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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended September 30, 2007

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | -----------------------------------------------------------------------------------------

For the transition period from _________ to _______.

Commission File
No. 1-11181



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IRIS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-2579751                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|9172 Eton Avenue, Chatsworth, CA.                              |  | 91311                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(818) 709-1244

(Registrants Telephone Number, Including Area Code)



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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



|                         |  |                      |  |                       
|------------------------ |  | -------------------- |  | ----------------------
|Large accelerated filer ̈ |  | Accelerated filer  x |  | Non accelerated filer ̈

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

The registrant had 18,566,327 shares of common stock issued and outstanding as of November 1, 2007.



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IRIS INTERNATIONAL, INC.

INDEX TO FORM 10-Q



|         |  |                                                                                                          |  |     
|-------- |  | -------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                          |  | Page
|PART I   |  | FINANCIAL INFORMATION                                                                                    |  |     
|         |  |                                                                                                         
|Item 1.  |  | Financial Statements                                                                                     |  |     
|         |  |                                                                                                         
|         |  | Consolidated Balance Sheets as of September 30, 2007 (unaudited) and December 31, 2006                   |  | 3   
|         |  |                                                                                                         
|         |  | Consolidated Statements of Operations for the three months ended September 30, 2007 and 2006 (unaudited) |  | 4   
|         |  |                                                                                                         
|         |  | Consolidated Statements of Operations for the nine months ended September 30, 2007 and 2006 (unaudited)  |  | 5   
|         |  |                                                                                                         
|         |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006 (unaudited)  |  | 6   
|         |  |                                                                                                         
|         |  | Notes to Consolidated Financial Statements                                                               |  | 7   
|         |  |                                                                                                         
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                    |  | 14  
|         |  |                                                                                                         
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                               |  | 19  
|         |  |                                                                                                         
|Item 4.  |  | Controls and Procedures                                                                                  |  | 19  
|         |  |                                                                                                         
|PART II  |  | OTHER INFORMATION                                                                                        |  |     
|         |  |                                                                                                         
|Item 1A. |  | Risk Factors                                                                                             |  | 20  
|         |  |                                                                                                         
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                      |  | 20  
|         |  |                                                                                                         
|Item 6.  |  | Exhibits                                                                                                 |  | 20  
|         |  |                                                                                                         
|         |  | Signatures                                                                                               |  | 21  



2



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PART I

FINANCIAL INFORMATION



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

IRIS INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)



|                                                                                                                   |  |                   |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                   |  | September 30,2007 |         |   | December 31,2006 |  
|                                                                                                                   |  | (Unaudited)       |         |   |                  |  
|Assets                                                                                                             |  |                   |         |   |                  |   |         |  
|Current assets:                                                                                                    |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                          |  | $                 | 23,777  |   |                  | $ | 23,159  |  
|Marketable securities                                                                                              |  |                   |        |   |                  |   | 132     |  
|Accounts receivable, net of allowance for doubtful accounts and sales returns of $430 and $601                     |  |                   | 16,337  |   |                  |   | 13,166  |  
|Inventories, net                                                                                                   |  |                   | 9,042   |   |                  |   | 6,918   |  
|Prepaid expenses and other current assets                                                                          |  |                   | 1,008   |   |                  |   | 626     |  
|Investment in sales-type leases                                                                                    |  |                   | 2,548   |   |                  |   | 2,145   |  
|Deferred tax asset                                                                                                 |  |                   | 2,865   |   |                  |   | 2,865   |  
|                                                                                                                   |  |                   |         |   |                  |   |         |  
|Total current assets                                                                                               |  |                   | 55,577  |   |                  |   | 49,011  |  
|Property and equipment, at cost, net                                                                               |  |                   | 8,237   |   |                  |   | 6,662   |  
|Goodwill                                                                                                           |  |                   | 2,450   |   |                  |   | 2,450   |  
|Core technology, net                                                                                               |  |                   | 1,656   |   |                  |   | 1,723   |  
|Software development costs, net of accumulated amortization of $2,174 and $1,729                                   |  |                   | 1,645   |   |                  |   | 1,387   |  
|Deferred tax asset                                                                                                 |  |                   | 3,851   |   |                  |   | 5,516   |  
|Inventories  long term portion                                                                                    |  |                   | 440     |   |                  |   | 440     |  
|Investment in sales-type leases                                                                                    |  |                   | 6,874   |   |                  |   | 6,728   |  
|Other assets                                                                                                       |  |                   | 410     |   |                  |   | 400     |  
|                                                                                                                   |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                       |  | $                 | 81,140  |   |                  | $ | 74,317  |  
|                                                                                                                   |  |                   |         |   |                  |   |         |  
|Liabilities and Shareholders Equity                                                                               |  |                   |         |   |                  |   |         |  
|Current liabilities:                                                                                               |  |                   |         |   |                  |   |         |  
|Accounts payable                                                                                                   |  | $                 | 3,410   |   |                  | $ | 3,797   |  
|Accrued expenses                                                                                                   |  |                   | 5,185   |   |                  |   | 6,414   |  
|Deferred service contract revenue                                                                                  |  |                   | 1,149   |   |                  |   | 1,540   |  
|                                                                                                                   |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                                                          |  |                   | 9,744   |   |                  |   | 11,751  |  
|Commitments and contingencies                                                                                      |  |                   |         |   |                  |   |         |  
|Shareholders equity:                                                                                              |  |                   |         |   |                  |   |         |  
|Preferred Stock, $.01 par value; Authorized 1 million shares:Callable Series C shares issued and outstanding: none |  |                   |        |   |                  |   |        |  
|Common stock, $.01 par value; Authorized 50 million shares:issued and outstanding: 18,560 shares and 18,046 shares |  |                   | 186     |   |                  |   | 180     |  
|Additional paid-in capital                                                                                         |  |                   | 83,552  |   |                  |   | 79,226  |  
|Other comprehensive income                                                                                         |  |                   | 220     |   |                  |   | 48      |  
|Accumulated deficit                                                                                                |  |                   | (12,562 | ) |                  |   | (16,888 | )
|                                                                                                                   |  |                   |         |   |                  |   |         |  
|Total shareholders equity                                                                                         |  |                   | 71,396  |   |                  |   | 62,566  |  
|                                                                                                                   |  |                   |         |   |                  |   |         |  
|Total liabilities and shareholders equity                                                                         |  | $                 | 81,140  |   |                  | $ | 74,317  |  
|                                                                                                                   |  |                   |         |   |                  |   |         |  

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



3



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IRIS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited  in thousands)



|                                                           |  |                                         |        |   |      |   |        |  
|---------------------------------------------------------- |  | --------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                           |  | For the three monthsended September 30, |       
|                                                           |  | 2007                                    |        |   | 2006 |  
|Sales of IVD instruments                                   |  | $                                       | 7,479  |   |      | $ | 7,477  |  
|Sales of IVD consumables and service                       |  |                                         | 9,492  |   |      |   | 7,775  |  
|Sales of sample processing instruments and supplies        |  |                                         | 3,220  |   |      |   | 2,756  |  
|                                                           |  |                                         |        |   |      |   |        |  
|Total revenues                                             |  |                                         | 20,191 |   |      |   | 18,008 |  
|                                                           |  |                                         |        |   |      |   |        |  
|Cost of goods - IVD instruments                            |  |                                         | 3,992  |   |      |   | 4,432  |  
|Cost of goods - IVD consumables and service                |  |                                         | 3,871  |   |      |   | 3,976  |  
|Cost of goods - sample processing instruments and supplies |  |                                         | 1,585  |   |      |   | 1,460  |  
|                                                           |  |                                         |        |   |      |   |        |  
|Total cost of goods sold                                   |  |                                         | 9,448  |   |      |   | 9,868  |  
|                                                           |  |                                         |        |   |      |   |        |  
|Gross profit                                               |  |                                         | 10,743 |   |      |   | 8,140  |  
|                                                           |  |                                         |        |   |      |   |        |  
|Marketing and selling                                      |  |                                         | 3,566  |   |      |   | 2,718  |  
|General and administrative                                 |  |                                         | 2,725  |   |      |   | 2,284  |  
|Research and development, net                              |  |                                         | 2,355  |   |      |   | 2,173  |  
|                                                           |  |                                         |        |   |      |   |        |  
|Total operating expenses                                   |  |                                         | 8,646  |   |      |   | 7,175  |  
|                                                           |  |                                         |        |   |      |   |        |  
|Operating income                                           |  |                                         | 2,097  |   |      |   | 965    |  
|Other income (expense):                                    |  |                                         |        |   |      |   |        |  
|Interest income                                            |  |                                         | 402    |   |      |   | 267    |  
|Interest expense                                           |  |                                         | (5     | ) |      |   | (5     | )
|Other income (expense)                                     |  |                                         | (9     | ) |      |   | 1      |  
|                                                           |  |                                         |        |   |      |   |        |  
|Income before provision for income taxes                   |  |                                         | 2,485  |   |      |   | 1,228  |  
|Provision for income taxes                                 |  |                                         | 867    |   |      |   | 454    |  
|                                                           |  |                                         |        |   |      |   |        |  
|Net income                                                 |  | $                                       | 1,618  |   |      | $ | 774    |  
|                                                           |  |                                         |        |   |      |   |        |  
|Basic net income per share                                 |  | $                                       | 0.09   |   |      | $ | 0.04   |  
|                                                           |  |                                         |        |   |      |   |        |  
|Diluted net income per share                               |  | $                                       | 0.09   |   |      | $ | 0.04   |  
|                                                           |  |                                         |        |   |      |   |        |  
|Basic  average shares outstanding                         |  |                                         | 18,260 |   |      |   | 18,004 |  
|                                                           |  |                                         |        |   |      |   |        |  
|Diluted  average shares outstanding                       |  |                                         | 18,977 |   |      |   | 18,574 |  
|                                                           |  |                                         |        |   |      |   |        |  

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



4



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IRIS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited  in thousands)



|                                                           |  |                                         |        |   |      |   |        |  
|---------------------------------------------------------- |  | --------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                           |  | For the nine months ended September 30, |       
|                                                           |  | 2007                                    |        |   | 2006 |  
|Sales of IVD instruments                                   |  | $                                       | 24,615 |   |      | $ | 19,429 |  
|Sales of IVD consumables and service                       |  |                                         | 27,747 |   |      |   | 22,779 |  
|Sales of sample processing instruments and supplies        |  |                                         | 8,928  |   |      |   | 8,513  |  
|                                                           |  |                                         |        |   |      |   |        |  
|Total revenues                                             |  |                                         | 61,290 |   |      |   | 50,721 |  
|                                                           |  |                                         |        |   |      |   |        |  
|Cost of goods - IVD instruments                            |  |                                         | 13,002 |   |      |   | 10,839 |  
|Cost of goods - IVD consumables and service                |  |                                         | 12,378 |   |      |   | 10,600 |  
|Cost of goods - sample processing instruments and supplies |  |                                         | 4,441  |   |      |   | 4,442  |  
|                                                           |  |                                         |        |   |      |   |        |  
|Total cost of goods sold                                   |  |                                         | 29,821 |   |      |   | 25,881 |  
|                                                           |  |                                         |        |   |      |   |        |  
|Gross profit                                               |  |                                         | 31,469 |   |      |   | 24,840 |  
|                                                           |  |                                         |        |   |      |   |        |  
|Marketing and selling                                      |  |                                         | 9,878  |   |      |   | 7,674  |  
|General and administrative                                 |  |                                         | 7,403  |   |      |   | 7,229  |  
|Research and development, net                              |  |                                         | 7,791  |   |      |   | 5,752  |  
|In-process research and development                        |  |                                         |       |   |      |   | 5,180  |  
|                                                           |  |                                         |        |   |      |   |        |  
|Total operating expenses                                   |  |                                         | 25,072 |   |      |   | 25,835 |  
|                                                           |  |                                         |        |   |      |   |        |  
|Operating income (loss)                                    |  |                                         | 6,397  |   |      |   | (995   | )
|Other income (expense):                                    |  |                                         |        |   |      |   |        |  
|Interest income                                            |  |                                         | 1,125  |   |      |   | 773    |  
|Interest expense                                           |  |                                         | (8     | ) |      |   | (17    | )
|Other income (expense)                                     |  |                                         | (34    | ) |      |   | 34     |  
|                                                           |  |                                         |        |   |      |   |        |  
|Income (loss) before provision for income taxes            |  |                                         | 7,480  |   |      |   | (205   | )
|Provision for income taxes                                 |  |                                         | 2,607  |   |      |   | 1,840  |  
|                                                           |  |                                         |        |   |      |   |        |  
|Net income (loss)                                          |  | $                                       | 4,873  |   |      | $ | (2,045 | )
|                                                           |  |                                         |        |   |      |   |        |  
|Basic net income (loss) per share                          |  | $                                       | 0.27   |   |      | $ | (0.11  | )
|                                                           |  |                                         |        |   |      |   |        |  
|Diluted net income (loss) per share                        |  | $                                       | 0.26   |   |      | $ | (0.11  | )
|                                                           |  |                                         |        |   |      |   |        |  
|Basic  average shares outstanding                         |  |                                         | 18,124 |   |      |   | 17,793 |  
|                                                           |  |                                         |        |   |      |   |        |  
|Diluted  average shares outstanding                       |  |                                         | 18,723 |   |      |   | 17,793 |  
|                                                           |  |                                         |        |   |      |   |        |  

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



5



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IRIS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited  in thousands)



|                                                                               |  |                                        |        |   |      |   |        |  
|------------------------------------------------------------------------------ |  | -------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                               |  | For the nine monthsended September 30, |       
|                                                                               |  | 2007                                   |        |   | 2006 |  
|Cash flows from operating activities:                                          |  |                                        |        |   |      |   |        |  
|Net income (loss)                                                              |  | $                                      | 4,873  |   |      | $ | (2,045 | )
|Adjustments to reconcile net income (loss) to net cash provided by operations: |  |                                        |        |   |      |   |        |  
|In-process research and development charge                                     |  |                                        |       |   |      |   | 5,180  |  
|Deferred taxes                                                                 |  |                                        | 2,486  |   |      |   | 1,839  |  
|Tax benefit from stock option exercises                                        |  |                                        | (1,368 | ) |      |   | (731   | )
|Depreciation and amortization                                                  |  |                                        | 1,884  |   |      |   | 1,546  |  
|Foreign currency translation                                                   |  |                                        | 172    |   |      |   | (49    | )
|Gain on sale of investment                                                     |  |                                        |       |   |      |   | (30    | )
|Common stock and stock based compensation                                      |  |                                        | 1,007  |   |      |   | 1,076  |  
|Changes in assets and liabilities:                                             |  |                                        |        |   |      |   |        |  
|Accounts receivable                                                            |  |                                        | (3,171 | ) |      |   | (1,753 | )
|Inventories, net                                                               |  |                                        | (2,124 | ) |      |   | 120    |  
|Prepaid expenses and other assets                                              |  |                                        | (392   | ) |      |   | (224   | )
|Sales-type leases                                                              |  |                                        | (549   | ) |      |   | (1,397 | )
|Accounts payable and accrued expenses                                          |  |                                        | (1,616 | ) |      |   | (689   | )
|Deferred service contract revenue                                              |  |                                        | (391   | ) |      |   | 25     |  
|                                                                               |  |                                        |        |   |      |   |        |  
|Net cash provided by operating activities                                      |  |                                        | 811    |   |      |   | 2,868  |  
|                                                                               |  |                                        |        |   |      |   |        |  
|Cash flows from investing activities:                                          |  |                                        |        |   |      |   |        |  
|Acquisition of business, net of cash acquired                                  |  |                                        |       |   |      |   | (3,568 | )
|Acquisition of property and equipment                                          |  |                                        | (2,947 | ) |      |   | (3,041 | )
|Software development costs                                                     |  |                                        | (703   | ) |      |   | (136   | )
|Marketable securities available for sale                                       |  |                                        | 132    |   |      |   | 15,465 |  
|                                                                               |  |                                        |        |   |      |   |        |  
|Net cash (used in) provided by investing activities                            |  |                                        | (3,518 | ) |      |   | 8,720  |  
|                                                                               |  |                                        |        |   |      |   |        |  
|Cash flows from financing activities:                                          |  |                                        |        |   |      |   |        |  
|Issuance of common stock and warrants for cash                                 |  |                                        | 1,957  |   |      |   | 1,236  |  
|Tax benefit from stock option exercises                                        |  |                                        | 1,368  |   |      |   | 731    |  
|Borrowings under line of credit                                                |  |                                        |       |   |      |   | 3,000  |  
|Repayments of line of credit                                                   |  |                                        |       |   |      |   | (3,000 | )
|                                                                               |  |                                        |        |   |      |   |        |  
|Net cash provided by financing activities                                      |  |                                        | 3,325  |   |      |   | 1,967  |  
|                                                                               |  |                                        |        |   |      |   |        |  
|Net increase in cash and cash equivalents                                      |  |                                        | 618    |   |      |   | 13,555 |  
|Cash and cash equivalents at beginning of period                               |  |                                        | 23,159 |   |      |   | 3,169  |  
|                                                                               |  |                                        |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                     |  | $                                      | 23,777 |   |      | $ | 16,724 |  
|                                                                               |  |                                        |        |   |      |   |        |  
|Supplemental schedule of non-cash financing activities:                        |  |                                        |        |   |      |   |        |  
|Issuance of common stock and deferred stock units to acquire subsidiary        |  | $                                      |       |   |      | $ | 5,000  |  
|Supplemental disclosure of cash flow information:                              |  |                                        |        |   |      |   |        |  
|Cash paid for income taxes                                                     |  | $                                      | 733    |   |      | $ | 34     |  
|Cash paid for interest                                                         |  | $                                      | 8      |   |      | $ | 12     |  

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



6



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IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited  dollars in thousands except per share amounts)

1. Nature of Business

IRIS International, Inc. was incorporated in California in 1979. We design, develop, manufacture and
market in-vitro diagnostic (IVD) products, including IVD imaging systems based on patented and proprietary neural network-based Automated Particle Recognition (APR) software to enable high-speed digital processing to classify and
display images and describe the morphology of microscopic particles, molecular diagnostics assays based in our Nucleic Acid Detection Immuno-Assay (NADIA) technology, as well as special purpose centrifuges and other small instruments for automating
microscopic procedures and DNA processing performed in clinical laboratories.

2. Interim Financial Reporting

Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to
Form 10-Q under the Securities Exchange Act of 1934, as amended, and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States (GAAP). These financial
statements should be read in conjunction with the consolidated financial statements and accompanying notes contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2006.

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

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

Earnings Per Share Basic earnings per share are computed by dividing net income or loss by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and common stock equivalents outstanding, calculated on the treasury stock method for options and warrants. The weighted
average number of outstanding antidilutive common stock options and warrants excluded from the computation of diluted net income per common share for the three and nine month periods ended September 30, 2007 were 359,000 and 576,000. The
weighted average number of outstanding antidilutive common stock options and warrants excluded from the computation of diluted net income per common share for the three months ended September 30, 2006 was 653,000. During the prior year nine
month period, the Company incurred a loss accordingly, all outstanding options and warrants were excluded from the computation because they were anti-dilutive. A reconciliation of the shares used in the basic and diluted earnings per common share is
as follows:



|                                    |  |                                 |  |                                |  |        |  |       
|----------------------------------- |  | ------------------------------- |  | ------------------------------ |  | ------ |  | ------
|                                    |  | Three months endedSeptember 30, |  | Nine months endedSeptember 30,
|(In thousands)                      |  | 2007                            |  | 2006                           |  | 2007   |  | 2006  
|Basic weighted shares outstanding   |  | 18,260                          |  | 18,004                         |  | 18,124 |  | 17,793
|Dilutive stock options & warrants   |  | 717                             |  | 570                            |  | 599    |  |      
|                                    |  |                                 |  |                                |  |        |  |       
|Diluted weighted shares outstanding |  | 18,977                          |  | 18,574                         |  | 18,723 |  | 17,793
|                                    |  |                                 |  |                                |  |        |  |       

Reclassifications Certain amounts have been reclassified in the
interim 2006 consolidated financial statements to conform to the 2007 presentation with no changes in the previously reported net income or shareholders equity.



7



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3. Acquisition

On April 3, 2006 we acquired all the stock of Leucadia Technologies, Inc., a development stage molecular diagnostics company, pursuant to the merger of Leucadia into our wholly owned subsidiary, Iris Molecular
Diagnostics (IMD). With this acquisition we acquired significant core technology for an ultra-sensitive immunoassay process and novel in-vitro separation and concentration process as well as in-process research and development for
bacteria and cancer detection applications.

Pursuant to the acquisition agreement we paid $3.3 million of cash, 272,375 shares of IRIS
common stock, valued at $4.2 million, deferred stock units for 51,879 shares of IRIS common stock valued at $800,000 and $230,000 of transaction fees. The IRIS common stock and deferred stock units were valued based on the average closing market
price of IRIS common stock a few days before and a few days following the acquisition. In addition, we will issue up to 108,950 shares of IRIS common stock and deferred stock units for 20,752 shares of IRIS common stock as earn-out consideration if
certain regulatory and sales milestones are achieved. As of September 30, 2007, the earn-out consideration for certain regulatory and sales milestones were not yet achieved.

The acquisition was accounted for as a purchase with the allocation, based on fair value, as follows:



|                                            |  |   |      
|------------------------------------------- |  | - | -----
|(In thousands)                              |  |  
|Cash and cash equivalents                   |  | $ | 2    
|Fixed assets                                |  |   | 21   
|Core technology                             |  |   | 1,790
|Goodwill                                    |  |   | 2,231
|                                            |  |   |      
|Total assets acquired                       |  | $ | 4,044
|                                            |  |   |      
|Total liabilities  deferred income tax     |  | $ | 662  
|                                            |  |   |      
|In process research and development expense |  | $ | 5,180
|                                            |  |   |      

The following unaudited condensed consolidated pro forma statement of operations data shows the
results of our operations for the nine months ended September 30, 2006 as if the acquisition had occurred January 1, 2006:



|                                      |  |   |        |  
|------------------------------------- |  | - | ------ | -
|(In thousands, except per share data) |  |   |       
|Revenues                              |  | $ | 50,721 |  
|Operating loss                        |  | $ | (1,120 | )
|Net loss                              |  | $ | (2,170 | )
|Net loss per share  diluted          |  | $ | (0.11  | )

These unaudited condensed consolidated pro forma results have been prepared for comparative
purposes only and are not necessarily indicative of the actual results of operations had the acquisitions taken place as of the beginning of the period presented or the results of our future operations. Furthermore, the pro forma results do not give
effect to all cost savings or incremental costs that may occur as a result of the integration and consolidation of the acquisition.

4. Inventories

Inventories consist of the following:



|                                           |  |                   |       |   |                  |   |       |  
|------------------------------------------ |  | ----------------- | ----- | - | ---------------- | - | ----- | -
|(In thousands)                             |  | September 30,2007 |       |   | December 31,2006 |  
|Finished goods                             |  | $                 | 3,180 |   |                  | $ | 2,127 |  
|Work-in-process                            |  |                   | 370   |   |                  |   | 241   |  
|Raw materials, parts and sub-assemblies    |  |                   | 5,932 |   |                  |   | 4,990 |  
|                                           |  |                   |       |   |                  |   |       |  
|                                           |  |                   | 9,482 |   |                  |   | 7,358 |  
|Less: non-current portion, net of reserves |  |                   | (440  | ) |                  |   | (440  | )
|                                           |  |                   |       |   |                  |   |       |  
|Inventories  current portion              |  | $                 | 9,042 |   |                  | $ | 6,918 |  
|                                           |  |                   |       |   |                  |   |       |  



8



---

5. Bank Loan Agreement

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

As of September 30, 2007 and 2006, there were no outstanding borrowings under the credit facility. We
are however, subject to certain financial covenants under the credit facility with the bank and as of September 30, 2007, we were in compliance with such covenants.

6. Income Taxes

On a quarterly basis, we estimate what our effective tax rate will be for the full
fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances by each tax jurisdiction. The effective tax rate for both the three and nine
month periods ended September 30, 2007 was approximately 35%.

We adopted the provisions of Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109 (FIN 48), on January 1, 2007. Our condensed consolidated financial statements for 2007 reflect the impact of FIN
48, but the condensed consolidated financial statements for 2006 have not been restated to reflect, and do not include, the impact of FIN 48.

As a result of the initial adoption of FIN 48, we recognized a $547,000 reduction in our deferred tax benefit relating to federal and California tax credits for which we could not conclude that it is more likely than not that such tax
credits will be sustainable on audit by the respective taxing authorities. As a result we reduced the deferred tax asset by $547,000 and recorded a charge to retained earnings as of January 1, 2007, by a like amount.

We will recognize potential interest and penalties related to income tax positions as a component of the provision for income taxes on the consolidated
statements of income in any futures periods in which we must record a liability. Since we have not recorded a liability at September 30, 2007, there would be no impact to our effective tax rate. We do not anticipate that total unrecognized tax
benefits will significantly change during the next twelve months. We are no longer subject to federal, state, or foreign income tax examinations for years prior to 2003.

7. Stock-Based Compensation

Effective January 1, 2006, we adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, which requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial
statements based on fair value. Share-based compensation expense for the three months and nine months ended September 30, 2007 and 2006 includes incremental share-based compensation expense as follows:



|                                     |  |                                        |      |   |                                       |   |      |      |  |   |       |   |  |   |       |  
|------------------------------------ |  | -------------------------------------- | ---- | - | ------------------------------------- | - | ---- | ---- |  | - | ----- | - |  | - | ----- | -
|                                     |  | For the threemonths endedSeptember 30, |      |   | For the ninemonths endedSeptember 30, |  
|(In thousands)                       |  | 2007                                   |      |   | 2006                                  |   |      | 2007 |  |   | 2006  |  
|Cost of sales                        |  | $                                      | 72   |   |                                       | $ | 73   |      |  | $ | 204   |   |  | $ | 189   |  
|Marketing and selling                |  |                                        | 67   |   |                                       |   | 60   |      |  |   | 134   |   |  |   | 158   |  
|General and administrative           |  |                                        | 194  |   |                                       |   | 189  |      |  |   | 367   |   |  |   | 506   |  
|Research and development             |  |                                        | 111  |   |                                       |   | 75   |      |  |   | 302   |   |  |   | 223   |  
|                                     |  |                                        |      |   |                                       |   |      |      |  |   |       |   |  |   |       |  
|Stock-based compensation             |  |                                        | 444  |   |                                       |   | 397  |      |  |   | 1,007 |   |  |   | 1,076 |  
|Income tax benefit                   |  |                                        | (178 | ) |                                       |   | (159 | )    |  |   | (403  | ) |  |   | (429  | )
|                                     |  |                                        |      |   |                                       |   |      |      |  |   |       |   |  |   |       |  
|Stock-based compensation, net of tax |  | $                                      | 266  |   |                                       | $ | 238  |      |  | $ | 604   |   |  | $ | 647   |  
|                                     |  |                                        |      |   |                                       |   |      |      |  |   |       |   |  |   |       |  



9



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Stock Options

Stock option activity during the nine months ended September 30, 2007 is as follows:



|                                     |  |        |   |  |                                       |       |                                         |           |                         |   |       
|------------------------------------ |  | ------ | - |  | ------------------------------------- | ----- | --------------------------------------- | --------- | ----------------------- | - | ------
|(In thousands, except for per share) |  | Shares |   |  | WeightedAverageExercisePrice PerShare |       | WeightedAverageRemainingContractualTerm |           | AggregateIntrinsicValue
|Outstanding at January 1, 2007       |  | 1,973  |   |  | $                                     | 9.98  |                                         | 3.4 years |                         | $ | 9,599 
|Granted                              |  | 558    |   |  | $                                     | 13.18 |                                         |           |                         |   |       
|Exercised                            |  | (390   | ) |  | $                                     | 4.81  |                                         |           |                         |   |       
|Canceled or expired                  |  | (209   | ) |  | $                                     | 14.42 |                                         |           |                         |   |       
|                                     |  |        |   |  |                                       |       |                                         |           |                         |   |       
|Outstanding at September 30, 2007    |  | 1,932  |   |  | $                                     | 11.40 |                                         | 3.5 years |                         | $ | 16,413
|                                     |  |        |   |  |                                       |       |                                         |           |                         |   |       
|Exercisable at September 30, 2007    |  | 1,148  |   |  | $                                     | 9.24  |                                         | 2.8 years |                         | $ | 12,357
|                                     |  |        |   |  |                                       |       |                                         |           |                         |   |       

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the
difference between our closing stock price on September 30, 2007 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders, had all option holders exercised their options on
September 30, 2007. Total intrinsic value of options exercised for the nine months ended September 30, 2007 amounted to $4,360,000. As of September 30, 2007, total unrecognized stock-based compensation expense related to nonvested
stock options was $3.1 million.

On July 13, 2007, the Companys shareholders approved the adoption of the IRIS International,
Inc. 2007 Stock Incentive Plan, which authorizes the issuance of up to 1,750,000 shares of our common stock pursuant to equity awards granted under the plan.

Restricted Shares

We began awarding restricted shares of our common
stock in 2006. Restricted shares currently vest 25% after one year and 61/4% quarterly thereafter. Unvested
restricted shares are forfeited if the recipients employment terminates for any reason other than death, disability, or special circumstances as determined by the Compensation Committee of the Board. Restricted shares activity during the nine
months ended September 30, 2007 is as follows:



|                                     |  |        |   |  |                                                |      
|------------------------------------ |  | ------ | - |  | ---------------------------------------------- | -----
|(In thousands, except for per share) |  | Shares |   |  | Weighted AverageGrant Date FairValue Per Share
|Unvested at January 1, 2007          |  | 88     |   |  | $                                              | 17.11
|Granted                              |  | 94     |   |  | $                                              | 12.76
|Vested during period                 |  | (26    | ) |  | $                                              | 18.32
|Cancelled during period              |  | (4     | ) |  | $                                              | 12.38
|                                     |  |        |   |  |                                                |      
|Unvested at September 30, 2007       |  | 152    |   |  | $                                              | 14.33
|                                     |  |        |   |  |                                                |      

Fair value of our restricted shares is based on our closing stock price on the date of grant. As
of September 30, 2007, total unrecognized stock-based compensation expense related to non vested restricted share grants was $1.8 million which is expected to be recognized over the remaining weighted average period of approximately 2.7 years.



10



---

The Compensation Committee of the Board of Directors determines the exercise price of options. Payment of
the exercise price may be made either in cash or with shares of common stock that have been held at least nine months. The options generally vest over either three or four years and expire either five or ten years from the date of grant. The fair
value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:



|                        |  |                                        |   |  |      |  
|----------------------- |  | -------------------------------------- | - |  | ---- | -
|                        |  | For the nine months endedSeptember 30, |  
|                        |  | 2007                                   |   |  | 2006 |  
|Risk free interest rate |  | 4.7                                    | % |  | 4.6  | %
|Expected lives (years)  |  | 3.0                                    |   |  | 3.0  |  
|Expected volatility     |  | 46                                     | % |  | 45   | %
|Expected dividend yield |  |                                       |   |  |     |  

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

A summary of our non-vested stock options
during the nine months ended September 30, 2007 is presented below:



|                                         |  |        |   |  |                                                |      
|---------------------------------------- |  | ------ | - |  | ---------------------------------------------- | -----
|(In thousands, except for per share)     |  | Shares |   |  | Weighted AverageGrant Date FairValue Per Share
|Non-vested options at January 1, 2007    |  | 503    |   |  | $                                              | 17.05
|Granted                                  |  | 558    |   |  | $                                              | 13.18
|Vested                                   |  | (125   | ) |  | $                                              | 19.49
|Forfeited or expired                     |  | (152   | ) |  | $                                              | 13.60
|                                         |  |        |   |  |                                                |      
|Non-vested options at September 30, 2007 |  | 784    |   |  | $                                              | 14.55
|                                         |  |        |   |  |                                                |      

8. Capital Stock  Warrants

At September 30, 2007, there were outstanding and exercisable warrants to purchase 74,300 shares at a price of $7.80 per share.

9. Contingencies

Litigation

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

Guarantees

We enter into indemnification provisions under (i) agreements with other companies in the ordinary course of business, typically with business
partners, contractors, customers and landlords, and (ii) agreements with investors. Under such provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our
activities or, in some cases, as a result of the indemnified partys activities under the agreement. Indemnification provisions often include indemnifications relating to representations made by us with regard to intellectual property rights.
Such indemnification provisions generally survive termination of the underlying agreement. In addition, in some cases, we agree to reimburse employees for certain expenses and to provide salary continuation. The maximum potential amount of future
payments we could be required to make under these indemnification provisions is unlimited. To date, we have not incurred any material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the
estimated fair value of these agreements is minimal. Accordingly, we have no recorded liabilities for these agreements as of September 30, 2007.



11



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10. Segments and Geographic Information

Our operations are organized on the basis of products and related services and under SFAS No. 131, we operate in two segments: (1) IVD and
(2) sample processing.

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

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

The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies. We
evaluate the performance of our segments and allocate resources to them based on earnings before income taxes, excluding corporate charges.

The tables below present information about reported segments for the three and nine months ended September 30, 2007 and 2006:



|                                        |  |     |        |                  |   |                              |  |   |        |   |  |   |       
|--------------------------------------- |  | --- | ------ | ---------------- | - | ---------------------------- |  | - | ------ | - |  | - | ------
|(In thousands)                          |  | IVD |        | SampleProcessing |   | UnallocatedCorporateExpenses |  |   | Total 
|For the three months September 30, 2007 |  |     |        |                  |   |                              |  |   |        |   |  |   |       
|Revenues                                |  | $   | 16,971 |                  | $ | 3,220                        |  | $ |       |   |  | $ | 20,191
|Interest income                         |  |     | 402    |                  |   |                             |  |   |       |   |  |   | 402   
|Interest expense                        |  |     | 5      |                  |   |                             |  |   |       |   |  |   | 5     
|Depreciation and amortization           |  |     | 558    |                  |   | 68                           |  |   | 4      |   |  |   | 630   
|Segment pre-tax profit                  |  |     | 3,212  |                  |   | 770                          |  |   | (1,497 | ) |  |   | 2,485 
|Segment assets                          |  |     | 56,452 |                  |   | 18,000                       |  |   | 6,688  |   |  |   | 81,140
|Investment in long-lived assets         |  |     | 21,240 |                  |   | 472                          |  |   |       |   |  |   | 21,712
|For the three months September 30, 2006 |  |     |        |                  |   |                              |  |   |        |   |  |   |       
|Revenues                                |  | $   | 15,252 |                  | $ | 2,756                        |  | $ |       |   |  | $ | 18,008
|Interest income                         |  |     | 265    |                  |   | 2                            |  |   |       |   |  |   | 267   
|Interest expense                        |  |     | 5      |                  |   |                             |  |   |       |   |  |   | 5     
|Depreciation and amortization           |  |     | 614    |                  |   | 69                           |  |   | 37     |   |  |   | 720   
|Segment pre-tax profit                  |  |     | 1,999  |                  |   | 577                          |  |   | (1,348 | ) |  |   | 1,228 
|Segment assets                          |  |     | 45,383 |                  |   | 15,572                       |  |   | 8,259  |   |  |   | 69,214
|Investment in long-lived assets         |  |     | 18,506 |                  |   | 521                          |  |   |       |   |  |   | 19,027
|For the nine months September 30, 2007  |  |     |        |                  |   |                              |  |   |        |   |  |   |       
|Revenues                                |  | $   | 52,362 |                  | $ | 8,928                        |  | $ |       |   |  | $ | 61,290
|Interest income                         |  |     | 1,125  |                  |   |                             |  |   |       |   |  |   | 1,125 
|Interest expense                        |  |     | 8      |                  |   |                             |  |   |       |   |  |   | 8     
|Depreciation and amortization           |  |     | 1,668  |                  |   | 204                          |  |   | 12     |   |  |   | 1,884 
|Segment pre-tax profit                  |  |     | 9,097  |                  |   | 2,030                        |  |   | (3,647 | ) |  |   | 7,480 
|Segment assets                          |  |     | 56,452 |                  |   | 18,000                       |  |   | 6,688  |   |  |   | 81,140
|Investment in long-lived assets         |  |     | 21,240 |                  |   | 472                          |  |   |       |   |  |   | 21,712



12



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|                                       |  |     |        |                  |   |                              |  |   |        |   |  |   |        |  
|-------------------------------------- |  | --- | ------ | ---------------- | - | ---------------------------- |  | - | ------ | - |  | - | ------ | -
|(In thousands)                         |  | IVD |        | SampleProcessing |   | UnallocatedCorporateExpenses |  |   | Total  |  
|For the nine months September 30, 2006 |  |     |        |                  |   |                              |  |   |        |   |  |   |        |  
|Revenues                               |  | $   | 42,208 |                  | $ | 8,513                        |  | $ |       |   |  | $ | 50,721 |  
|Interest income                        |  |     | 767    |                  |   | 6                            |  |   |       |   |  |   | 773    |  
|Interest expense                       |  |     | 17     |                  |   |                             |  |   |       |   |  |   | 17     |  
|Depreciation and amortization          |  |     | 959    |                  |   | 304                          |  |   | 283    |   |  |   | 1,546  |  
|Segment pre-tax profit (loss)          |  |     | 1,854  |                  |   | 1,903                        |  |   | (3,962 | ) |  |   | (205   | )
|Segment assets                         |  |     | 45,383 |                  |   | 15,572                       |  |   | 8,259  |   |  |   | 69,214 |  
|Investment in long-lived assets        |  |     | 18,506 |                  |   | 521                          |  |   |       |   |  |   | 19,027 |  

We ship products from two locations in the United States and one location in Germany.
Substantially all long-lived assets are located in the United States. Sales to international customers amounted to approximately $18.6 million and $15.3 million during the nine months ended September 30, 2007 and 2006.

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

11. Other
Comprehensive Income (Loss)

Other comprehensive income (loss) was approximately $56,000 and $172,000 for the three and nine months
ended September 30, 2007, respectively and approximately $(49,000) for the three and nine months ended September 30, 2006.



13



---

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

Overview

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

We generate revenues primarily from: sales of IVD instruments, IVD
consumables and service and sample processing instruments and supplies. Revenues from IVD instruments include sales of urine microscopy and chemistry analyzers manufactured by us and urine chemistry analyzers sourced from a Japanese manufacturer. We
sell the urine microscopy analyzers and the iChem100; our semi-automated chemistry analyzer introduced in the third quarter of 2006 on a global basis and distribute the Japanese manufacturers fully automated chemistry analyzers domestically
only. Consumables include products such as chemical reagents and urine test strips. Service revenues are derived primarily from annual service contracts purchased by our domestic customers after the initial year of sale, which is covered by product
warranties and spare parts from international customers. Once the analyzers are installed, we generate recurring revenue from sales of consumables. Consumable and service revenue will continue to expand as the installed base of related instruments
increases. Revenue is also generated from sales of sample processing instruments and related supplies, which primarily consists of centrifuge systems, DNA processing workstations and blood analysis products.

Domestic sales of our automated urinalysis systems are direct to the customer through our sales force. International sales, with the exception of France,
are through independent distributors. Sales in France are direct to end use customers. International sales represented 31% of consolidated revenues during the first nine months of 2007 as compared to 28% during the first nine months of 2006. Since
the launch of our iQ200 product line, we have increased our sales efforts in the international marketplace. Our Sample Processing products are sold worldwide through distributors.

We make significant investments in research and development for new products and enhancements to existing products. We internally fund research and
development programs. During the second quarter of 2007 we closed the operations of our Advanced Digital Imaging Research subsidiary (ADIR), whose costs had previously been substantially covered by government sponsored grants. Under
government guidelines under the Small Business Administration (SBA), ADIR no longer qualified for government grant funding previously provided to ADIR. While the closing of ADIR resulted in one-time charges of approximately $163,000 in
the second quarter of 2007, period expenses related to this operation decreased slightly as we no longer incur costs related to salaries and related overhead of this subsidiary.

In addition to the suspension of government funding, the 3D facial recognition technology which ADIR had been developing would have taken at least
another two years to develop a commercial product capable of screening individuals at airports and other security checkpoints. Further, the present market for 3D facial recognition is practically non-existent and it would likely take years to
develop a commercially viable product. Therefore, as this product development initiative was outside of our core healthcare business, we determined that it was not in the best interest of our shareholders to continue these efforts.

Application of Critical Accounting Policies and Use of Estimates

A description of our critical accounting policies that represent the more significant judgments and estimates used in the preparation of our financial statements was provided in the Managements Discussion and
Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2006. Other than the adoption of FIN48 as discussed in Note 6 to the accompanying condensed consolidated
financial statements, there have been no material changes in theses critical accounting policies since December 31, 2006.



14



---

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

Results of Operations

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



|                                    |  |                                  |        |  |                                 |   |      |   |        |  |     |      |  |   |        |  |      |   |  |   |        |   |  |     |   
|----------------------------------- |  | -------------------------------- | ------ |  | ------------------------------- | - | ---- | - | ------ |  | --- | ---- |  | - | ------ |  | ---- | - |  | - | ------ | - |  | --- | --
|                                    |  | Three months ended September 30, |        |  | Nine months ended September 30, |  
|                                    |  | 2007                             |        |  |                                 |   | 2006 |   |        |  |     | 2007 |  |   |        |  | 2006 |   |  |   |       
|Revenues                            |  |                                  |        |  |                                 |   |      |   |        |  |     |      |  |   |        |  |      |   |  |   |        |   |  |     |   
|IVD instruments                     |  | $                                | 7,479  |  | 37                              | % |      | $ | 7,477  |  | 42  | %    |  | $ | 24,615 |  | 40   | % |  | $ | 19,429 |   |  | 38  | % 
|IVD consumables and service         |  |                                  | 9,492  |  | 47                              | % |      |   | 7,775  |  | 43  | %    |  |   | 27,747 |  | 45   | % |  |   | 22,779 |   |  | 45  | % 
|Sample processing and supplies      |  |                                  | 3,220  |  | 16                              | % |      |   | 2,756  |  | 15  | %    |  |   | 8,928  |  | 15   | % |  |   | 8,513  |   |  | 17  | % 
|                                    |  |                                  |        |  |                                 |   |      |   |        |  |     |      |  |   |        |  |      |   |  |   |        |   |  |     |   
|Total revenues                      |  |                                  | 20,191 |  | 100                             | % |      |   | 18,008 |  | 100 | %    |  |   | 61,290 |  | 100  | % |  |   | 50,721 |   |  | 100 | % 
|                                    |  |                                  |        |  |                                 |   |      |   |        |  |     |      |  |   |        |  |      |   |  |   |        |   |  |     |   
|Gross Profit Margins*               |  |                                  |        |  |                                 |   |      |   |        |  |     |      |  |   |        |  |      |   |  |   |        |   |  |     |   
|IVD instruments                     |  |                                  | 3,487  |  | 47                              | % |      |   | 3,045  |  | 41  | %    |  |   | 11,613 |  | 47   | % |  |   | 8,590  |   |  | 44  | % 
|IVD consumable and service          |  |                                  | 5,621  |  | 59                              | % |      |   | 3,799  |  | 49  | %    |  |   | 15,369 |  | 55   | % |  |   | 12,179 |   |  | 54  | % 
|Sample processing and supplies      |  |                                  | 1,635  |  | 51                              | % |      |   | 1,296  |  | 47  | %    |  |   | 4,487  |  | 50   | % |  |   | 4,071  |   |  | 48  | % 
|                                    |  |                                  |        |  |                                 |   |      |   |        |  |     |      |  |   |        |  |      |   |  |   |        |   |  |     |   
|Gross margin                        |  |                                  | 10,743 |  | 53                              | % |      |   | 8,140  |  | 45  | %    |  |   | 31,469 |  | 51   | % |  |   | 24,840 |   |  | 49  | % 
|                                    |  |                                  |        |  |                                 |   |      |   |        |  |     |      |  |   |        |  |      |   |  |   |        |   |  |     |   
|Operating expenses                  |  |                                  |        |  |                                 |   |      |   |        |  |     |      |  |   |        |  |      |   |  |   |        |   |  |     |   
|Marketing and selling               |  |                                  | 3,566  |  | 18                              | % |      |   | 2,718  |  | 15  | %    |  |   | 9,878  |  | 16   | % |  |   | 7,674  |   |  | 15  | % 
|General and administrative          |  |                                  | 2,725  |  | 13                              | % |      |   | 2,284  |  | 13  | %    |  |   | 7,403  |  | 12   | % |  |   | 7,229  |   |  | 14  | % 
|Research and development, net       |  |                                  | 2,355  |  | 12                              | % |      |   | 2,173  |  | 12  | %    |  |   | 7,791  |  | 13   | % |  |   | 5,752  |   |  | 11  | % 
|In-process research and development |  |                                  |       |  |                                 |   |      |   |       |  |     |      |  |   |       |  |      |   |  |   | 5,180  |   |  | 10  | % 
|                                    |  |                                  |        |  |                                 |   |      |   |        |  |     |      |  |   |        |  |      |   |  |   |        |   |  |     |   
|Total operating expenses            |  |                                  | 8,646  |  | 43                              | % |      |   | 7,175  |  | 40  | %    |  |   | 25,072 |  | 41   | % |  |   | 25,835 |   |  | 51  | % 
|                                    |  |                                  |        |  |                                 |   |      |   |        |  |     |      |  |   |        |  |      |   |  |   |        |   |  |     |   
|Operating income (loss)             |  |                                  | 2,097  |  | 10                              | % |      |   | 965    |  | 5   | %    |  |   | 6,397  |  | 10   | % |  |   | (995   | ) |  | (2  | %)
|                                    |  |                                  |        |  |                                 |   |      |   |        |  |     |      |  |   |        |  |      |   |  |   |        |   |  |     |   
|Net income (loss)                   |  | $                                | 1,618  |  | 8                               | % |      | $ | 774    |  | 4   | %    |  | $ | 4,873  |  | 8    | % |  | $ | (2,045 | ) |  | (4  | %)
|                                    |  |                                  |        |  |                                 |   |      |   |        |  |     |      |  |   |        |  |      |   |  |   |        |   |  |     |   



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

Comparison of Three Months Ended September 30, 2007 to 2006

Revenues for the three months ended September 30,
2007 increased by 12% over the prior year quarter. Revenues in the IVD segment increased to $17.0 million in the third quarter of 2007, up from $15.3 million or 11% over the prior year quarter. Sales of IVD instruments amounted to $7.5 million
during both quarters. We sell our instruments and consumables direct to customers domestically. In the international market, the average sale prices of the iQ200 analyzer and related consumables are lower due to the fact that such sales, with the
exception of France, are made through independent distributors in approximately 60 countries. International revenues accounted for approximately 27% of consolidated revenue during the three months ended September 30, 2007 compared to 27% during
the prior year quarter. IVD consumables and service revenue increased during the quarter to $9.5 million from $7.8 million, an increase of $1.7 million or 22% over the prior year quarter, primarily due to the larger installed base of instruments and
a high conversion rate from instruments previously covered by warranty now under servicing agreements. We also continue to service and support the declining installed base of legacy systems discontinued in 2004. Revenues during the quarter from the
Sample Processing segments instruments and supplies increased to a record $3.2 million compared to $2.8 million for the prior year quarter primarily due to higher sales of the DNA workstations, consumables and service.



15



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We sold 102 iQ200 Analyzers during the current quarter, as compared to 108 units sold during the third
quarter of 2006, but we achieved approximately the same IVD instrument revenue due to a higher proportion of complete iQ200 Systems sold in the US in comparison to the third quarter of 2006. Domestically, we sell the iQ200 microscopy analyzers
either separately or combined with a chemistry analyzer, which we acquire from a Japanese supplier. The majority of domestic sales are sold as combined systems. Internationally, we sell our iQ200 microscopy analyzer separately or with our
semi-automated chemistry analyzer, as we do not have distribution rights for the fully automated chemistry analyzer. We are currently developing an automated chemistry analyzer internally which we anticipate shipping during the first quarter of
2008.

Gross profit margin for the current quarter improved to 53% compared to 45% during the 2006 quarter. This improvement is
attributable to across the board improvements. The gross profit margin of our IVD instruments increased to 47% compared to 41% during the 2006 quarter. Gross margin of our IVD consumables and services increased to 59% during the quarter compared to
49% during the prior year quarter. The increase resulted primarily from increased consumable revenues plus improved gross margins being realized in our service department. We continue to experience losses in our German chemistry strip manufacturing
operation acquired in September 2005, which is operating below capacity. Our German strip manufacturing facility is expected to continue to operate below capacity until we launch our new automated urine chemistry analyzer next year. Gross profit
margin for our sample processing laboratory instrument and supply segment improved to 51% in the 2007 quarter compared to 47% in 2006 due to the continued implementation of manufacturing cost improvement programs and increased manufacturing volumes
during the quarter.

Marketing and selling expenses totaled $3.6 million, or 18% of revenue, for the current years third quarter, as
compared to $2.7 million, or 15% of revenue, in the third quarter of 2006. The $0.8 million increase is primarily related to additional personnel and related costs of $440,000, higher commissions of $119,000, fees paid to GPOs (group purchasing
organizations) of $64,000 as well as increased travel and related costs of $130,000 due to increased domestic sales personnel.

General and
administrative expenses increased $441,000 to $2.7 million compared to $2.3 million in the prior year quarter and includes $468,000 of additional personnel, recruiting and restructuring costs related to the reorganization of our finance department.
The increases were partially offset by reductions in our allowance for bad debts of $90,000 and lower professional fees of $95,000 and $114,000 of increased expense primarily related to stock based compensation for our non-employee directors.

Research and development expense increased to $2.4 million during the third quarter of 2007 compared to $2.2 million in the same period in
the prior year reflecting our continuing investments in new product platforms in urinalysis and molecular diagnostics. The increase related primarily to payroll and related expenditures.

Interest income during the third quarter of 2007 amounted to $402,000 compared to $267,000 during the prior year quarter. The increase relates to our
continued investment of excess cash during the quarter, as well as interest earned on lease financing from the sale of instruments to customers. Our sales-type lease financings approximated $9.4 million during the current quarter as compared to $8.7
million during the prior year quarter.

Income tax expense during both the third quarter of 2007 and 2006 was approximately 35% of pre-tax
income. The tax provision continues to be primarily a non-cash expense, since we have significant deferred tax assets relating to tax loss carryforwards and credits. As of January 1, 2007 federal tax loss carryforward amounted to approximately
$9.4 million and research and development tax credit carryovers totaled $3.9 million.

Comparison of Nine Months Ended September 30, 2007 to 2006

Revenues for the nine months ended September 30, 2007 increased by 21% over the prior year period. Revenues in the IVD segment
increased to $52.4 million in 2007 from $42.2 million in the prior year period. Sales of IVD instruments increased to $24.6 million up from $19.4 million during the prior year period. Unit volume of iQ200 instruments sold during the first nine
months of 2007 was 359, which is 15% higher than the 312 units sold during the prior year period. The increase in instrument sales is primarily due to a large increase in unit sales and a favorable mix of domestic and international customers.
International revenues accounted for approximately 34% of consolidated revenue during both the current nine month period and the prior year period as well. IVD consumables and service revenue increased to $27.7 million from $22.8 million, an
increase of nearly $5.0 million or 22% over the prior year, primarily due to the larger installed base of instruments and the success of converting warranty agreements to service agreements as mentioned previously. Revenues during the first nine
months from the sample processing instruments and supplies increased to $8.9 million a 5% increase as compared to the prior year period.



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Overall gross profit margins for the first nine months improved to 51% during the current year period
compared to 49% for the 2006 period, even though IVD instruments (which generate lower gross margin than consumable products) represented 40% of consolidated revenues in the first nine months of 2007 as compared to 38% of consolidated revenue in the
first nine months of 2006. The gross profit margin of our IVD instruments improved to 47% in 2007 compared to 44% during the prior year period, primarily due to the mix of instruments sold domestically versus internationally and a cost reduction
resulting from a change in the estimated accrual for laboratory information system implementations of approximately $250,000. The gross margin of our IVD consumables and services improved to 55% during the current year period compared to 53% during
the prior year period, primarily due to higher volumes and increased efficiencies. Gross profit margin for our sample processing laboratory instrument and supply segment increased to 50% in 2007 from 48% in 2006, primarily due to manufacturing cost
improvement programs.

Marketing and selling expenses totaled $9.9 million or 16% of revenue, for the first nine months, as compared to
$7.7 million or 15% of revenue, in the same period of 2006. The increase includes additional personnel and related costs of $817,000, higher commissions of $428,000, higher fees paid to GPOs of $146,000, increased travel and related costs of
$419,000 due to the increased domestic sales personnel hired during the current year and additional personnel added to our sales office in France.

General and administrative expenses remained essentially flat during the first nine months at $7.4 million compared to $7.2 million in the prior year. This year we experienced increases in professional fees for audit and legal services of
$378,000 and additional facility costs of $130,000 and $110,000 of increased expense primarily related to stock based compensation for our non-employee directors while last years first nine month results included a provision for bad debts of
approximately $380,000.

Gross research and development expense for the nine months ended September 30, 2006 amounted to $10.9 million
of which $5.2 million represents the purchased in-process research and development expenses booked in the second quarter of 2006 relating to the acquisition of Leucadia Technologies, Inc. Net research and development expense amounted to $7.8 million
during the first nine months of 2007 compared to $5.8 million in the same period in the prior year, reflecting our continuing investment in new product platforms. The current year period includes the cost of closing down the ADIR subsidiary which
amounted to approximately $163,000. During the current year, our spending, excluding the purchased in-process research and development, increased by $2.0 million and included higher payroll and related costs of $1.2 million, increased facility costs
of $105,000, and increased professional fees of $110,000, plus incremental spending for our new chemistry analyzer amounting to $730,000. These costs were partially offset by increased grant revenue of $248,000 and capitalized software development
expenditures of $567,000 relating to our new products.

Interest income during the first nine months of 2007 amounted to $1.1 million, a
$352,000 increase over the same period in 2006. The increase relates to our continued investment of excess cash during the quarter, as well as interest earned on lease financing from the sale of instruments to customers.

Income tax expense during the nine months of 2007 amounted to 35% of pre-tax income as compared to $1.8 million tax on the loss during the prior year
period. During the prior year, we purchased Leucadia Technologies in-process research and development totaling $5.2 million which was expensed for accounting purposes but not deductible for tax purposes.

Off-Balance Sheet Arrangements

At September 30,
2007 and 2006, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Liquidity and Capital Resources

Our primary source
of liquidity is cash from operations, which depends heavily on sales of our IVD instruments, consumables and service, as well as sales of sample processing instruments and supplies. At September 30, 2007, our cash and cash equivalents amounted
to $23.8 million compared to $23.2 million at December 31, 2006.



17



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Operating Cash Flows.Cash provided by operations for the nine months ended September 30,
2007 amounted to $811,000 as compared to $2.9 million during the prior year period. The reduction was the result of a planned increase in purchases of inventories of approximately $2.1 million primarily associated with the launch of our new
chemistry analyzer and higher finished goods inventory of the AUTION MAX AX-4280 automated urine chemistry analyzer and related accessories, increased receivables of $3.2 million as a result of increased revenues, plus reductions in accounts payable
and accruals of $1.6 million. In addition, our investments in sales-type leases increased $549,000 during the first nine months of 2007.

The relationship of receivables to revenues has increased over the prior year. The number of days sales in accounts receivable increased to 74 at the end of the third quarter of 2007 compared to 69 days for the prior year third quarter. The
increase was primarily caused by the fact that the majority of instrument sales occurred during the final weeks of the current quarter. The number of days sales in inventory increased to 90 days at the end of the third quarter based on the planned
purchases of certain inventories mentioned above. The number of days sales in inventory at the beginning of the year was 75 days.

Our cash flow continues to be favorably affected by the fact that at December 31, 2006 we had net operating tax loss carry forwards into 2007 of $9.4 million for federal and $1.0 million for state, as well as tax credit carry forwards
of $2.2 million for federal and $1.7 million for state taxes. We continue to realize tax deductions from both the exercise of stock options and the purchase by employees of our common stock at a discount to market. During the nine months ended
September 30, 2007, we realized additional tax deductions of approximately $1.4 million from these items.

Investing Activities.Cash used in investing activities decreased to $3.5 million during the nine months ended September 30, 2007. The difference over the prior year was primarily as a result of the acquisition in 2006 of Leucadia Technologies which amounted to
$3.6 million and the sale of marketable securities in the amount of $15.4 million purchased during 2005.

Financing Activities.Cash
provided by financing activities amounted to $3.3 million during the first nine months of 2007, an increase of $1.4 million over the same period in 2006, partially the result of increased issuances of common stock for cash of $2.0 million compared
to $1.2 million during the 2006 period. In addition during the first nine months of 2007, we realized tax deduction benefits amounting to $1.4 million from the exercise of stock options, an increase of $637,000 over the same period of 2006.

We currently have a credit facility with a commercial bank consisting of a $6.5 million revolving line of credit for working capital and a
$10.0 million line of credit for acquisitions and product opportunities. The entire credit facility has variable interest rates, which will change from time to time based on changes to either the LIBOR rate or the lenders prime rate. As of
September 30, 2007, there were no borrowings under the new credit facility. We are subject to certain financial covenants under the credit facility with the bank and as of September 30, 2007, we were in compliance with such covenants.

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

New Accounting Pronouncements

In September 2006, the
FASB issued SFAS 157, which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposed under generally accepted accounting principles. As a result of SFAS 157, there is
a common definition of fair value to be used throughout GAAP; SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of adopting SFAS 157 on our financial position and results of
operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159), which provides entities with the option to measure certain financial instruments and other items at fair value, whereas those items are not currently required to be measured at fair value. SFAS 159 will be effective for
us on January 1, 2008. We are currently evaluating the impact of adopting SFAS 159 on our financial position and results of operations.



18



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Inflation

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

Healthcare Reform Policies

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



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

Market Risk

Our business is exposed to various market risks, including changes in interest rates and
foreign currency exchange rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates. We do not invest in derivatives or other financial instruments
for trading or speculative purposes. We had no debt at September 30, 2007.

Foreign Currencies

We are subject to certain foreign currency risks in the importation of goods from Japan. Our purchases from this supplier are denominated in Japanese Yen.
These components represent a significant portion of our material costs. Fluctuations in the US Dollar/ Japanese Yen exchange rate could result in increased costs for our key components. Similarly, we are also exposed to currency fluctuations with
respect to the exportation of our products. With the exception of France which is denominated in Euros, all of our sales are denominated in US Dollars. Our strip manufacturing facility in Germany has the US Dollar as its functional currency.



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

(a) Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined by
paragraph (e) of Exchange Act Rules 13a-15 or 15d-15, designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the SEC and to approve, summarize and disclose this information within
the time periods specified in the rules of the SEC. Our Chief Executive Officer and Interim Chief Financial Officer are responsible for establishing and maintaining these procedures, and, as required by the rules of the SEC, evaluate their
effectiveness. Our Chief Executive Officer and Interim Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2007, the end of the period covered by this report, and based upon
that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective.

(b) Changes in Internal Controls over Financial Reporting

There was no change in the Companys internal control over
financial reporting that occurred during the period covered by this Quarterly Report of Form 10-Q that materially affected, or is reasonable likely to materially affect, the Companys internal control over financial reporting.



19



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PART II

OTHER INFORMATION



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

There has been
no material changes in risk factors as set forth in our Annual Report on Form 10-K for the year ended December 31, 2006.



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

Reference is made to our Quarterly Report on Form 10-Q for the period ended June 30, 2007.



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



|              |  |                                                                                                         |  |                  
|------------- |  | ------------------------------------------------------------------------------------------------------- |  | -----------------
|ExhibitNumber |  | Description                                                                                             |  | ReferenceDocument
|              |  |                                                                                                        
|3.1           |  | Restated Bylaws as amended                                                                              |  | (1)              
|              |  |                                                                                                        
|3.2           |  | Amendment to Amended and Restated Bylaws of IRIS International, Inc.                                    |  | (2)              
|              |  |                                                                                                        
|4.1           |  | IRIS International, Inc. 2007 Stock Incentive Plan                                                      |  | (3)              
|              |  |                                                                                                        
|10.1          |  | Employment Agreement, dated August 6, 2007, between IRIS International, Inc. and Peter Donato           |  | (4)              
|              |  |                                                                                                        
|31.1          |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer      |  | *                
|              |  |                                                                                                        
|31.2          |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Principal Accounting Officer |  | *                
|              |  |                                                                                                        
|32.1          |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer      |  | *                
|              |  |                                                                                                        
|32.2          |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Principal Accounting Officer |  | *                



|(1) | Incorporated by reference to Exhibit 3.2 to Annual Report on Form 10-K, filed March 26, 2004.
|--- | ---------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K, filed July 18, 2007.
|--- | --------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-8, filed August 22, 2007.
|--- | ------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, filed August 8, 2007.
|--- | ----------------------------------------------------------------------------------------------

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



20



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SIGNATURES

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

Date: November 1, 2007



IRIS INTERNATIONAL, INC.By:

/s/ CESAR M. GARCÍACésar M. GarcíaPresident and Chief Executive OfficerBy:

/s/ PETER L. DONATOPeter L. DonatoChief Financial Officer (Principal Financial Officer and Principal Accounting Officer)




21