                                        |                                                           |    | 21 |     
|                                        
|                                        
|                                        
|                                        
|PART II
           OTHER INFORMATION    |           |                                                                                                                     |                                                           |   
|                                        
|                                        
|                                        
|                                        
|                                         |           | Item 1
          - Legal Proceedings                                                                                |                                                           |    | 21 |     
|                                        
|                                        
|                                        
|                                        
|                                         |           | Item 4
          - Submission of Matters to a Vote of Security Holders                                              |                                                           |    | 22 |     
|                                        
|                                        
|                                        
|                                        
|                                         |           | Item 6
          - Exhibits and Reports on Form 8-K                                                                 |                                                           |    |    |     
|                                         |           |                                                                                                                     | (a) Exhibits                                              |    |    | 22   | 
|                                         |           |                                                                                                                     | (b) Reports
          on Form 8-K                         |    |    | 22   | 
|                                        
|                                        
|                                        
|                                        
|                                         | SIGNATURE |                                                                                                                     |                                                           | 24 |   

1



---



##### Table of Contents






PART I
FINANCIAL INFORMATION




Item 1. Consolidated Financial Statements




INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS

Assets

|                                                                                                                                                     |                                                                                                                        |                                     |                                                      |       |            |                 |             |             |            |            |  | 
|---------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ---------------------------------------------------- | ----- | ---------- | --------------- | ----------- | ----------- | ---------- | ---------- |  | 
|                                                                                                                                                     |                                                                                                                        |                                     |                                                      |       |            | At December 31, |             | At June 30,
|                                                                                                                                                     |                                                                                                                        |                                     |                                                      |       |            | 2000            |             | 2001       
|                                                                                                                                                     |                                                                                                                        |                                     |                                                      |       |            |                 |             |            
|Current
          assets:                                                                                                                            |                                                                                                                        |                                     |                                                      |       |            |                 |             |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Cash and
          cash equivalents                                                                                                                  |                                                                                                                        | $                                   | 3,661,310                                            |       |            | $               | 1,756,525   |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Accounts
          receivable, net of allowance for doubtful
          accounts of $334,696 in 2000 and $266,913 in 2001                             |                                                                                                                        |                                     | 5,446,466                                            |       |            |                 | 5,018,518   |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Inventories                                                                                                                                          |                                                                                                                        |                                     | 5,184,272                                            |       |            |                 | 5,877,848   |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Prepaid
          expenses and other current assets                                                                                                  |                                                                                                                        |                                     | 507,604                                              |       |            |                 | 530,208     |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Investments
          available for sale                                                                                                             |                                                                                                                        |                                     | 1,396,970                                            |       |            |                 | 836,255     |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Deferred
          tax asset                                                                                                                         |                                                                                                                        |                                     | 983,812                                              |       |            |                 | 1,208,098   |            
|                                                                                                                                                     |                                                                                                                        |                                     |                                                      |       |            |                 |             |            
|                                                                                                                                                     |                                                                                                                        | Total
          current assets      |                                                      |       | 17,180,434 |                 |             |             | 15,227,452 |           
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Property
          and equipment, at cost, net of accumulated depreciation
          of $4,061,861 in 2000 and $4,307,572 in 2001                    |                                                                                                                        |                                     | 1,344,418                                            |       |            |                 | 1,356,579   |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Purchased
          intangibles, net of accumulated amortization 
          of $159,505 in 2000 and $176,851 in 2001                                 |                                                                                                                        |                                     | 223,603                                              |       |            |                 | 206,257     |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Software
          development costs, net of accumulated amortization of
          $1,375,569 in 2000 and $1,453,547 in 2001                         |                                                                                                                        |                                     | 435,517                                              |       |            |                 | 659,373     |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Deferred
          tax asset                                                                                                                         |                                                                                                                        |                                     | 8,348,179                                            |       |            |                 | 7,869,682   |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Other
          assets                                                                                                                               |                                                                                                                        |                                     | 755,388                                              |       |            |                 | 736,020     |            
|                                                                                                                                                     |                                                                                                                        |                                     |                                                      |       |            |                 |             |            
|                                                                                                                                                     |                                                                                                                        | Total
          assets              |                                                      | $     | 28,287,539 |                 |             | $           | 26,055,363 |           
|                                                                                                                                                     |                                                                                                                        |                                     |                                                      |       |            |                 |             |            
|Liabilities and Shareholders
            Equity                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Current
          liabilities:                                                                                                                       |                                                                                                                        |                                     |                                                      |       |            |                 |             |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Short-term
          borrowings                                                                                                                      |                                                                                                                        | $                                   | 648,972                                              |       |            | $               |            |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Current
          portion of long-term debt                                                                                                          |                                                                                                                        |                                     | 1,972,333                                            |       |            |                 | 1,972,500   |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Accounts
          payable                                                                                                                           |                                                                                                                        |                                     | 2,676,398                                            |       |            |                 | 2,676,688   |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Accrued
          expenses                                                                                                                           |                                                                                                                        |                                     | 2,683,274                                            |       |            |                 | 1,616,547   |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Deferred
          income  service contracts and other                                                                                              |                                                                                                                        |                                     | 727,158                                              |       |            |                 | 721,676     |            
|                                                                                                                                                     |                                                                                                                        |                                     |                                                      |       |            |                 |             |            
|                                                                                                                                                     |                                                                                                                        | Total
          current liabilities |                                                      |       | 8,708,135  |                 |             |             | 6,987,411  |           
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Long term
          debt                                                                                                                             |                                                                                                                        |                                     | 5,527,667                                            |       |            |                 | 4,069,399   |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Deferred
          income  service contracts and other                                                                                              |                                                                                                                        |                                     | 432,459                                              |       |            |                 | 347,489     |            
|                                                                                                                                                     |                                                                                                                        |                                     |                                                      |       |            |                 |             |            
|                                                                                                                                                     |                                                                                                                        | Total
          liabilities         |                                                      |       | 14,668,261 |                 |             |             | 11,404,299 |           
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Commitments
          and contingencies                                                                                                              |                                                                                                                        |                                     |                                                      |       |            |                 |             |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Shareholders
          equity:                                                                                                                      |                                                                                                                        |                                     |                                                      |       |            |                 |             |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Preferred
          stock, $.01 par value; Authorized: 3,000,000 shares;
          Callable Series B shares issued and outstanding:                  |                                                                                                                        |                                     |                                                      |       |            |                 |             |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                     | 2000 -
          204,000 ($612,000 liquidation preference) 
          2001 - 204,000 ($612,000 liquidation preference) |                                     |                                                      | 2,040 |            |                 |             | 2,040       |           
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Common
          stock, $.01 par value; Authorized: 50,000,000 shares
          Shares issued and outstanding: 2000 - 9,868,855 and 2001 - 9,980,393 |                                                                                                                        |                                     | 98,687                                               |       |            |                 | 99,802      |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Additional
          paid-in capital                                                                                                                 |                                                                                                                        |                                     | 40,444,269                                           |       |            |                 | 40,969,123  |            
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Unearned
          compensation                                                                                                                      |                                                                                                                        |                                     | (205,091                                             | )     |            |                 | (98,887     | )          
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Unrealized
          gains (losses) on investments                                                                                                   |                                                                                                                        |                                     | 289,028                                              |       |            |                 | (47,401     | )          
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|Accumulated
          deficit                                                                                                                        |                                                                                                                        |                                     | (27,009,655                                          | )     |            |                 | (26,273,613 | )          
|                                                                                                                                                     |                                                                                                                        |                                     |                                                      |       |            |                 |             |            
|                                                                                                                                                     |                                                                                                                        |                                     | Total
          shareholders equity                 |       |            | 13,619,278      |             |             |            | 14,651,064 | 
|                                                                                                                                                     |                                                                                                                        |                                     |                                                      |       |            |                 |             |            
|                                                                                                                                                     |                                                                                                                        |                                     | Total
          liabilities and shareholders equity |       | $          | 28,287,539      |             |             |            | 26,055,363 | 
|                                                                                                                                                     |                                                                                                                        |                                     |                                                      |       |            |                 |             |            

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

2



---



##### Table of Contents






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

|                                                                                                  |                        |   |           |                                     |   |      |           |          |   | 
|------------------------------------------------------------------------------------------------- | ---------------------- | - | --------- | ----------------------------------- | - | ---- | --------- | -------- | - | 
|                                                                                                  |                        |   |           | For the three months ended June 30,
|                                                                                                  |                        |   |           |                                    
|                                                                                                  |                        |   |           | 2000                                |   | 2001
|                                                                                                  |                        |   |           |                                     |   |     
|Sales of IVD systems                                                                              |                        | $ | 2,005,428 |                                     |   | $    | 1,253,351 |         
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Sales of IVD supplies and services                                                                |                        |   | 3,635,482 |                                     |   |      | 4,046,367 |         
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Sales of small instruments and supplies                                                           |                        |   | 1,786,181 |                                     |   |      | 1,640,410 |         
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Royalties and licensing revenues                                                                  |                        |   | 49,390    |                                     |   |      | 65,956    |         
|                                                                                                  |                        |   |           |                                     |   |      |           |         
|Net revenues                                                                                      |                        |   | 7,476,481 |                                     |   |      | 7,006,084 |         
|                                                                                                  |                        |   |           |                                     |   |      |           |         
|Cost of goods  IVD systems                                                                       |                        |   | 1,320,961 |                                     |   |      | 884,108   |         
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Cost of goods  IVD supplies and services                                                         |                        |   | 1,396,260 |                                     |   |      | 1,386,590 |         
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Cost of goods  small instruments and supplies                                                    |                        |   | 920,590   |                                     |   |      | 784,353   |         
|                                                                                                  |                        |   |           |                                     |   |      |           |         
|Cost of goods sold                                                                                |                        |   | 3,637,811 |                                     |   |      | 3,055,051 |         
|                                                                                                  |                        |   |           |                                     |   |      |           |         
|Gross margin                                                                                      |                        |   | 3,838,670 |                                     |   |      | 3,951,033 |         
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Marketing and selling                                                                             |                        |   | 1,011,083 |                                     |   |      | 975,679   |         
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|General and administrative                                                                        |                        |   | 948,885   |                                     |   |      | 1,140,930 |         
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Research and development, net                                                                     |                        |   | 596,932   |                                     |   |      | 994,028   |         
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Amortization of intangibles                                                                       |                        |   | 33,724    |                                     |   |      | 36,207    |         
|                                                                                                  |                        |   |           |                                     |   |      |           |         
|Total operating expenses                                                                          |                        |   | 2,590,624 |                                     |   |      | 3,146,844 |         
|                                                                                                  |                        |   |           |                                     |   |      |           |         
|Operating income                                                                                  |                        |   | 1,248,046 |                                     |   |      | 804,189   |         
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Other income (expense):                                                                           |                        |   |           |                                     |   |      |           |         
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                  | Interest income        |   |           | 50,061                              |   |      |           | 29,834   |  
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                  | Interest expense       |   |           | (242,876                            | ) |      |           | (208,192 | )
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                  | Other income (expense) |   |           | 11,178                              |   |      |           | (205     | )
|                                                                                                  |                        |   |           |                                     |   |      |           |         
|Income
          from continuing operations before provision
          for income taxes           |                        |   | 1,066,409 |                                     |   |      | 625,626   |         
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Provision for income taxes                                                                        |                        |   | 392,277   |                                     |   |      | 250,250   |         
|                                                                                                  |                        |   |           |                                     |   |      |           |         
|Income from continuing operations                                                                 |                        |   | 674,132   |                                     |   |      | 375,376   |         
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Loss on
          disposal of discontinued segment, including tax provision 
          of $29,374 |                        |   | (199,159  | )                                   |   |      |          |         
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                  |                        |   |           |                                     |   |      |           |         
|Net income                                                                                        |                        | $ | 474,973   |                                     |   | $    | 375,376   |         
|                                                                                                  |                        |   |           |                                     |   |      |           |         

3



---



##### Table of Contents



|                                                                                                         |  |                                              |            |                                     |       |      |            |   |      | 
|-------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | ---------- | ----------------------------------- | ----- | ---- | ---------- | - | ---- | 
|                                                                                                         |  |                                              |            | For the three months ended June 30,
|                                                                                                         |  |                                              |            |                                    
|                                                                                                         |  |                                              |            | 2000                                |       | 2001
|                                                                                                         |  |                                              |            |                                     |       |     
|Income (loss) per share  basic:                                                                         |  |                                              |            |                                     |       |      |            |  
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |  | Income from continuing operations            |            | $                                   | 0.07  |      |            | $ | 0.04 | 
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |  | Loss from operations of discontinued segment |            |                                     | (0.02 | )    |            |   |     | 
|                                                                                                         |  |                                              |            |                                     |       |      |            |  
|Income per share attributable to common shareholders  basic                                             |  | $                                            | 0.05       |                                     |       | $    | 0.04       |  
|                                                                                                         |  |                                              |            |                                     |       |      |            |  
|Income (loss) per share  diluted:                                                                       |  |                                              |            |                                     |       |      |            |  
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |  | Income from continuing operations            |            | $                                   | 0.07  |      |            | $ | 0.03 | 
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |  | Loss from operations of discontinued segment |            |                                     | (0.02 | )    |            |   |     | 
|                                                                                                         |  |                                              |            |                                     |       |      |            |  
|Income per share attributable to common shareholders  diluted                                           |  | $                                            | 0.05       |                                     |       | $    | 0.03       |  
|                                                                                                         |  |                                              |            |                                     |       |      |            |  
|Weighted
          average number of common shares outstanding 
          basic                         |  |                                              | 9,649,658  |                                     |       |      | 9,971,455  |  
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|Weighted
          average number of common and common equivalent
          shares outstanding  diluted |  |                                              | 10,325,890 |                                     |       |      | 10,818,425 |  

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

4



---



##### Table of Contents






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

|                                                                    |                  |                                                                                                                          |            |                                   |          |      |            |          |   | 
|------------------------------------------------------------------- | ---------------- | ------------------------------------------------------------------------------------------------------------------------ | ---------- | --------------------------------- | -------- | ---- | ---------- | -------- | - | 
|                                                                    |                  |                                                                                                                          |            | For the six months ended June 30,
|                                                                    |                  |                                                                                                                          |            |                                  
|                                                                    |                  |                                                                                                                          |            | 2000                              |          | 2001
|                                                                    |                  |                                                                                                                          |            |                                   |          |     
|Sales of IVD systems                                                |                  | $                                                                                                                        | 3,519,153  |                                   |          | $    | 2,924,145  |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Sales of IVD supplies and services                                  |                  |                                                                                                                          | 7,155,051  |                                   |          |      | 7,915,224  |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Sales of small instruments and supplies                             |                  |                                                                                                                          | 3,129,010  |                                   |          |      | 3,322,573  |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Royalties and licensing revenues                                    |                  |                                                                                                                          | 426,405    |                                   |          |      | 121,966    |         
|                                                                    |                  |                                                                                                                          |            |                                   |          |      |            |         
|Net revenues                                                        |                  |                                                                                                                          | 14,229,619 |                                   |          |      | 14,283,908 |         
|                                                                    |                  |                                                                                                                          |            |                                   |          |      |            |         
|Cost of goods  IVD systems                                         |                  |                                                                                                                          | 2,325,101  |                                   |          |      | 2,109,499  |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Cost of goods  IVD supplies and services                           |                  |                                                                                                                          | 2,909,567  |                                   |          |      | 2,728,815  |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Cost of goods  small instruments and supplies                      |                  |                                                                                                                          | 1,619,349  |                                   |          |      | 1,603,082  |         
|                                                                    |                  |                                                                                                                          |            |                                   |          |      |            |         
|Cost of goods sold                                                  |                  |                                                                                                                          | 6,854,017  |                                   |          |      | 6,441,396  |         
|                                                                    |                  |                                                                                                                          |            |                                   |          |      |            |         
|Gross margin                                                        |                  |                                                                                                                          | 7,375,602  |                                   |          |      | 7,842,512  |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Marketing and selling                                               |                  |                                                                                                                          | 1,842,746  |                                   |          |      | 1,961,578  |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|General and administrative                                          |                  |                                                                                                                          | 1,970,426  |                                   |          |      | 2,180,243  |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Research and development, net                                       |                  |                                                                                                                          | 1,020,651  |                                   |          |      | 2,047,911  |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Amortization of intangibles                                         |                  |                                                                                                                          | 70,673     |                                   |          |      | 72,024     |         
|                                                                    |                  |                                                                                                                          |            |                                   |          |      |            |         
|Total operating expenses                                            |                  |                                                                                                                          | 4,904,496  |                                   |          |      | 6,261,756  |         
|                                                                    |                  |                                                                                                                          |            |                                   |          |      |            |         
|Operating income                                                    |                  |                                                                                                                          | 2,471,106  |                                   |          |      | 1,580,756  |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Other income (expense):                                             |                  |                                                                                                                          |            |                                   |          |      |            |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Interest income  |                                                                                                                          |            | 83,318                            |          |      |            | 81,824   |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Interest expense |                                                                                                                          |            | (484,627                          | )        |      |            | (436,829 | )
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Other income     |                                                                                                                          |            | 11,857                            |          |      |            | 985      |  
|                                                                    |                  |                                                                                                                          |            |                                   |          |      |            |         
|Income from continuing operations before provision
for income taxes |                  |                                                                                                                          | 2,081,654  |                                   |          |      | 1,226,736  |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Provision for income taxes                                          |                  |                                                                                                                          | 770,212    |                                   |          |      | 490,694    |         
|                                                                    |                  |                                                                                                                          |            |                                   |          |      |            |         
|Income from continuing operations                                   |                  |                                                                                                                          | 1,311,442  |                                   |          |      | 736,042    |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Loss from discontinued operations:                                  |                  |                                                                                                                          |            |                                   |          |      |            |         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    |                  | Loss from
          operations of discontinued segment prior to March 
          31, 2000, net of tax benefit of $61,015 |            |                                   | (286,385 | )    |            |          |  | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    |                  | Loss on
          disposal of discontinued segment, including tax
          provision of $29,374                         |            |                                   | (199,159 | )    |            |          |  | 
|                                                                    |                  |                                                                                                                          |            |                                   |          |      |            |         
|Loss from discontinued operations                                   |                  |                                                                                                                          | (485,544   | )                                 |          |      |           |         
|                                                                    |                  |                                                                                                                          |            |                                   |          |      |            |         
|Net income                                                          |                  | $                                                                                                                        | 825,898    |                                   |          | $    | 736,042    |         
|                                                                    |                  |                                                                                                                          |            |                                   |          |      |            |         

5



---



##### Table of Contents



|                                                                                                         |  |                                              |            |                                   |       |      |            |   |      | 
|-------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | ---------- | --------------------------------- | ----- | ---- | ---------- | - | ---- | 
|                                                                                                         |  |                                              |            | For the six months ended June 30,
|                                                                                                         |  |                                              |            |                                  
|                                                                                                         |  |                                              |            | 2000                              |       | 2001
|                                                                                                         |  |                                              |            |                                   |       |     
|Income (loss) per share  basic:                                                                         |  |                                              |            |                                   |       |      |            |  
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |  | Income from continuing operations            |            | $                                 | 0.14  |      |            | $ | 0.07 | 
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |  | Loss from operations of discontinued segment |            |                                   | (0.05 | )    |            |   |     | 
|                                                                                                         |  |                                              |            |                                   |       |      |            |  
|Income per share attributable to common shareholders  basic                                             |  | $                                            | 0.09       |                                   |       | $    | 0.07       |  
|                                                                                                         |  |                                              |            |                                   |       |      |            |  
|Income (loss) per share  diluted:                                                                       |  |                                              |            |                                   |       |      |            |  
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |  | Income from continuing operations            |            | $                                 | 0.13  |      |            | $ | 0.07 | 
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |  | Loss from operations of discontinued segment |            |                                   | (0.05 | )    |            |   |     | 
|                                                                                                         |  |                                              |            |                                   |       |      |            |  
|Income per share attributable to common shareholders  diluted                                           |  | $                                            | 0.08       |                                   |       | $    | 0.07       |  
|                                                                                                         |  |                                              |            |                                   |       |      |            |  
|Weighted average number of common shares outstanding  basic                                             |  |                                              | 9,513,836  |                                   |       |      | 9,940,377  |  
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|Weighted
          average number of common and common equivalent
          shares outstanding  diluted |  |                                              | 10,280,304 |                                   |       |      | 10,746,214 |  

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

6



---



##### Table of Contents






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

|                                                     |                                                                         |   |           |                                                         |   |                                   |            |             |   |  |            |  
|---------------------------------------------------- | ----------------------------------------------------------------------- | - | --------- | ------------------------------------------------------- | - | --------------------------------- | ---------- | ----------- | - |  | ---------- | -
|                                                     |                                                                         |   |           |                                                         |   | For the six months ended June 30,
|                                                     |                                                                         |   |           |                                                         |   |                                  
|                                                     |                                                                         |   |           |                                                         |   | 2000                              |            | 2001       
|                                                     |                                                                         |   |           |                                                         |   |                                   |            |            
|Cash flow from operating activities:                 |                                                                         |   |           |                                                         |   |                                   |            |            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net income                                                              |   | $         | 825,898                                                 |   |                                   | $          | 736,042     |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net income to net cash provided by
operations: |   |           |                                                         |   |                                   |            |             |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                         |   |           | Loss from discontinued operations                       |   |                                   | 485,544    |             |   |  |           |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                         |   |           | Deferred tax benefit                                    |   |                                   | 700,884    |             |   |  | 478,497    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                         |   |           | Depreciation and amortization                           |   |                                   | 376,627    |             |   |  | 508,247    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                         |   |           | Common stock and stock option compensation amortization |   |                                   | 113,384    |             |   |  | 116,204    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                         |   |           | Gain on disposal of equipment                           |   |                                   | (1,677     | )           |   |  |           |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Changes in assets and liabilities:                                      |   |           |                                                         |   |                                   |            |             |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                         |   |           | Accounts receivable  trade and other                   |   |                                   | 319,647    |             |   |  | 472,517    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                         |   |           | Service contracts, net                                  |   |                                   | (305,605   | )           |   |  | (135,021   | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                         |   |           | Inventories                                             |   |                                   | (300,063   | )           |   |  | (693,576   | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                         |   |           | Prepaid expenses and other current assets               |   |                                   | 22,268     |             |   |  | (22,604    | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                         |   |           | Other assets                                            |   |                                   | (68,581    | )           |   |  | (51,074    | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                         |   |           | Accounts payable                                        |   |                                   | 405,724    |             |   |  | 290        |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                         |   |           | Accrued expenses                                        |   |                                   | 424,369    |             |   |  | (1,054,200 | )
|                                                     |                                                                         |   |           |                                                         |   |                                   |            |            
|Net cash provided by continuing operations           |                                                                         |   | 2,998,419 |                                                         |   |                                   | 355,322    |            
|                                                    
|                                                    
|                                                    
|                                                    
|Net cash used by discontinued operations             |                                                                         |   | (858,988  | )                                                       |   |                                   |           |            
|                                                     |                                                                         |   |           |                                                         |   |                                   |            |            
|Net cash provided by operating activities            |                                                                         |   | 2,139,431 |                                                         |   |                                   | 355,322    |            
|                                                     |                                                                         |   |           |                                                         |   |                                   |            |            
|Cash flow from investing activities:                 |                                                                         |   |           |                                                         |   |                                   |            |            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Acquisition of property and equipment                                   |   |           | (151,544                                                | ) |                                   |            | (354,642    | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Software development costs                                              |   |           | (31,935                                                 | ) |                                   |            | (301,833    | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Investing activities of discontinued operations                         |   |           | (136,694                                                | ) |                                   |            |            |  
|                                                     |                                                                         |   |           |                                                         |   |                                   |            |            
|Net cash used by investing activities                |                                                                         |   | (320,173  | )                                                       |   |                                   | (656,475   | )          
|                                                     |                                                                         |   |           |                                                         |   |                                   |            |            
|Cash flow from financing activities:                 |                                                                         |   |           |                                                         |   |                                   |            |            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Borrowings under line of credit                                         |   |           | 7,110,000                                               |   |                                   |            | 11,019,118  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayments of line of credit                                            |   |           | (7,388,789                                              | ) |                                   |            | (11,680,618 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Borrowings under term loan                                              |   |           |                                                        |   |                                   |            | 3,000,000   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayments of term loan                                                 |   |           | (600,000                                                | ) |                                   |            | (583,333    | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayment of notes payable                                              |   |           |                                                        |   |                                   |            | (3,500,000  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Issuance of common stock and warrant for cash                           |   |           | 49,750                                                  |   |                                   |            | 141,201     |  
|                                                     |                                                                         |   |           |                                                         |   |                                   |            |            
|Net cash used by financing activities                |                                                                         |   | (829,039  | )                                                       |   |                                   | (1,603,632 | )          
|                                                     |                                                                         |   |           |                                                         |   |                                   |            |            
|Net increase (decrease) in cash and cash equivalents |                                                                         |   | 990,219   |                                                         |   |                                   | (1,904,785 | )          
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of period     |                                                                         |   | 2,034,593 |                                                         |   |                                   | 3,661,310  |            
|                                                     |                                                                         |   |           |                                                         |   |                                   |            |            
|Cash and cash equivalents at end of period           |                                                                         | $ | 3,024,812 |                                                         |   | $                                 | 1,756,525  |            
|                                                     |                                                                         |   |           |                                                         |   |                                   |            |            

7



---



##### Table of Contents



|                                                                      |                                                        |  |   |         |  |                                   |   |         |  |  |  | 
|--------------------------------------------------------------------- | ------------------------------------------------------ |  | - | ------- |  | --------------------------------- | - | ------- |  |  |  | 
|                                                                      |                                                        |  |   |         |  | For the six months ended June 30,
|                                                                      |                                                        |  |   |         |  |                                  
|                                                                      |                                                        |  |   |         |  | 2000                              |   | 2001   
|                                                                      |                                                        |  |   |         |  |                                   |   |        
|Supplemental schedule of non-cash investing and financing activities: |                                                        |  |   |         |  |                                   |   |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Issuance of common stock in exchange for services      |  | $ | 80,500  |  |                                   | $ | 10,000  | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Addition to capital lease obligation                   |  |   | 33,840  |  |                                   |   |        | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Issuance of warrants in connection with debt financing |  |   |        |  |                                   |   | 374,768 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Supplemental disclosure of cash flow information:                     |                                                        |  |   |         |  |                                   |   |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Cash paid for interest                                 |  |   | 432,497 |  |                                   |   | 456,580 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Cash paid for income taxes                             |  |   | 14,596  |  |                                   |   | 33,592  | 

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

8



---



##### Table of Contents






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

|                                              |  |                                     |         |      |  |   |         | 
|--------------------------------------------- |  | ----------------------------------- | ------- | ---- |  | - | ------- | 
|                                              |  | For the three months ended June 30,
|                                              |  |                                    
|                                              |  | 2000                                |         | 2001
|                                              |  |                                     |         |     
|Net income                                    |  | $                                   | 474,973 |      |  | $ | 375,376 | 
|                                             
|                                             
|                                             
|                                             
|Unrealized gains on investments, net of taxes |  |                                     |        |      |  |   | 25,434  | 
|                                              |  |                                     |         |      |  |   |         | 
|Comprehensive income                          |  | $                                   | 474,973 |      |  | $ | 400,810 | 
|                                              |  |                                     |         |      |  |   |         | 

|                                               |  |                                   |         |      |  |   |          |  
|---------------------------------------------- |  | --------------------------------- | ------- | ---- |  | - | -------- | -
|                                               |  | For the six months ended June 30,
|                                               |  |                                  
|                                               |  | 2000                              |         | 2001
|                                               |  |                                   |         |     
|Net income                                     |  | $                                 | 825,898 |      |  | $ | 736,042  |  
|                                              
|                                              
|                                              
|                                              
|Unrealized losses on investments, net of taxes |  |                                   |        |      |  |   | (336,429 | )
|                                               |  |                                   |         |      |  |   |          |  
|Comprehensive income                           |  | $                                 | 825,898 |      |  | $ | 399,613  |  
|                                               |  |                                   |         |      |  |   |          |  

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

9



---



##### Table of Contents






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

1. Formation and Business of the Company.

International Remote Imaging Systems, Inc. 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) designs, develops, manufactures and markets in vitrodiagnostic
(IVD) equipment, including IVD imaging systems based on patented and
proprietary automated intelligent microscopy (AIM) technology, and special
purpose centrifuges and other small instruments for use in clinical laboratories. The Company also provides
ongoing service and supplies to support the equipment sold.

2. Summary of Significant Accounting Policies.

Basis of Presentation of Unaudited Interim Financial Statements:

In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of the Company as of June 30, 2001 and
2000 and the results of its operations for the three and six month periods then
ended. These financial statements should be read in conjunction with the
financial statements and notes included in the Companys latest annual report
on Form 10-K. Interim results are not necessarily indicative of results for a
full year.

Use of Estimates:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting periods. The significant estimates in the preparation of the
consolidated financial statements relate to the assessment of the carrying
value of accounts receivables, inventories, purchased intangibles, estimated
provisions for warranty costs and deferred tax assets. Actual results could
differ from those estimates.

Principles of Consolidation:

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

Recent Accounting Pronouncements

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

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

Reclassifications:

Certain reclassifications have been made to the 2000 financial statements
to conform to the 2001 presentation.

3. Comprehensive Income.

The Companys components of comprehensive income are net income and
unrealized gains (losses) on investments. Income tax effect allocated to the
unrealized gains and losses on available for sale securities for the three and
six months ended June 30, 2001 was an expense of $16,956 and a benefit of
$224,286, respectively.

The following is a reconciliation of accumulated other comprehensive
income balance for the three and six months ended June 30, 2001:

|                      |  |              |         |            |  |   |          |  
|--------------------- |  | ------------ | ------- | ---------- |  | - | -------- | -
|                      |  | Three months |         | Six months
|                      |  |              |         |           
|Beginning balance     |  | $            | (72,835 | )          |  | $ | 289,028  |  
|                     
|                     
|                     
|                     
|Current period change |  |              | 25,434  |            |  |   | (336,429 | )
|                      |  |              |         |            |  |   |          |  
|Ending balance        |  | $            | (47,401 | )          |  | $ | (47,401  | )
|                      |  |              |         |            |  |   |          |  

4. Inventories.

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

10



---



##### Table of Contents



|                                        |  |                      |           |                  |  |   |           | 
|--------------------------------------- |  | -------------------- | --------- | ---------------- |  | - | --------- | 
|                                        |  | At December 31, 2000 |           | At June 30, 2001
|                                        |  |                      |           |                 
|Finished goods                          |  | $                    | 1,715,881 |                  |  | $ | 1,485,467 | 
|                                       
|                                       
|                                       
|                                       
|Work-in-process                         |  |                      | 216,050   |                  |  |   | 1,398,357 | 
|                                       
|                                       
|                                       
|                                       
|Raw materials, parts and sub-assemblies |  |                      | 3,252,341 |                  |  |   | 2,994,024 | 
|                                        |  |                      |           |                  |  |   |           | 
|                                        |  | $                    | 5,184,272 |                  |  | $ | 5,877,848 | 
|                                        |  |                      |           |                  |  |   |           | 

5.Short-Term Borrowings and Notes Payable.

In March 2001, the Company renewed its existing credit facility with Foothill Capital
that was due to mature in May 2001. At June 30, 2001, the outstanding amounts
under the revised credit facility consist of $2.9 million outstanding under a
$3.0 million term loan and no balance 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 $1.1
million available under the line of credit at June 30, 2001. The term loan
bears interest at the lenders prime rate (6.75% on June 30, 2001) plus 3.0%
and is payable in thirty-six monthly installments of approximately $83,000. 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 May 2004. It also contains financial covenants
based primarily on tangible net worth and cash flows and imposes restrictions
on acquisitions, capital expenditures and cash dividends.

The Company refinanced a $7.0 million Subordinated Note by paying $3.5
million in May 2001, with the remaining $3.5 million payable in 36 monthly
installments of approximately $97,000 commencing in September 2001. The note
bears interest on the unpaid principal at a fixed rate of 8.5% per annum until
July 31, 2001 and at a variable rate equal to the prime rate plus 2.0%
thereafter. Interest is payable monthly. In connection with the refinancing
of the $7.0 million note, the Company agreed to cancel and reissue warrants to
purchase 853,040 shares of common stock. As a result of the cancellation and
reissuance, the warrant life was extended from July 31, 2001 to July 31, 2004
and the exercise price was reduced from $3.56 per share to $1.90 per share
commencing July 31, 2001. The Company has accounted for the reissuance of the
warrants in accordance with Accounting Principles Board Opinion No. 14
Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants
and recorded as a discount to the note an amount of $374,768, representing the
relative fair value of the warrants based on the Black-Scholes option-pricing
model. The Company will record the discount as additional interest expense
over the remaining period of the note, using the interest method. At June 30,
2001, the maturity of the Companys long term debt obligations, excluding the
discount, are $1,972,500 within one year and $4,444,167 thereafter.

6. Capital Stock.

Stock Issuances:

During the six months ended June 30, 2001, the Company (i) issued 10,870
shares of common stock in exchange for $10,000 in cash and services under the
Employee Stock Purchase Plan, (ii) issued options to purchase 348,005 shares of
common stock under the Companys stock option plans and (iii) cancelled options
to purchase 16,916 shares of common stock. Options for 100,668 shares of
common stock were exercised during the period. At June 30, 2001, options to
purchase 2,233,305 shares of common stock were issued and outstanding under the
Companys stock options plans. The outstanding options expire by the end of
2011. The exercise price for these options ranges from $0.69 to $4.38 per
share. At June 30, 2001, there were 672,055 shares of common stock available
for the granting of future options under the Companys stock option plans.

11



---



##### Table of Contents



Warrants

As of June 30, 2001, the following warrants to purchase shares of common
stock were outstanding and exercisable:

|                 |         |                 |  |                 |      |  |  |                  
|---------------- | ------- | --------------- |  | --------------- | ---- |  |  | -----------------
|Number of Shares |         | Per Share Price |  | Expiration Date
|                 |         |                 |  |                
|                 | 875,000 |                 |  | $               | 3.56 |  |  | July 31, 2001    
|                
|                
|                
|                
|                 | 84,270  |                 |  |                 | 3.56 |  |  | December 31, 2001
|                
|                
|                
|                
|                 | 100,000 |                 |  |                 | 1.50 |  |  | February 10, 2002
|                
|                
|                
|                
|                 | 10,000  |                 |  |                 | 4.31 |  |  | May 15, 2002     
|                
|                
|                
|                
|                 | 306,000 |                 |  |                 | 2.00 |  |  | August 6, 2002   
|                
|                
|                
|                
|                 | 297,000 |                 |  |                 | 1.00 |  |  | August 6, 2002   
|                
|                
|                
|                
|                 | 50,000  |                 |  |                 | 2.13 |  |  | October 31, 2005 

7. Income Taxes.

The income tax provision from continuing operations for the six-month
period ended June 30, 2001 was $490,694 as compared to $770,212 for the
comparable period last year. The income tax provision differs from the federal
statutory rate due primarily to state income taxes and permanent differences
between income reported for financial statement and income tax purposes.

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

8. Earnings Per Share (EPS).

The computation of per share amounts for the three and six months ended
June 30, 2001 and 2000 is based on the average number of common shares outstanding for
the period. Options and warrants to purchase 1,694,275 and 1,759,903 shares of
common stock outstanding during the three months ended June 30, 2001 and three
months ended June 30, 2000, respectively, were not considered in the
computation of diluted EPS because their inclusion would have been
antidilutive. Options and warrants to purchase 1,719,275 and 1,756,903 shares
of common stock outstanding during the six months ended June 30, 2001 and six
months ended June 30, 2000, respectively, were not considered in the
computation of diluted EPS because their inclusion would have been
antidilutive.

The following is a reconciliation of shares used in computing basic and
diluted earnings per share amounts.

|                                            |                 |  |                    |         |               |  |            |         | 
|------------------------------------------- | --------------- |  | ------------------ | ------- | ------------- |  | ---------- | ------- | 
|                                            |                 |  | Three Months Ended
|                                            |                 |  |                   
|                                            |                 |  | June 30, 2000      |         | June 30, 2001
|                                            |                 |  |                    |         |              
|Weighted average number of shares  basic   |                 |  | 9,649,658          |         |               |  | 9,971,455  |        
|                                           
|                                           
|                                           
|                                           
|Effects of Dilutive Securities              |                 |  |                    |         |               |  |            |        
|                                           
|                                           
|                                           
|                                           
|                                            | Options         |  |                    | 247,466 |               |  |            | 373,201 | 
|                                           
|                                           
|                                           
|                                           
|                                            | Warrants        |  |                    | 122,766 |               |  |            | 167,769 | 
|                                           
|                                           
|                                           
|                                           
|                                            | Preferred Stock |  |                    | 306,000 |               |  |            | 306,000 | 
|                                            |                 |  |                    |         |               |  |            |        
|Weighted average number of shares  diluted |                 |  | 10,325,890         |         |               |  | 10,818,425 |        
|                                            |                 |  |                    |         |               |  |            |        

12



---



##### Table of Contents



|                                            |                 |  |                  |         |               |  |            |         | 
|------------------------------------------- | --------------- |  | ---------------- | ------- | ------------- |  | ---------- | ------- | 
|                                            |                 |  | Six Months Ended
|                                            |                 |  |                 
|                                            |                 |  | June 30, 2000    |         | June 30, 2001
|                                            |                 |  |                  |         |              
|Weighted average number of shares  basic   |                 |  | 9,513,836        |         |               |  | 9,940,377  |        
|                                           
|                                           
|                                           
|                                           
|Effects of Dilutive Securities              |                 |  |                  |         |               |  |            |        
|                                           
|                                           
|                                           
|                                           
|                                            | Options         |  |                  | 319,918 |               |  |            | 341,874 | 
|                                           
|                                           
|                                           
|                                           
|                                            | Warrants        |  |                  | 142,182 |               |  |            | 157,963 | 
|                                           
|                                           
|                                           
|                                           
|                                            | Preferred Stock |  |                  | 304,368 |               |  |            | 306,000 | 
|                                            |                 |  |                  |         |               |  |            |        
|Weighted average number of shares  diluted |                 |  | 10,280,304       |         |               |  | 10,746,214 |        
|                                            |                 |  |                  |         |               |  |            |        

9. Discontinued Operations.

In March, 2000, the Board of Directors approved a plan of disposal for its
wholly-owned subsidiary, Perceptive Scientific Instruments, LLC, the Companys
genetic analysis business segment. The Company completed the sale of
substantially all of the U.S. operations of this business to Applied Imaging
Corporation (Nasdaq: AICX) on July 6, 2000. The purchase price consisted of
385,371 shares of Applied Imaging common stock, the assumption of certain
liabilities and potential cash payments based on future performance of Applied
Imagings business. To date, the Company has not received any contingent
purchase consideration. The Company was unable to sell the international
operations of this business and placed Perceptive Scientific International
Limited (a wholly-owned subsidiary of Perceptive Scientific Instruments, LLC)
into a voluntary liquidation under United Kingdom law on June 6, 2000.

The operating results of the discontinued operations for the three and six
months ended June 30, 2000 are summarized as follows:

|                                              |  |              |          |            |  |   |           |  
|--------------------------------------------- |  | ------------ | -------- | ---------- |  | - | --------- | -
|                                              |  | Three Months |          | Six Months
|                                              |  |              |          |           
|Revenues                                      |  | $            | 442,665  |            |  | $ | 1,227,400 |  
|                                             
|                                             
|                                             
|                                             
|Loss from discontinued operations, net of tax |  |              | (199,159 | )          |  |   | (485,544  | )

10. Segment and Geographic Information.

The Companys continuing operations are organized on the basis of products
and related services and under FAS 131 the Company operates in two segments:
(1) urinalysis and (2) small laboratory devices.

The urinalysis segment designs, develops, manufactures and markets IVD
imaging systems based on patented and proprietary AIM technology for automating
microscopic procedures for urinalysis. In December 1997, this segment also
began distributing the UF-100 urine cell analyzer in the United States under an
existing agreement with its manufacturer. The segment also provides ongoing
sales of supplies and service necessary for the operation of installed
urinalysis workstations. In the United States, these products are sold through
a direct sales force. Internationally, these products are sold through
distributors.

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

The accounting policies of the segments are the same as those described in
the Summary of Significant Accounting Policies included in the Companys
report on Form 10-K for the year ended December 31, 2000. The Company evaluates
the performance of its segments and allocates resources to them based on
earnings before income taxes, excluding corporate charges (Segment Profit).

The tables below present information about reported segments for the three
and six month periods ended June 30, 2001 and 2000:

13



---



##### Table of Contents



Three Months Ended June 30, 2001:

|                                |  |            |            |         |  |            |           |             |  |   |           |   |  |   |            | 
|------------------------------- |  | ---------- | ---------- | ------- |  | ---------- | --------- | ----------- |  | - | --------- | - |  | - | ---------- | 
|                                |  |            |            |         |  | Small      |           | Unallocated |  |   |           |  
|                                |  |            |            |         |  | Laboratory |           | Corporate   |  |   |           |  
|                                |  | Urinalysis |            | Devices |  | Expenses   |           | Total      
|                                |  |            |            |         |  |            |           |            
|Revenues                        |  | $          | 5,365,674  |         |  | $          | 1,640,410 |             |  |   |          |   |  | $ | 7,006,084  | 
|                               
|                               
|                               
|                               
|Interest income                 |  | $          | 29,834     |         |  |            |          |             |  |   |          |   |  | $ | 29,834     | 
|                               
|                               
|                               
|                               
|Interest expense                |  | $          | 1,859      |         |  |            |          |             |  | $ | 206,333   |   |  | $ | 208,192    | 
|                               
|                               
|                               
|                               
|Depreciation and amortization   |  | $          | 238,886    |         |  | $          | 36,175    |             |  | $ | 42,701    |   |  | $ | 317,762    | 
|                               
|                               
|                               
|                               
|Segment profit (loss)           |  | $          | 1,047,222  |         |  | $          | 384,278   |             |  | $ | (805,874  | ) |  | $ | 625,626    | 
|                               
|                               
|                               
|                               
|Segment assets                  |  | $          | 14,696,601 |         |  | $          | 2,280,982 |             |  | $ | 9,077,780 |   |  | $ | 26,055,363 | 
|                               
|                               
|                               
|                               
|Investment in long-lived assets |  | $          | 298,658    |         |  | $          | 13,272    |             |  |   |          |   |  | $ | 311,930    | 

Three Months Ended June 30, 2000:

|                                |  |            |            |         |  |            |           |             |  |   |            |   |  |   |            | 
|------------------------------- |  | ---------- | ---------- | ------- |  | ---------- | --------- | ----------- |  | - | ---------- | - |  | - | ---------- | 
|                                |  |            |            |         |  | Small      |           | Unallocated |  |   |            |  
|                                |  |            |            |         |  | Laboratory |           | Corporate   |  |   |            |  
|                                |  | Urinalysis |            | Devices |  | Expenses   |           | Total      
|                                |  |            |            |         |  |            |           |            
|Revenues                        |  | $          | 5,690,300  |         |  | $          | 1,786,181 |             |  |   |           |   |  | $ | 7,476,481  | 
|                               
|                               
|                               
|                               
|Interest income                 |  | $          | 50,061     |         |  |            |          |             |  |   |           |   |  | $ | 50,061     | 
|                               
|                               
|                               
|                               
|Interest expense                |  | $          | 125        |         |  |            |          |             |  | $ | 242,751    |   |  | $ | 242,876    | 
|                               
|                               
|                               
|                               
|Depreciation and amortization   |  | $          | 193,089    |         |  | $          | 29,884    |             |  | $ | 62,279     |   |  | $ | 285,252    | 
|                               
|                               
|                               
|                               
|Segment profit (loss)           |  | $          | 1,276,794  |         |  | $          | 519,712   |             |  | $ | (730,097   | ) |  | $ | 1,066,409  | 
|                               
|                               
|                               
|                               
|Segment assets                  |  | $          | 13,099,056 |         |  | $          | 2,105,380 |             |  | $ | 10,661,313 |   |  | $ | 25,865,749 | 
|                               
|                               
|                               
|                               
|Investment in long-lived assets |  | $          | 69,643     |         |  | $          | 17,237    |             |  |   |           |   |  | $ | 86,880     | 

14



---



##### Table of Contents



Six Months Ended June 30, 2001:

|                                |  |            |            |         |  |            |           |             |  |   |            |   |  |   |            | 
|------------------------------- |  | ---------- | ---------- | ------- |  | ---------- | --------- | ----------- |  | - | ---------- | - |  | - | ---------- | 
|                                |  |            |            |         |  | Small      |           | Unallocated |  |   |            |  
|                                |  |            |            |         |  | Laboratory |           | Corporate   |  |   |            |  
|                                |  | Urinalysis |            | Devices |  | Expenses   |           | Total      
|                                |  |            |            |         |  |            |           |            
|Revenues                        |  | $          | 10,961,335 |         |  | $          | 3,322,573 |             |  |   |           |   |  | $ | 14,283,908 | 
|                               
|                               
|                               
|                               
|Interest income                 |  | $          | 81,824     |         |  |            |          |             |  |   |           |   |  | $ | 81,824     | 
|                               
|                               
|                               
|                               
|Interest expense                |  | $          | 3,815      |         |  |            |          |             |  | $ | 433,014    |   |  | $ | 436,829    | 
|                               
|                               
|                               
|                               
|Depreciation and amortization   |  | $          | 454,535    |         |  | $          | 67,389    |             |  | $ | 102,527    |   |  | $ | 624,451    | 
|                               
|                               
|                               
|                               
|Segment profit (loss)           |  | $          | 1,984,128  |         |  | $          | 861,382   |             |  | $ | (1,618,774 | ) |  | $ | 1,226,736  | 
|                               
|                               
|                               
|                               
|Investment in long-lived assets |  | $          | 620,176    |         |  | $          | 36,299    |             |  |   |           |   |  | $ | 656,475    | 

Six Months Ended June 30, 2000:

|                                |  |            |            |         |  |            |           |             |  |   |            |   |  |   |            | 
|------------------------------- |  | ---------- | ---------- | ------- |  | ---------- | --------- | ----------- |  | - | ---------- | - |  | - | ---------- | 
|                                |  |            |            |         |  | Small      |           | Unallocated |  |   |            |  
|                                |  |            |            |         |  | Laboratory |           | Corporate   |  |   |            |  
|                                |  | Urinalysis |            | Devices |  | Expenses   |           | Total      
|                                |  |            |            |         |  |            |           |            
|Revenues                        |  | $          | 11,100,609 |         |  | $          | 3,129,010 |             |  |   |           |   |  | $ | 14,229,619 | 
|                               
|                               
|                               
|                               
|Interest income                 |  | $          | 83,318     |         |  |            |          |             |  |   |           |   |  | $ | 83,318     | 
|                               
|                               
|                               
|                               
|Interest expense                |  | $          | 1,080      |         |  |            |          |             |  | $ | 483,547    |   |  | $ | 484,627    | 
|                               
|                               
|                               
|                               
|Depreciation and amortization   |  | $          | 356,379    |         |  | $          | 58,627    |             |  | $ | 75,005     |   |  | $ | 490,011    | 
|                               
|                               
|                               
|                               
|Segment profit (loss)           |  | $          | 2,775,492  |         |  | $          | 841,184   |             |  | $ | (1,535,022 | ) |  | $ | 2,081,654  | 
|                               
|                               
|                               
|                               
|Investment in long-lived assets |  | $          | 158,342    |         |  | $          | 25,137    |             |  |   |           |   |  | $ | 183,479    | 

Long-lived assets were all located in the United States and totaled
$2,758,926 at December 31, 2000 and $2,958,229 at June 30, 2001.

15



---



##### Table of Contents






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

Overview

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

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

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

|                                                                                        |                                       |   |                             |         |                           |   |         |           |      |   |           |           |  |   |           |           | 
|--------------------------------------------------------------------------------------- | ------------------------------------- | - | --------------------------- | ------- | ------------------------- | - | ------- | --------- | ---- | - | --------- | --------- |  | - | --------- | --------- | 
|                                                                                        |                                       |   | Three Months Ended June 30, |         | Six Months Ended June 30,
|                                                                                        |                                       |   |                             |         |                          
|                                                                                        |                                       |   | 2000                        |         | 2001                      |   | 2000    |           | 2001
|                                                                                        |                                       |   |                             |         |                           |   |         |           |     
|Research and development expense, net                                                   |                                       | $ | 597,000                     |         |                           | $ | 994,000 |           |      | $ | 1,021,000 |           |  | $ | 2,048,000 |          
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Capitalized software development costs                                                  |                                       |   | 17,000                      |         |                           |   | 162,000 |           |      |   | 32,000    |           |  |   | 302,000   |          
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Reimbursed
          costs for research and 
          development grants and contracts |                                       |   | 262,000                     |         |                           |   | 271,000 |           |      |   | 451,000   |           |  |   | 553,000   |          
|                                                                                        |                                       |   |                             |         |                           |   |         |           |      |   |           |           |  |   |           |          
|                                                                                        | Total product technology expenditures |   | $                           | 876,000 |                           |   | $       | 1,427,000 |      |   | $         | 1,504,000 |  |   | $         | 2,903,000 | 
|                                                                                        |                                       |   |                             |         |                           |   |         |           |      |   |           |           |  |   |           |          

We sold Perceptive Scientific Instruments, our genetic analysis business,
on July 6, 2000 as part of a plan to refocus on our core business. We have
treated this business as a discontinued operation for accounting purposes, and
we have removed it from most of the discussion and financial information in
this Quarterly Report. For a further discussion of the sale of this business,
please see the discussion below in this section entitled Discontinued Business
Operations on page 20 of this Quarterly Report.

Results of Operations

Comparison of Quarter Ended June 30, 2001 to Quarter Ended June 30, 2000

Net revenues for the quarter ended June 30, 2001 decreased to $7.0 million
from $7.5 million, a decrease of $470,000, or 6% over the same period last
year. Sales of IVD imaging systems decreased to $1.3 million from $2.0
million, a decrease of $752,000 or 38% from the same period last year. The
decrease is due primarily to lower sales to domestic hospitals, as well as
decreased sales to international distributors. Sales of IVD imaging system
supplies and services increased to $4.0 million from $3.6 million, an increase
of $411,000 or 11% over the same period last year, primarily due to the larger
installed base of urinalysis workstations. Sales of small instruments and
supplies decreased to $1.6 million from $1.8 million, a decrease of $146,000,
or 8%. The decrease is due primarily to decreased sales of small instruments.
Royalties and licensing revenues increased to $66,000 from $49,000 in the
comparable period from the prior year.

Revenues from the urinalysis segment totaled $5.4 million in the current
period as compared to $5.7 million in the comparable period last year, a
decrease of $325,000 or 6%. This reduction is due to decreased sales of our
urinalysis workstations partially offset by increased sales of related system
supplies and services to the growing installed base. Revenues from the small
laboratory devices segment decreased to $1.6 million in the current period, as
compared to $1.8 million in the comparable period from last year, a decrease of
$146,000. This reduction is due primarily to decreased sales of small
instruments.

Cost of goods for IVD systems as a percentage of sales of IVD imaging
systems totaled 71% in the current period as compared to 66% in the comparable
period from last year. The increase is primarily attributable to changes in
the mix of products sold from one period to the other, as well as increased
manufacturing overhead associated with improved inventory control processes and
the effect of the amortization of certain capitalized

16



---



##### Table of Contents









software which began in June 2000. Cost of goods for IVD imaging system
supplies and services as a percentage of sales of such products decreased to
34% for the current period as compared to 38% for the same period last year.
This decrease is due primarily to efficiencies derived from improved
manufacturing processes. Cost of goods for small instruments and supplies as a
percentage of sales of small instruments and supplies totaled 48% for the
current period, as compared to 52% in the second quarter of last year. This
decrease is primarily due to manufacturing efficiencies from increased
production volume. The aggregate gross margin totaled 56% for the quarter
ended June 30, 2001 as compared to 51% in the comparable period of the prior
year.

Cost of goods sold as a percentage of revenues from the urinalysis segment
totaled 42%, as compared to 48% in the second quarter of last year. This
decrease is primarily due to improvements in the manufacturing process. Cost
of goods for small laboratory devices as a percentage of revenues totaled 48%
in the current period, as compared to 52% in the second quarter of the prior
year. This decrease is primarily due to manufacturing efficiencies from
increased production volume.

Marketing and selling expenses totaled $976,000, compared to $1,011,000
for the comparable period of last year, a decrease of $35,000, or 4%, due
primarily to decreased sales commissions consistent with the lower sales of our
urinalysis workstations. Marketing and selling expenses as a percentage of net
revenues were 14% in the quarter ended June 30, 2001, which was comparable to
the same period last year.

General and administrative expenses were $1.1 million, compared to
$949,000 for the comparable period in the prior year, an increase of $192,000,
or 20%. This increase is primarily due to increased charges for legal
fees and other professional services, as well as the cost of upgrading the Company's internal information systems. General and administrative expenses for the period as a percentage of
net revenue were 16% as compared to 13% in the same period in the prior year.

Net research and development expenses increased to $994,000 for the
quarter ended June 30, 2001, as compared to $597,000 in the second quarter of
last year, an increase of $397,000 or 67%. Net research and development
expenses as a percentage of revenues increased to 14% in the quarter ended June
30, 2001 from 8% in the comparable period of the prior year. Total product
technology expenditures, including capitalized software development costs and
reimbursed costs under research and development grants and contracts, increased
to $1.4 million from $876,000, an increase of $551,000 or 63% as compared to
the same period of the prior year. The increase in total product technology
expenditures is due to increased spending under a major project begun in 1999
to improve our urinalysis workstation product line. We believe that this
project is important to maintaining our competitive position in the urinalysis
market and that our failure to complete this project on schedule could have a
material and adverse effect on our business. We expect our net research and
development expenses will continue at current levels during 2001.

Amortization of intangible assets reflects the amortization of acquired
intangible assets and patents. Amortization of intangible assets for the
quarter ended June 30, 2001 increased slightly to $36,000 from $34,000 in the
comparable period in the prior year.

Operating income for the quarter ended June 30, 2001 decreased to $804,000
as compared to an operating income of $1.2 million in the comparable quarter of
the prior year, principally as a result of increased research and development
costs.

Interest expense decreased to $208,000 in the quarter ended June 30, 2001
from $243,000 in the comparable quarter of the prior year due to decreased
interest rates on the credit facility and reduced indebtedness.

For the quarter ended June 30, 2001, urinalysis segment profits decreased
to $1.0 million from $1.3 million in the comparable quarter of the prior year.
This decrease is attributable to higher operating costs, particularly research
and development, partially offset by higher gross margins. Segment profits for
the small laboratory devices segment totaled $384,000, as compared to $520,000
in the comparable quarter of the prior year. The decrease results from
decreased product sales and higher operating expenses in that segment.
Unallocated corporate expenses totaled $806,000 in the current period as
compared to $730,000 in the same period last year. The increase was primarily
due to higher charges incurred for legal and other professional services.

17









---



##### Table of Contents



The income tax provision for the quarter ended June 30, 2001 totaled
$250,000, as compared to $392,000 in the quarter ended June 30, 2000. The
decrease reflects the decreased taxable income experienced by the Company in
2001.

Income from continuing operations decreased to $375,000, or $0.03 per
diluted share, for the quarter ended June 30, 2001, as compared to $674,000, or
$0.07 per diluted share, for the same period of the prior year.

Comparison of Six Months Ended June 30, 2001 to Six Months Ended June 30,
2000

Net revenues for the six months ended June 30, 2001 totaled $14.3 million,
a slight increase over the same period last year. Sales of IVD imaging systems
decreased to $2.9 million from $3.5 million, a decrease of $595,000 or 17% from
the comparable period last year. The decrease is primarily due to decreased
sales to international distributors. Sales of IVD system supplies and services
increased to $7.9 million from the $7.2 million, an increase of $760,000 or 11%
over the comparable last year, primarily due to the larger installed base of
urinalysis workstations. Sales of small instruments and supplies increased to
$3.3 million from $3.1 million, an increase of $194,000 or 6% over the
comparable period last year. Royalties and licensing revenues decreased to
$122,000 from $426,000 in the same period last year. The decrease was due to
the fact that the year ago period contained a nonrecurring $300,000 license fee
in connection with expanded licensing of several existing patents.

Revenues from the urinalysis segment totaled $11.0 million in the current
six-month period, down slightly from the comparable period last year. Higher
sales of IVD system supplies and services were more than offset by lower sales
of IVD imaging systems and royalties and licensing revenues. Revenues from the
small laboratory devices segment increased to $3.3 million in the current
six-month period, as compared to $3.1 million in the same period last year, an
increase of $194,000. This growth is due primarily to increased sales of small
instruments.

Cost of goods for IVD systems as a percentage of sales of IVD systems
totaled 72% in the current period as comparable to 66% in the comparable period
last year. The increase is primarily attributable to changes in the mix of
products sold from one period to the other, as well as increased manufacturing
overhead associated with improved inventory control processes and the effect of
the amortization of certain capitalized software which began in June 2000.
Cost of goods for IVD imaging system supplies and services as a percentage of
sales of such products decreased to 34% for the current period as compared to
41% for the same period last year. This decrease is due primarily to
efficiencies derived from improved manufacturing processes. Cost of goods for
small instruments and supplies as a percentage of sales of small instruments
and supplies totaled 48% for the current period, as compared to 52% in the
first six months of the prior year. This decrease is primarily due to
manufacturing efficiencies from increased production volume. The aggregate
gross margin totaled 55% for the current period as compared to 52% the same
period last year.

Cost of goods sold as a percentage of revenues from the urinalysis segment
totaled 44% for the six months ended June 30, 2001 as compared to 47% in the
same period last year. Lower cost of goods percentages in IVD system supplies
and services more than offset the higher cost of goods percentages in the IVD
systems area as well as the impact on revenues of the nonrecurring license fee
in the year ago period. Cost of goods for small laboratory devices as a
percentage of revenues totaled 48% in the current period as compared to 52% in
the first six months of 2000. This decrease is primarily due to manufacturing
efficiencies from increased production volume.

Marketing and selling expenses totaled $2.0 million for the six months
ended June 30, 2001, compared to $1.9 million in the same period last year, an
increase of $119,000 or 6%. Marketing and selling expenses as a percentage of
net revenues were 14% in the current period as compared to 13% last year.

General and administrative expenses increased to $2.2 million for the six
months ended June 30, 2001 as compared to $2.0 million for the comparable
period last year, an increase of $210,000 or 11%. This increase is primarily
due to increased charges for legal fees and other professional services.
General and administrative expenses for the period as a percentage of net
revenues were 15% in the current year as compared to 14% in the same period in
the prior year.

18



---



##### Table of Contents



Net research and development expenses increased to $2.0 million for the
six months ended June 30, 2001 from $1.0 million, an increase of $1.0 million
or 100% from the comparable period last year. Net research and development
expenses as a percentage of revenues increased to 14% from 7% in the prior
year. Total product technology expenditures, including capitalized software
development costs and reimbursed costs under research and development grants
and contracts, increased to $2.9 million from $1.5 million, an increase of $1.4
million or 93% as compared to the year ago period. The increase in total
product technology expenditures is due to increased spending under a major
project begun in 1999 to improve our urinalysis workstation product line. We
believe that this project is important to maintaining our competitive position
in the urinalysis market and that our failure to complete this project on
schedule could have a material and adverse effect on our business. We expect
our net research and development expenses will continue at current levels
during 2001.

Amortization of intangible assets reflects the amortization of acquired
intangible assets and patents. Amortization of intangible assets for the six
months ended June 30, 2001 increased slightly to $72,000 from $71,000 in the
comparable period in the prior year.

Operating income for the first six months of 2001 decreased to $1.6
million as compared to $2.5 million in the comparable period of the prior year,
principally as a result of increased research and development costs.

Interest expense decreased to $437,000 for the six months ended June 30,
2001 from $485,000 for the comparable period last year due to reduced
indebtedness and lower interest rates on the credit facility.

For the six months ended June 30, 2001, urinalysis segment profits
decreased to $2.0 million as compared to $2.8 million in the same period last
year, a decrease of $791,000, or 29%. This decrease is largely due to higher
operating expenses, particularly research and development, partially offset by
higher gross margins. Segment profits for the small laboratory devices segment
totaled $861,000 in the current six-month period as compared to $841,000 in the
same period last year. The improvement was the result of increased product
sales and gross margins. Unallocated corporate expenses totaled $1.6 million
in the current period as compared to $1.5 million in the comparable period last
year, an increase of $84,000, which was primarily due to higher charges for
legal and other professional services.

The income tax provision for the six months ended June 30, 2001 was
$491,000, as compared to $770,000 in the comparable year ago period. The
decrease reflects the decreased taxable income experienced by the Company in
2001.

Income from continuing operations decreased to $736,000 or $0.07 per
diluted share for the first six months of 2001 as compared to $1.3 million, or
$0.13 per diluted share for the first six months of 2000.

Liquidity and Capital Resources

Cash and cash equivalents decreased to $1.8 million at June 30, 2001 from
$3.7 million at December 31, 2000. The decrease is due to the fact that the
amount of cash used by investing and financing activities exceeded the cash
provided by operations. Cash provided by operations for the six months ended June
30, 2001 decreased to $355,000 from $2.1 million for the comparable period last
year. This decrease is primarily due to the payment of bonuses accrued in 2000
under the Companys bonus plan, increased expenditures for research and
development and increased inventory levels.

Cash used by investing activities totaled $656,000 for the six months
ended June 30, 2001, as compared to $320,000 in the same period last year. The
increase is primarily due to the increase in expenditures for property and
equipment as part of the Companys efforts to upgrade its facilities, as well
as increased software development costs under the Companys research and
development program.

We have a credit facility with Foothill Capital Corporation, a Wells Fargo
company, that consists of a $3.0 million term loan and a $4.0 million revolving
line of credit. Borrowings under the revolving line of credit are limited to a
percentage of eligible accounts receivable. The term loan bears interest at
the lenders prime rate (6.75% on June 30, 2001) 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

19



---



##### Table of Contents



penalties and customary fees and is collateralized by a first priority lien on
all the assets of the Company. It also contains financial covenants based
primarily on tangible net worth and cash flow and imposes restrictions on
acquisitions, capital expenditures and cash dividends. The credit facility was
recently renewed as discussed below.

We began a major project in 1999 to improve our urinalysis workstation
product line. As a result, we expect continuing high levels of research and
development expenditures in 2001. We plan to fund this project with cash from
operations.

Net cash used by financing activities totaled $1.6 million and consisted
primarily of partial payment of a recently refinanced subordinated note,
principal payments made on the term loan and revolving line of credit described
above, partially offset by funds received from the new term loan under our
credit facility and exercise of stock options. As of June 30, 2001, we owed
$2.9 million on the term loan and no balance on the revolving line of credit
and were eligible to borrow an additional $1.1 million under the revolving
credit line.

In March 2001, we refinanced a $7.0 million subordinated note due July 31,
2001. We refinanced the subordinated note with the combination of (1) a new
$3.0 million term loan from Foothill Capital, (2) a new $3.5 million
subordinated note issued to the existing note holder and (3) $500,000 from our
cash reserves. The new term loan and new subordinated note will both amortize
over three years. In connection with the refinancing, we issued a new 3-year
warrant to the note holder to purchase 853,040 shares of common stock at $1.90
per share, the closing price of the common stock on the date of the
refinancing. The new warrant replaces an old warrant expiring July 2001 for
the same number of shares.

We reduced our outstanding debt by $1.7 million in the first six months of
2001 and, after considering the effect of the refinancing discussed above, we
have scheduled principal payments totaling $1.7 million during the next twelve
months. We believe that our current cash on hand, together with cash generated
from operations and cash available under the credit facility, will be
sufficient to fund normal operations and pay principal and interest on
outstanding debt obligations for at least a year.

Discontinued Business Operations

We sold Perceptive Scientific Instruments, our genetic analysis business,
in July 2000. Its principal product was the PowerGene family of genetic
analyzers  IVD imaging systems for karyotyping, DNA probe analysis and
comparative genomic hybridization. We sold the assets of the U.S. operations
to Applied Imaging Corporation (Nasdaq: AICX) for 385,371 shares of Applied
Imaging common stock, the assumption of certain liabilities and contingent cash
payments tied to the future performance of Applied Imagings business. We
retained the Houston-based research group, including its federally funded
research grants, and changed the name of the group to Advanced Digital Imaging
Research. We were unable to sell the international operations and placed
Perceptive Scientific International Limited (a wholly-owned subsidiary of
Perceptive Scientific Instruments) into a voluntary liquidation under United
Kingdom law. We have classified Perceptive Scientific Instruments as a
discontinued operation for accounting purposes and have removed it from most of
the discussion and financial information in this Quarterly Report and our other
reports filed with the Securities and Exchange Commission after July 2000.

Shareholder Rights Plan

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

Recent Accounting Pronouncements

Recent accounting
pronouncements are discussed in Note 2 to the interim financial
statements on page 10.

Inflation

20



---



##### Table of Contents



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

Healthcare Reform Policies

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

Forward-Looking Statements

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



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

We have attempted to identify additional significant uncertainties and
other factors affecting forward-looking statements in Exhibit 99 to our 2000
Annual Report on Form 10-K. Stockholders should understand that the
uncertainties and other factors identified in this Quarterly Report and in
Exhibit 99 to the Annual Report are not a comprehensive list of all the
uncertainties and other factors which may affect forward-looking statements.
We do not undertake any obligation to update or revise any forward-looking
statements or the list of uncertainties and other factors which could affect
those statements.




Item 3. Quantitative And Qualitative Disclosures About Market Risk.

There was no material change in the Companys exposure to market risk on
June 30, 2001 as compared to its market risk exposure on December 31, 2000.
See Managements Discussion and Analysis of Financial Condition and Results of
Operations  Market Risk in our Annual Report on Form 10-K for the year ended
December 31, 2000.




PART II
OTHER INFORMATION




Item 1. Legal Proceedings.

We are not presently involved in any litigation.

21



---



##### Table of Contents






Item 4. Submission of Matters to a Vote of Security Holders.

We held our annual meeting of stockholders on June 1, 2001. At the
meeting, our stockholders voted on the following matters:

1.     Election of the Class 2 Director. The stockholders re-elected Dr.
John A. OMalley as the Class 2 Director. Dr. OMalley received 8,553,275
votes for re-election, and 235,923 votes were withheld.

2.     Approval of Amendment to the Companys Certificate of Incorporation.
The stockholders approved an amendment of the Companys Certificate of
Incorporation increasing the number of authorized shares of common
stock from 15,600,000 to 50,000,000. The voting results were
8,038,440 votes
for, 712,854 votes against, 37,904 votes abstaining
and no broker non-votes.

3.     Amendment to the 1998 Stock Option Plan. The stockholders approved an
increase in the number of shares of common stock available for grant under the
1998 Stock Option Plan from 1,200,000 shares to 1,900,000 shares, an increase
of 700,000 shares. The voting results were 4,764,197 votes
for, 670,300 votes
against, 54,822 votes abstaining and 3,299,879 broker
non-votes.

4.     Ratification of Appointment of Independent Auditors. The stockholders
ratified the reappointment of the accounting firm of PricewaterhouseCoopers LLP
as independent auditors for the Company for 2001. The voting results were
8,687,680 votes for, 73,579 votes against, 27,939
votes abstaining and no
broker non-votes.




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

(a)  Exhibits

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

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



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

(b)  Reports on
Form 8-K

22



---



##### Table of Contents



The Company did not file any Current Reports on Form 8-K during the
quarter ended June 30, 2001.

23



---



##### Table of Contents






SIGNATURE

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

Date: August 8, 2001

| |                                                    |                                                                                                                           
| | -------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------
| | INTERNATIONAL
        REMOTE IMAGING SYSTEMS, INC.
|
|
|
|
| |                                                    |                                                                                                                           
| | By:                                                | /s/ Donald E. Horacek                                                                                                     
| |                                                    |                                                                                                                           
| |                                                    | Donald E. Horacek
        Controller and Secretary
        [Authorized Signatory and
        Principal Accounting Officer]

24



---



##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

EXHIBITS

TO

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2001

COMMISSION FILE NO. 1-9767

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.





---



##### Table of Contents






EXHIBIT INDEX

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

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



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