<PAGE>   1




                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

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

                                    FORM 10-Q

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



 For the quarter ended                                         Commission File
 March 31, 1999                                                    No. 1-11181
                             ----------------------


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


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



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

          Telephone Number:  818-709-1244




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



                       Yes   X                  No 
                           -----                   -----

The number of shares of Common Stock of the registrant outstanding as of 
April 30, 1999 was 6,458,275.



<PAGE>   2

                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.


                               INDEX TO FORM 10-Q

                        Three Months Ended March 31, 1999


<TABLE>
<CAPTION>


                                                                                             PAGE
<S>                                                                                          <C> 

PART 1 -    FINANCIAL INFORMATION

            ITEM 1 - Consolidated Financial Statements

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


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


            Consolidated Statements of Cash Flows..............................................5


            Consolidated Statements of Comprehensive Income....................................6


            Notes to Consolidated Financial Statements.........................................7


            ITEM 2 - Management's Discussion and Analysis of
                       Financial Condition and Results of Operations..........................12



PART 2 -    OTHER INFORMATION

            ITEM 1 - Legal Proceedings........................................................18

            ITEM 6 - Exhibits and Reports on Form 8-K
                 (a) Exhibits.................................................................18
                 (b) Reports on Form 8-K......................................................18



SIGNATURE ....................................................................................19
</TABLE>




                                       2




<PAGE>   3

PART 1 - FINANCIAL INFORMATION

ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS


                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS
<TABLE>
<CAPTION>

                                                                              At December 31,                  At March 31,
                                                                                         1998                          1999
                                                                              ---------------                  ------------
                                                                                                                (unaudited)
<S>                                                                           <C>                              <C> 

Current assets:
Cash and cash equivalents                                                            $389,495                    $1,013,981
Accounts receivable, net of allowance for doubtful
  accounts of $271,544 in 1998 and 1999                                             5,615,799                     5,113,831
Inventories                                                                         4,503,446                     4,293,747
Prepaid expenses and other current assets                                             251,483                       237,744
Deferred tax asset                                                                    942,589                       942,589
                                                                                 ------------                    ----------
     Total current assets                                                          11,702,812                    11,601,892

Property and equipment, at cost, net of accumulated depreciation
  of $5,140,169 in 1998 and $5,394,149 in 1999                                      2,004,661                     1,769,662
Purchased intangibles, net of accumulated amortization                              7,512,100                     7,282,672
Software development costs, net of accumulated amortization of
  $1,558,597 in 1998 and $1,639,546 in 1999                                         1,097,907                     1,116,168
Deferred tax asset                                                                  7,914,129                     8,216,358
Other assets                                                                        1,875,475                     1,800,893
                                                                                -------------                 -------------
     Total assets                                                                 $32,107,084                   $31,787,645
                                                                                =============                 =============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Short-term borrowings                                                              $464,769                      $520,738
  Current portion of long-term debt                                                 1,742,027                     1,642,027
  Accounts payable                                                                  2,871,613                     2,383,895
  Accrued expenses                                                                  2,259,802                     2,279,441
  Deferred income - service contracts and other                                       794,688                     1,051,997
                                                                                 ------------                     ---------
     Total current liabilities                                                      8,132,899                     7,878,098

Subordinated note payable                                                           7,000,000                     7,000,000
Deferred income - service contracts and other                                         274,798                     1,769,817
Notes payable, long-term portion                                                    1,700,000                     1,400,000
                                                                                 ------------                   -----------
     Total liabilities                                                             17,107,697                    18,047,915

Commitments and contingencies

Shareholders' equity:
  Preferred stock, $.01 par value; Authorized: 3,000,000 shares;
    Convertible Series A  shares issued and outstanding : 1998
    and 1999 - 3,000 ($3,000,000 liquidation preference)                                   30                            30
  Common stock, $.01 par value; Authorized: 15,600,000 shares
    Shares issued and outstanding: 1998 and 1999 - 6,432,875                           64,328                        64,328
  Additional paid-in capital                                                       38,134,290                    38,134,290
  Unearned compensation                                                             (204,294)                      (146,820)
  Foreign currency translation adjustment                                              47,510                        49,448
  Accumulated deficit                                                            (23,042,477)                   (24,361,546)
                                                                                 ------------                   ------------
          Total shareholders' equity                                               14,999,387                    13,739,730
                                                                                 ------------                  ------------
          Total liabilities and shareholders' equity                              $32,107,084                   $31,787,645
                                                                                 ============                  ============
</TABLE>

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



                                       3

<PAGE>   4



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

<TABLE>
<CAPTION>

                                                                                 For the three months ended March 31,
                                                                                          1998                   1999
                                                                                 -------------             ----------
 <S>                                                                              <C>                       <C>  

Sales of IVD systems                                                                $2,445,937             $2,012,281
Sales of IVD supplies and services                                                   2,968,201              3,410,739
Sales of small instruments and supplies                                              1,111,644              1,134,270
Royalties and licensing revenues                                                        66,859                 64,948
                                                                                    ----------             ----------

Net revenues                                                                         6,592,641              6,622,238
                                                                                    ----------             ----------

Cost of goods - IVD systems                                                          1,310,466              1,160,857
Cost of goods - IVD supplies and services                                            1,346,782              1,572,054
Cost of goods - small instruments and supplies                                         628,249                607,396
                                                                                    ----------             ----------

Cost of goods sold                                                                   3,285,497              3,340,307
                                                                                    ----------             ----------

Gross margin                                                                         3,307,144              3,281,931

Marketing and selling                                                                1,266,460              1,333,062
General and administrative                                                             817,710                922,040
Research and development, net                                                          606,115                435,384
Amortization of intangibles                                                            289,488                290,817
Unusual charges                                                                         37,666              1,616,731
                                                                                    ----------             ----------

Total operating expenses                                                             3,017,439              4,598,034

Operating income (loss)                                                                289,705             (1,316,103)

Other income (expense):
   Interest income                                                                       8,169                  7,814
   Interest expense                                                                   (271,235)              (282,344)
   Other expense                                                                       (20,615)               (21,230)
                                                                                     ---------            -----------

Income (loss) before provision (benefit) for income taxes                                6,024             (1,611,863)

Provision (benefit) for income taxes                                                     2,218               (292,794)
                                                                                     ---------            -----------

Net income (loss)                                                                       $3,806            $(1,319,069)
                                                                                     =========            ===========

Net income (loss) per common share - basic                                                $.00                  $(.21)
                                                                                     =========             ==========

Net income (loss) per common share - diluted                                              $.00                  $(.21)
                                                                                     =========             ==========

Weighted average number of common shares - basic                                     6,245,276              6,432,875
                                                                                     =========             ==========

Weighted average number of common shares and common
    share equivalents outstanding for the period - diluted                           7,426,990              6,432,875
                                                                                     =========              =========
</TABLE>

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



                                       4
<PAGE>   5

                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
<TABLE>
<CAPTION>

                                                                                            For the three months ended March 31,
                                                                                                    1998                    1999
                                                                                            ------------            ------------
<S>                                                                                         <C>                     <C> 

Cash flow from operating activities:
    Net income (loss)                                                                            $3,806             $(1,319,069)
    Adjustments to reconcile net income (loss) to net cash provided by
    operations:
       Deferred tax benefit                                                                       3,800                (302,230)
       Depreciation and amortization                                                            628,029                 607,368
       Common stock and stock option compensation amortization                                   66,136                  57,475
       Gain on disposal of equipment                                                                 --                 (87,158)
    Litigation settlement payable in equity securities                                               --               1,520,644
    Changes in assets and liabilities:
       Accounts receivable - trade and other                                                    552,989                 661,731
       Service contracts, net                                                                   220,211                  67,212
       Inventories                                                                             (224,462)                207,763
       Prepaid expenses and other current assets                                                   (492)                 13,040
       Other assets                                                                            (134,384)                  1,966
       Accounts payable                                                                         (25,858)               (484,597)
       Accrued expenses                                                                         131,864                  28,752
       Deferred income - other                                                                    7,070                    (273)
                                                                                            -----------              ----------
Net cash provided by operating activities                                                     1,228,709                 972,624
                                                                                            -----------              ----------

Cash flow from investing activities:
    Acquisition of property and equipment                                                      (152,667)                (29,051)
    Software development costs                                                                  (94,945)                (99,210)
    Sale of equipment                                                                                --                 125,000
                                                                                            -----------              ----------
Net cash used by investing activities                                                          (247,612)                 (3,261)
                                                                                            -----------              ----------

Cash flow from financing activities:
    Borrowings under credit facility                                                                 --               5,240,238
    Repayments of credit facility                                                              (350,000)             (5,184,270)
    Repayment of notes payable                                                                 (300,000)               (403,003)
    Issuance of common stock and warrant for cash                                                91,488                      --
    Deferred stock or debt issuance costs                                                       (85,844)                     --
                                                                                            -----------              ----------  
Net cash used by financing activities                                                          (644,356)               (347,035)
                                                                                            -----------              ----------

Effect of foreign currency fluctuation on cash and cash equivalents                               1,294                   2,158
                                                                                            -----------              ----------
Net increase in cash and cash equivalents                                                       338,035                 624,486
Cash and cash equivalents at beginning of period                                              1,470,861                 389,495
                                                                                            -----------              ----------
Cash and cash equivalents at end of period                                                   $1,808,896              $1,013,981
                                                                                            ===========              ==========

Supplemental schedule of non-cash investing and financing activities:
    Issuance of common stock in exchange for services                                           $20,956                      --
    Capital lease obligation incurred                                                            70,000                      --
    Issuance of common stock in satisfaction of liabilities                                      13,956                      --

Supplemental disclosure of cash flow information:
    Cash paid for interest                                                                      240,182                 273,704
    Cash paid for income taxes                                                                   40,000                  10,855
</TABLE>

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



                                       5
<PAGE>   6

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



<TABLE>
<CAPTION>

                                                                                For the three months ended March 31,
                                                                                            1998                 1999
                                                                                ----------------         ------------
                  <S>                                                            <C>                      <C>  

                  Net income (loss)                                                       $3,806          $(1,319,069)

                       Other comprehensive income (loss),
                       foreign currency translation adjustment                             5,995                1,938
                                                                                        --------         ------------

                  Comprehensive income (loss)                                             $9,801          $(1,317,131)
                                                                                        ========         ============
</TABLE>

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

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




                                       6



<PAGE>   7

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

1.   FORMATION AND BUSINESS OF THE COMPANY.

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

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

Basis of Presentation of Unaudited Interim Financial Statements:

     In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of the Company as of March 31, 1999 and
1998 and the results of its operations for the three month periods then ended.
These financial statements should be read in conjunction with the financial
statements and notes included in the Company's latest annual report on Form
10-K. Interim results are not necessarily indicative of results for a full year.

Segment Reporting:

     In 1998, the Company adopted Statement of Financial Accounting Standards
(FAS) 131, "Disclosures about Segments of an Enterprise and Related
Information". FAS 131 supersedes FAS 14, "Financial Reporting for Segments of a
Business Enterprise", replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. FAS
131 also requires disclosures about products and services, geographic areas, and
major customers. The adoption of FAS 131 did not affect results of operations or
financial position but did affect the disclosure of segment information. See
Note 13-"Segment and Geographic Information".

Use of Estimates:

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

Principles of Consolidation:

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

Reclassifications:

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

3.   COMPREHENSIVE INCOME.

     In January 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"). FAS 130 establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in financial
statements. FAS 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements.

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

     The following is a reconciliation of accumulated other comprehensive income
balance for the three months ended March 31, 1999:
<TABLE>
       <S>                                                      <C> 

       Beginning balance                                        $47,510
       Current period change                                      1,938
                                                                -------
       Ending balance                                           $49,448
                                                                =======
</TABLE>



                                       7
<PAGE>   8


4.   INVENTORIES.

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

                                                                 At December 31, 1998                At March 31, 1999
                                                                 --------------------                -----------------
        <S>                                                      <C>                                 <C> 

        Finished goods                                                     $1,647,028                       $1,469,648
        Work-in-process                                                       432,569                          246,621
        Raw materials, parts and sub-assemblies                             2,423,849                        2,577,478
                                                                            ---------                        ---------
                                                                           $4,503,446                       $4,293,747
                                                                           ==========                       ==========
</TABLE>

5.   PURCHASED INTANGIBLES.

     Purchased intangibles, at cost, consist of the following:
<TABLE>
<CAPTION>

                                                                 At December 31, 1998                At March 31, 1999
                                                                 --------------------                -----------------
        <S>                                                       <C>                                 <C> 

        Goodwill                                                             $383,108                         $383,108
        International distribution channel                                  5,403,938                        5,403,938
        Acquired technology and know-how                                    3,960,904                        3,960,904
                                                                            ---------                        ---------
                                                                            9,747,950                        9,747,950
        Less accumulated amortization                                      (2,235,850)                      (2,465,278)
                                                                           -----------                      -----------
        Total                                                              $7,512,100                       $7,282,672
                                                                           ==========                       ==========
</TABLE>

6.   SHORT-TERM BORROWINGS AND NOTES PAYABLE.

     At March 31, 1999, the outstanding amount under the credit facility with
Foothill Capital Corporation, consists of $2.6 million outstanding under a $3.6
million term loan and $520,738 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 $601,000 available
under the line of credit at March 31, 1999. The term loan bears interest at the
lender's prime rate (7.75% on March 31, 1999) plus 3.0% and is payable in
monthly installments of $100,000. The revolving credit line bears interest at
the lender's prime rate plus 1.0%. The credit facility is subject to minimum
interest charges, prepayment penalties and customary fees, is collateralized by
a first priority lien on all assets of the Company and matures in 2001. It also
contains financial covenants based primarily on tangible net worth and cash
flows and imposes restrictions on acquisitions, capital expenditures and cash
dividends.

     On March 31, 1999, the Company had outstanding notes payable in the
aggregate amount of $442,027 from the repurchase of common stock and warrants
from an affiliate of Roche Diagnostics, a former strategic partner in 1996. The
notes bear interest at the rate of 8%, and the principal is due in bi-monthly
installments of $100,000.

7.   CAPITAL STOCK.

Stock Issuances:

     During the three months ended March 31, 1999, the Company (i) issued
options to purchase 55,400 shares of common stock under the Company's stock
option plans and (ii) cancelled options to purchase 74,500 shares of common
stock. At March 31, 1999, options to purchase 1,481,901 shares of common stock
were issued and outstanding under the Company's stock options plans. The
outstanding options expire by the end of 2009. The exercise price for these
options ranges from $0.81 to $4.50 per share. At March 31, 1999, there were
396,267 shares of common stock available for the granting of future options
under the Company's stock option plans.



                                       8

<PAGE>   9

Warrants:

     At March 31, 1999, the following warrants to purchase shares of common
stock were outstanding and exercisable:
<TABLE>
<CAPTION>

                         Number of Shares           Per Share Price             Expiration Date
                         ----------------           ---------------             ----------------
                         <S>                        <C>                         <C> 

                                   50,000                     $3.875            January 15, 2000
                                  298,633                      4.00             March 29, 2000
                                   25,000                      4.375            June 1, 2000
                                   25,000                      4.0625           July 1, 2000
                                  123,000                      7.80             September 28, 2000
                                  875,000                      8.00*            July 31, 2001
                                   84,270                      3.56             December 31, 2001
                                   10,000                      4.31             May 15, 2002
</TABLE>

* The Company has made an unconditional offer to reduce the exercise price on
this warrant from $8.00 to $3.56 per share. See "Other Information--Legal
Proceedings."

8.   COMMITMENTS AND CONTINGENCIES .

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

9.   RESEARCH AND DEVELOPMENT GRANTS AND CONTRACTS.

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

     Reimbursements and direct costs connected with research and development
grants and agreements were as follows:
<TABLE>
<CAPTION>

                                                 Three Months Ended March 31,
                                                       1998              1999
                                                 ----------          --------
          <S>                                    <C>                 <C> 

          Reimbursements                           $206,124          $ 77,201
          Costs                                     294,786           117,174
                                                  ---------          --------
          Net costs                                $ 88,662          $ 39,973
                                                  =========          ========
</TABLE>

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

10.  UNUSUAL CHARGES.

     The results of operations for the three month periods ended March 31, 1999
include litigation settlement and other unusual charges totaling $1,616,731.
Charges related to the pending settlement with Poly U/A Systems, Inc. totaled
$1,520,371. Expenses associated with the pending arbitration matter with DITI
totaled $96,360 in the current period as compared to $37,666 in the prior year.

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



                                       9

<PAGE>   10

11.  INCOME TAXES.

     The income tax benefit for the three-month period ended March 31, 1999 was
$292,794 as compared to an income tax provision of $2,218 for the comparable
period last year. The income tax provision and benefit differs from the federal
statutory rate due primarily to state income taxes, unutilized foreign losses,
permanent differences between income reported for financial statement and income
tax purposes and an increase in the tax valuation allowance relating to the net
operating loss carryforwards generated in the current period (primarily from the
Poly UA settlement).

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

12.  EARNINGS PER SHARE (EPS).

     The computation of per share amounts for the three months ended March 31,
1999 is based on the average number of common shares outstanding for the period.
Options and warrants to purchase 2,972,804 and 1,783,133 shares of common stock
outstanding during the three months ended March 31, 1999 and three months ended
March 31, 1998, respectively, were not considered in the computation of diluted
EPS because their inclusion would have been antidilutive. Preferred stock
convertible into 2,000,000 and 1,052,632 common shares at March 31, 1999 and
1998, respectively, was also not considered in the computation of diluted EPS
for the three month periods then ended because their inclusion would have been
antidilutive.


     The following is a reconciliation of net income and shares used in
computing basic and diluted earnings per share amounts for the three months
ended March 31, 1998.
<TABLE>
<CAPTION>

                                                                      Number of
                                                          Income          Shares        Per Share Amount
                                                          ------      ----------        ----------------
     <S>                                                  <C>         <C>                <C> 

     Basic EPS
       income available to Common Shareholders            $3,806       6,245,276                    $.00

     Effects of Dilutive Securities
          Warrants                                            --           9,270                      --
          Options                                             --         119,812                      --
          Convertible Preferred Stock                         --       1,052,632                      --

     Diluted EPS
       income available to Common Shareholders             
                                                          ------      ----------                   ------
         plus assumed conversions                         $3,806       7,426,990                     $.00
                                                          ======      ==========                   ======
</TABLE>


13.  SEGMENT AND GEOGRAPHIC INFORMATION.

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

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



                                       10

<PAGE>   11

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

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

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

     The tables below present information about reported segments for the three
and nine month periods ended March 31, 1999 and 1998:

     Three Months Ended March 31, 1999:
<TABLE>
<CAPTION>

                                                                                  Small        Unallocated
                                                            Genetic          Laboratory          Corporate
                                       Urinalysis          Analysis             Devices           Expenses             Total
                                      -----------        ----------         ----------          ----------        ----------
<S>                                    <C>               <C>                 <C>                <C>                <C> 

Revenues                              $ 4,354,520        $1,133,448         $1,134,270                 --        $ 6,622,238

Interest income                       $     6,465        $      804         $      545                 --        $     7,814

Interest expense                      $     1,397        $  280,947                 --                 --        $   282,344

Depreciation and amortization         $   263,335        $  350,198         $   41,548        $     9,762        $   664,843

Segment profit (loss)                 $ 1,013,912        $ (788,961)        $  253,189        $(2,090,003)(1)    $(1,611,863)

Segment assets                        $11,187,956        $9,574,156         $1,869,399        $ 9,156,134        $31,787,645

Investment in long-lived assets       $    83,679        $   40,047         $    4,535              --0--        $   128,261
</TABLE>

----------
(1) Includes litigation settlement of $1,520,371.



                                       11
<PAGE>   12

     Three Months Ended March 31, 1998:
<TABLE>
<CAPTION>

                                                                                  Small        Unallocated
                                                             Genetic         Laboratory          Corporate
                                        Urinalysis          Analysis            Devices           Expenses              Total
                                        ----------        ----------         ----------        -----------         ----------
<S>                                     <C>                <C>                <C>               <C>                 <C>   

Revenues                               $ 4,006,042       $ 1,474,955         $1,111,644                 --        $ 6,592,641

Interest income                        $     2,820                --         $    5,349                 --        $     8,169

Interest expense                                --       $   271,235                 --                 --        $   271,235

Depreciation and amortization          $   246,592       $   386,886         $   42,635         $   18,052        $   694,165

Segment profit (loss)                  $   748,516       $  (603,989)        $  224,557         $ (363,060)       $     6,024

Segment assets                         $10,507,480       $10,929,450         $2,432,106         $8,613,667        $32,482,703

Investment in long-lived assets        $   122,247       $   101,307         $   24,058                 --        $   247,612
</TABLE>



     The Company ships products from three locations in the United States and
from its subsidiary in the United Kingdom. The following is sales by its United
States and United Kingdom locations for the three month period ended March 31
1999 and 1998:
<TABLE>
<CAPTION>

                                                         Three Months Ended March 31,
                                                               1998              1999
                                                         ----------------------------
        <S>                                              <C>               <C>  

        Sales:

             United States                               $5,624,909        $6,040,297
             United Kingdom                                 967,732           581,941
                                                         ----------        ----------
                                                         $6,592,641        $6,622,238
</TABLE>

     The following is long-lived assets information by geographic area as of
March 31, 1999 and 1998:
<TABLE>
<CAPTION>

                                                                         At March 31,
                                                               1998              1999
                                                         ----------      ------------
        <S>                                              <C>              <C> 

        Long-lived assets:

             United States                              $ 7,917,603       $ 7,447,812
             United Kingdom                               5,319,650         4,521,583
                                                        -----------       -----------
                                                        $13,237,253       $11,969,395
</TABLE>


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

OVERVIEW

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

     Until 1996, the Company generated most of its revenues from sales of two
models of The Yellow IRIS urinalysis workstation and related supplies and
service. These two models differ mainly by their speed and price. In 1996, the
Company introduced a third model of The Yellow IRIS, the Model 900UDx urine
pathology system, which is a higher capacity automated urinalysis workstation
designed especially for the high-volume testing requirements of large hospitals
and reference laboratories. The Company also began selling the PowerGene family
of genetic analyzers in August 1996 after completing the acquisition (the "PSI
acquisition") of the digital imaging business of Perceptive Scientific
Instruments, Inc. ("PSI"). The Company is currently seeking to enhance PSI's
revenue stream by adding DNA probe kits for chromosome analysis to the PowerGene
product line and may pursue this goal through internal research and development




                                       12



<PAGE>   13

efforts or a strategic transaction with another company. Finally, in December
1997, the Company began distributing the UF-100 urine cell analyzer in the
United States under an existing agreement with its manufacturer, Sysmex
Corporation (Sysmex). Sysmex initiated contractual procedures for terminating
the exclusive nature of the IRIS distribution rights to the UF-100 based on
allegations of inadequate performance. The Company disputed these allegations
and entered into discussions about the pricing and marketing of the UF-100.
Those discussions did not resolve the matter. Sysmex is now asserting that it
has the right to appoint additional distributors for the UF-100 in North
America. The Company disputes that Sysmex has the right but expects that Sysmex
will attempt to appoint at least one additional distributor for North America in
the near future. The Company is presently evaluating its alternatives and may
take legal action if Sysmex does in fact appoint an additional distributor. The
Company cannot presently predict the impact of any attempt by Sysmex to appoint
an additional distributor or any legal action taken by the Company

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

                                                                 Three Months Ended March 31,
                                                                     1998                1999
                                                                 --------            --------
    <S>                                                          <C>                 <C> 

    Research and development expense, net                        $606,000            $435,000
    Capitalized software development costs                         95,000              99,000
    Reimbursed costs for research and
      development grants and contracts                            206,000              77,000
                                                                 --------            --------
            Total product technology expenditures                $907,000            $611,000
                                                                 ========            ========
</TABLE>

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

     During the first quarter of this year, the Company entered into a letter of
intent with Poly UA Systems, Inc. a Company-sponsored research and development
entity ("Poly UA"), to settle a potential dispute. Under the terms of the
settlement, the Company will offer the Poly UA stockholders a package of Company
securities with an estimated value of up to $1.5 million. The Company recorded
this amount as litigation settlement expense in the first quarter of 1999. See
"--Poly UA Transaction."

RESULTS OF OPERATIONS

     COMPARISON OF QUARTER ENDED MARCH 31, 1999 TO QUARTER ENDED MARCH 31, 1998

     Net revenues for the quarter ended March 31, 1999 totaled $6.6 million,
which is comparable to the same period last year. Sales of IVD systems decreased
to $2.0 million from $2.4 million, a decrease of $434,000 or 18% from the
comparable period last year. Revenues from sales of The Yellow IRIS family of
urinalysis workstations decreased to $1.0 million from $1.1 million or a
decrease of $81,000. The decrease is due to a decline in domestic sales,
partially offset by increased sales to an international distributor and a change
in mix to lower priced units. Revenues from sales of the PowerGene line of
genetic analyzers decreased to $972,000 from $1.3 million, or a decrease of
$352,000. The decrease relates primarily to decreased unit volumes. Sales of IVD
system supplies and services increased to $3.4 million from $3.0 million, an
increase of $443,000 or 15% over the comparable period last year, primarily due
to the larger installed base of The Yellow IRIS IVD imaging systems. Sales of
small instruments and supplies totaled $1.1 million, which is comparable to the
same period last year.

     Revenues from the urinalysis segment totaled $4.4 million in the current
quarter as compared to $4.0 million in the same quarter of last year, an
increase of $348,000. This growth is due to increased sales of related system
supplies and services to the growing installed base partially offset by
decreased system sales. Revenues from the genetic analysis segment decreased to
$1.1 million in the current quarter as compared to $1.5 million in the same
quarter last year, for the reason described above. Revenues from small
laboratory devices totaled $1.1 million in the current quarter, and are
comparable to the same quarter of last year.

     Royalty and license revenue was $65,000 in the three months ended March 31,
1999 and is comparable to the same period last year.

     Cost of goods for IVD systems increased as a percentage of sales of IVD
imaging systems to 58% for the quarter ended March 31, 1999 from 54% for the
comparable period last year. The increase is primarily due to an increased
proportion of sales of The Yellow IRIS urinalysis workstations having lower
margins to an international distributor and a shift in mix of PowerGene units
having a higher proportion of OEM components. Cost of goods for IVD imaging
system supplies and services as a percentage of sales of such products increased
to 46% for the current period as compared to 45% for the same period last year.
The increase is primarily due to increased service-related costs associated with
the PowerGene genetic analyzers. Cost of goods for small instruments and
supplies as a percentage of sales of small instruments and supplies totaled 54%
for the current quarter compared to 57% for the comparable period last year. The
decrease is primarily due to a change in the sales mix. The net result of these
changes was an aggregate gross margin of 50% in both periods.



                                       13

<PAGE>   14

     Cost of goods sold as a percentage of revenues from the urinalysis segment
totaled 48% this quarter as compared to 49% in the same quarter of last year.
This decrease results from increased revenues related to urinalysis supplies and
services along with lower associated expenses, partially offset by lower margins
on system sales. Cost of goods sold as a percentage of revenues from the genetic
analysis segment totaled 57% this quarter, as compared to 48% in the same
quarter of last year. This increase is primarily the result of a change in
product mix towards systems having a higher proportion of OEM components and
increased service related expenses. Cost of goods for small laboratory devices
as a percentage of revenues totaled 54% in the current period, as compared to
57% in the same quarter of last year. This decrease is due to a change in sales
mix.

     Marketing and selling expenses totaled $1.3 million for the quarter ended
March 31, 1999 and is comparable to the same period last year. Decreased selling
expenses related to the PowerGene genetic analyzers offset increased marketing
and selling expenses associated with The Yellow IRIS urinalysis workstations. As
a percentage of net revenues these expenses totaled 20% in the current quarter
as compared to 19% last year.

     General and administrative expenses increased to $922,000 for the current
quarter ended March 31, 1999 as compared to $818,000 for the comparable period
last year, an increase of $104,000. This increase is primarily due to increased
legal and tax professional fees, liability insurance expenses and increased
expenses associated with the Office of the Chief Executive, which was partially
offset by decreased expenses associated with the genetic analysis division.
General and administrative expenses as a percentage of net revenues increased to
14% in the current year from 12% in the prior year.

     Net research and development expenses decreased to $435,000 for the quarter
ended March 31, 1999 from $606,000, a decrease of $171,000 or 28% from the
comparable period last year. Net research and development expenses decreased as
a percentage of revenues from 9% to 7%. Reimbursements under joint development
programs decreased to $77,000 from $206,000. Total product technology
expenditures, including capitalized software development costs and reimbursed
costs under research and development grants and contracts, decreased to $611,000
from $907,000, a decrease of $272,000 or 30% as compared to the comparable
period last year. The decrease in total product technology expenditures is due
to decreased spending on The Yellow IRIS and PowerGene families of products.

     Amortization of intangible assets for the quarter ended March 31, 1999
totaled $291,000 and is comparable to the same period last year.

     The results of operations for the quarter ended March 31, 1999 include
unusual expenses of $1.6 million as compared to $38,000 in the prior year's
quarter. The increase primarily relates to the pending settlement with Poly UA.
Legal and other expenses relating to the pending arbitration with DITI totaled
$96,000 in the current period as compared to $38,000 in the prior period.

     The net result of the above-described changes was an operating loss of $1.3
million for the quarter ended March 31, 1999 as compared to operating income of
$290,000 for the same quarter last year. Excluding the charge for the Poly UA
transaction and other unusual expenses, operating income totaled $301,000 for
the first quarter of 1999 as compared $325,000 for the same quarter last year.

     Interest expense increased to $282,000 for the quarter ended March 31, 1999
from $271,000 for the comparable period last year due to increased interest
rates on the new credit facility.

     For the quarter ended March 31, 1999, urinalysis segment profits increased
to $1.0 million as compared to $749,000 in the same period last year, an
increase of $265,000, or 35%. This increase is largely due to higher revenue and
gross margins and lower operating expenses. Losses for the genetic analysis
segment totaled $788,000 in the current quarter as compared to losses of
$604,000 in the same period last year, an increased loss of $184,000. The
increased loss is due to the decrease in sales and gross margins described
above, partially offset by lower operating expenses. Segment profits from the
small laboratory devices segment totaled $253,000 in the current quarter as
compared to $225,000 in the same period last year. The improvement was primarily
caused by the increase in this segment's gross margins as described above.
Unallocated corporate expenses totaled $2.1 million in the current period as
compared to $363,000 in the comparable period last year, an increase of $1.7
million. This increase is due primarily to the pending settlement with Poly UA,
as well as higher legal and tax professional fees, liability insurance expenses,
expenses associated with the Office of the Chief Executive and increased unusual
expenses associated with the pending DITI arbitration.

     The income tax benefit for the quarter ended March 31, 1999 was $293,000,
as compared to an income tax provision of $2,000 for the comparable period in
1998. The difference between the effective tax rate and federal statutory rate
relates primarily to an increase in the deferred tax valuation allowance
relating to the net operating loss carryforwards generated by the potential
settlement with Poly UA, as well as the current period state income taxes,
unutilized foreign losses and permanent differences between income reported for
financial and income tax purposes.

     The above factors contributed to a net loss of $1.3 million or $.21 per
diluted share for the quarter ended March 31, 1999 as compared to net income of
$4,000 or $0.00 per diluted share for the quarter ended March 31, 1998.
Excluding the Poly UA litigation settlement expense and the other unusual
charges, net of related tax benefits, the Company would have had a net loss of
approximately $89,000 or $0.01 per share for the quarter ended March 31, 1999.



                                       14
<PAGE>   15

LIQUIDITY AND CAPITAL RESOURCES

     Cash and cash equivalents increased to $1.0 million at March 31, 1999 from
$389,000 at December 31, 1998. The increase is due to the cash provided by
operations in excess of amounts used by investing and financing activities. Cash
provided by operations for the three months ended March 31, 1999 decreased to
$973,000 from $1.2 million for the comparable period last year. This decline is
primarily due to the increased net loss and pay down of accounts payable, only
partially offset by an increase in non-cash adjustments and decreases in
accounts receivable and inventories.

     Cash used by investing activities totaled $3,000 for the three months ended
March 31, 1999, as compared to $248,000 in the prior year. The decrease is
primarily due to the decline in expenditures for property and equipment, offset
by the proceeds from the sale of The Yellow IRIS urinalysis workstations subject
to an operating lease.

     On May 8, 1998, the Company refinanced its bank loans with the proceeds of
a new credit facility from Foothill Capital Corporation, a Wells Fargo Company.
The new credit facility consists of a $3.6 million term loan and a $4.0 million
revolving line of credit. Borrowings under the line of credit are limited to a
percentage of eligible accounts receivable and are subject to a combined limit
of $7.0 million for the total credit facility. The term loan bears interest at
the lender's prime rate (7.75% on March 31, 1999) plus 3.0% and is payable in 36
equal monthly installments. The revolving line of credit bears interest at the
lender's prime rate plus 1.0%. The new credit facility is subject to minimum
interest charges, prepayment penalties and customary fees, is collateralized by
a first priority lien on all the assets of the Company and matures in 2001. It
also contains financial covenants based primarily on tangible net worth and cash
flow and imposes restrictions on acquisitions, capital expenditures and cash
dividends.

     Net cash used by financing activities totaled $347,000 and consisted
primarily of principal payments made on the term loan described above and notes
payable due to a former strategic partner (discussed below), partially offset by
net proceeds from borrowings on the revolving line of credit. As of March 31,
1999, the Company had $2.6 million outstanding under the term loan and had
$600,000 available under the revolving credit line.

     As of March 31, 1999, the Company also had outstanding notes payable in the
aggregate amount of $442,000 from the repurchase of common stock and warrants
from a former strategic partner in 1996. The notes bear interest at the rate of
8.0%, and principal is due in bi-monthly installments of $100,000.

     The Company has scheduled principal payments on outstanding debt totaling
$1.6 million during the next twelve months.

     The Company believes that its current cash on hand, together with cash
generated from operations, and cash available under the credit facility will be
sufficient to fund normal operations and pay principal and interest on
outstanding debt obligations for the next twelve months. The Company would like
to pursue equity financing to reduce indebtedness and to fund its long-term
business strategy. However, the Company has postponed these efforts due to the
decline in the Company's stock price.

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

     The Company has outstanding 3,000 shares of Series A Convertible Preferred
Stock ("Preferred Stock"). Each share of Preferred Stock is convertible into a
number of shares of common stock equal to (i) its $1,000 liquidation value
divided by (ii) a variable conversion price. The conversion price equals the
lower of (a) $3.56 per share or (b) 85% of the average closing bid price of the
common stock for the five consecutive trading days preceding the conversion (but
in no event less than $1.50). Assuming conversion prices of $3.56 and $1.50 per
share, the Preferred Stock is convertible into approximately 843,000 and
2,000,000 shares of Common Stock, respectively. Based on the average closing
price of $0.83 for the five-day period ending March 31, 1999, the conversion
price would be the $1.50 minimum, and the Preferred Stock would convert into
2,000,000 shares of common stock. Any unconverted shares of Preferred Stock will
automatically be converted into Common Stock on December 31, 1999. The Preferred
Stock is non-voting, is not entitled to any preferred dividends and is not
subject to any mandatory or optional redemption provisions. The Company may not
pay cash dividends on the Common Stock or repurchase any shares of the Common
Stock without the written consent of the holder of the Preferred Stock.




                                       15

<PAGE>   16

POLY UA TRANSACTION

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

     Under the terms of the proposed settlement, the Company will make a tender
offer for all of the outstanding stock of Poly UA which consists of 256,000
shares of common stock. The Company will offer to pay for each share of Poly UA
common stock (and a signed release of claims from the tendering stockholder) a
package of the Company's securities consisting of the following: (a) 3 shares of
the Company's common stock, (b) 1 share of a new series of callable preferred
stock with a liquidation preference of $3 per share and no coupon, and (c) a
three-year warrant to purchase 3 shares of common stock, 1.5 shares at $1.00 per
share and 1.5 shares at $2.00 per share. If all of the Poly UA common stock is
tendered and accepted, the Company would issue an aggregate of (i) 768,000
shares of common stock, (ii) 256,000 shares of callable preferred stock (with an
aggregate liquidation preference of $768,000), and (iii) warrants to purchase
768,000 shares of common stock (half at $1.00 per share and half at $2.00 per
share). The tender offer will be subject to customary conditions, as well as the
tender of shares constituting at least 90% of the outstanding stock of Poly UA
and signed releases of all claims from each tendering stockholder.

     The "callable" feature of the preferred stock will entitle the Company to
convert the preferred stock at any time into a number shares of common stock
equal to the liquidation value divided by the market price of the common stock
at the time of conversion (subject to a minimum value of $2.00 per share of
common stock). The preferred stock will automatically be converted under the
same formula at the end of three years if not converted sooner by the Company.
The Company will also have the right to redeem any unexercised warrants for a
nominal amount of cash any time after the 30-day average closing price of the
common stock exceeds 200% of the warrant exercise price.

     At March 31, 1999, the Company had federal net operating loss carryforwards
of approximately $18.8 million. If the Company completes the tender offer for
Poly UA and substantially all of the Company's outstanding options and warrants
are exercised on or before December 31, 1999, these transactions in combination
with other prior stock issuances during the past three years would constitute a
"change of ownership" under Section 382 of the Internal Revenue Code. The
Company notes that all 1.49 million warrants are currently out-of-the money with
exercise prices ranging from $3.56 to $7.80 per share. Section 382 imposes an
annual limitation on the utilization of net operating loss carryforwards based
on a statutory rate of return (usually the applicable federal rate) and the
value of the corporation at the time of the change of ownership. Depending on
the market price of the Company's common stock at the time a change of ownership
occurs, the resulting limitations imposed by Section 382 could trigger a
substantial write down in the Company's deferred tax assets and a corresponding
charge to earnings in the relevant quarter.

YEAR 2000 PROBLEM

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

     State of Readiness

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

     The Company has focused most of its Y2K efforts on internal systems because
it believes this area could be its primary source of Y2K problems. The Company's
internal computer systems are the foundation for its business operations and
include such critical functions as order entry, shipping, purchasing, inventory
control, manufacturing, accounts receivable, accounts payable and the general
ledger. The Company completed a review of these critical systems and determined
that they were not Y2K compliant. These systems are supported by third parties
that had certified software updates available. The Company has purchased and
installed these updates. Although the vendors have certified the updates as Y2K
compliant, the Company plans to test the updates on its systems by June 30,
1999. The Company is also in the process of reviewing other equipment that
contains date-sensitive information. The Company expects to complete its review
of all other internal systems by June 30, 1999 and does not expect this review
to uncover a risk of a material adverse effect on its operations from Y2K
problems in this area.



                                       16

<PAGE>   17

     The Company has reviewed its products and has determined that the IVD
imaging systems produced by the urinalysis and genetics segments have date
sensitive fields or components that have date sensitive fields. Based on
completed verification and validation testing and, if applicable, certificates
received from third party vendors, the Company has concluded that all the
genetic segment IVD imaging systems, the unattended urinalysis IVD imaging
system (the Model 900 UDx urinalysis workstation) and the UF-100 urine cell
analyzer are Y2K compliant. The Company has also determined that there are no
date sensitive fields contained in the products of the small instruments
segment. The Company has determined that the unattended IVD imaging systems
produced by the urinalysis segment (Models Bravo, 250, 300, 450 and 500
urinalysis workstations) have date sensitive fields. The Company has completed
work on the software updates to make these products Y2K compliant including
verification and validation of these software updates. The Company began
distributing these software updates in April 1999.

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

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

     Costs to Address the Y2K Issue

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

     Risks Presented by the Year 2000 Issue

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

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

     Contingency Plans

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

INFLATION

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



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<PAGE>   18

FORWARD-LOOKING STATEMENTS

     The foregoing discussion contains various forward-looking statements which
reflect the Company's current views with respect to future events and financial
results and are subject to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, but are
not limited to, the Company's views with respect to future financial results,
capital requirements, market growth, new product introductions and the like, and
are generally identified by phrases such as "anticipates," "believes,"
"estimates," "expects," "intends," "plans" and words of similar import. The
Company reminds stockholders that forward-looking statements are merely
predictions and therefore inherently subject to uncertainties and other factors
which could cause the actual results to differ materially from the
forward-looking statement. For example, the settlement with Poly UA is subject
to the completion of mutually acceptable documentation and final approvals by
the Boards of both companies; the tender offer may not be accepted by the
necessary number of Poly U/A stockholders to meet the 90% condition; and
dissatisfied Poly U/A stockholders could still file a lawsuit which could
adversely affect IRIS. The settlement could also be affected by material changes
in the Company's stock price, results of operations or financial condition. The
Company refers interested persons to its 1998 Annual Report on Form 10-K and its
other SEC filings for a description of certain additional uncertainties and
factors which may affect forward-looking statements.

PART 2 - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

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

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


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

     (a)      Exhibits

     No.          Description
     ----         -----------
     3.1(a) -- Certificate of Incorporation, as amended (1)
     3.1(b) -- Certificate of Designations of Series A Convertible Preferred
               Stock (2) 
     3.2    -- Restated Bylaws (3) 
     4.1    -- Specimen of Common Stock Certificate (4) 
     4.2    -- Certificate of Designations of Series A Convertible
               Preferred Stock (2) 
    27.1    -- Financial Data Schedule-1998 
    27.2    -- Financial Data Schedule-1999

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

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

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

     (b)      Reports on Form 8-K

     During the quarter ended March 31, 1999, the Company filed no current
reports on Form 8-K. However, on May 7, 1999, the Company filed a current report
on Form 8-K to voluntarily report the proposed transaction with Poly UA. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Poly UA Transaction."



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<PAGE>   19

                                    SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in Chatsworth, California, on May 17,
1999.


                                  INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.



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






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