<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

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

                                    FORM 10-Q

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



      For the quarter ended                                     Commission File
      September 30, 1997                                           No. 1-9767

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


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


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



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

                        Telephone Number:  818-709-1244




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



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

The number of shares of Common Stock of the registrant outstanding as of
November 4, 1997 was 6,057,092.



<PAGE>   2




                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.




                               INDEX TO FORM 10-Q

             Three and Nine Months Ended September 30, 1997 and 1996




<TABLE>
<CAPTION>
                                                                           PAGE

<S>      <C>                                                               <C>
PART 1 - FINANCIAL INFORMATION

         ITEM 1 -  Consolidated Financial Statements

         Consolidated Balance Sheets........................................2


         Consolidated Statements of Operations..............................3&4


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


         Notes to Consolidated Financial Statements.........................6


         ITEM 2 - Management's Discussion and Analysis of
                  Financial Condition and Results of Operations............10



PART 2 - OTHER INFORMATION

         ITEM 1 - Legal Proceedings........................................15


         ITEM 6 - Exhibits And Reports on Form 8-K

         (a)  Exhibits.....................................................15
         (b)  Reports on Form 8-K..........................................15



SIGNATURE .................................................................15
</TABLE>



                                        1
<PAGE>   3



PART 1 FINANCIAL INFORMATION

ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS

                   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                              At December 31,        At September 30,
                                                                                   1996                   1997
                                                                              ---------------        ----------------
                                                                                                       (unaudited)
<S>                                                                            <C>                    <C>         
Current assets:
  Cash and cash equivalents                                                    $  3,602,535           $  1,469,223
  Short-term investments                                                            667,589                 25,000
  Accounts receivable, net of allowance for doubtful
    accounts of $278,766 in 1996 and $257,016 in 1997                             5,207,933              4,816,918
  Inventories                                                                     4,838,206              4,403,861
  Prepaid expenses and other current assets                                         163,465                226,625
  Deferred tax asset                                                                936,500                971,944
                                                                               ------------           ------------
    Total current assets                                                         15,416,228             11,913,571

  Property and equipment, at cost, net of accumulated depreciation of
    $3,379,884 in 1996 and $4,272,973 in 1997                                     1,947,713              1,614,520
  Purchased intangibles                                                          10,324,760              9,557,992
  Software development costs, net of accumulated amortization of
   $847,880 in 1996 and $1,127,131 in 1997                                          920,972              1,030,159
  Deferred warrant costs                                                          1,155,452              1,057,519
  Deferred tax asset                                                              7,276,250              7,276,250
  Other assets                                                                      818,870              1,209,674
                                                                               ------------           ------------
    Total assets                                                               $ 37,860,245           $ 33,659,685
                                                                               ============           ============

                          LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Short-term borrowings                                                        $  1,334,755           $  2,092,027
  Current portion of long-term debt                                               2,600,000              3,700,000
  Accounts payable                                                                4,587,407              2,992,071
  Accrued expenses                                                                3,901,071              1,988,799
  Deferred income - service contracts                                               799,523                886,593
  Deferred income - other                                                           279,591                227,096
                                                                               ------------           ------------
    Total current liabilities                                                    13,502,347             11,886,586

Subordinated note payable                                                         7,000,000              7,000,000
Deferred income - service contracts and other                                       193,219                265,566
Notes payable, long-term portion                                                  3,400,000                     --
                                                                               ------------           ------------
    Total liabilities                                                            24,095,566             19,152,152

Commitments and contingencies

Shareholders' equity:
  Preferred stock, $.01 par value
    Authorized:  3,000,000 shares
    Convertible Series A,
    Shares issued and outstanding:  3,000 in 1996 and 1997
    ($3,000,000 liquidation preference)                                                  30                     30
  Common stock, $.01 par value
    Authorized:  15,600,000 shares
    Shares issued and outstanding:
    1996 - 5,911,890, 1997 - 6,053,425                                               59,118                 60,533
  Additional paid-in capital                                                     36,311,535             37,052,117
  Treasury stock, at cost (26,240 shares in 1996 and 1997)                         (103,500)              (103,500)
  Unearned compensation                                                            (385,879)              (375,657)
  Foreign currency translation adjustment                                            37,791                 (1,210)
  Accumulated deficit                                                           (22,154,416)           (22,124,780)
                                                                               ------------           ------------
    Total shareholders' equity                                                   13,764,679             14,507,533
                                                                               ------------           ------------
    Total liabilities and shareholders' equity                                 $ 37,860,245           $ 33,659,685
                                                                               ============           ============
</TABLE>

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

                                        2


<PAGE>   4



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


<TABLE>
<CAPTION>
                                                       For the three months ended September 30,
                                                       ----------------------------------------
                                                                       1996             1997
                                                                       ----             ----
<S>                                                                 <C>              <C>       
     Sales of IVD imaging systems                                  $1,766,239        $3,025,079
     Sales of IVD imaging supplies and services                     2,431,882         2,664,516
     Sales of small instruments and supplies                        1,345,327         1,143,862
     Royalties and licensing revenues                                  21,088           363,256
                                                                   ----------         ---------
     Net revenues                                                   5,564,536         7,196,713
                                                                   ----------         ---------
                                                                                  
     Cost of goods - IVD imaging systems                              933,958         1,574,168
     Cost of goods - IVD imaging supplies and services              1,522,617         1,343,553
     Cost of goods - small instruments and supplies                   743,866           666,676
                                                                   ----------         ---------
     Cost of goods sold                                             3,200,441         3,584,397
                                                                   ----------         ---------
                                                                                  
     Gross margin                                                   2,364,095         3,612,316
                                                                                  
     Marketing and selling                                          1,534,792         1,308,216
     General and administrative                                     1,342,332           930,352
     Research and development, net                                    658,263           439,513
     Intangibles amortization                                         265,591           324,019
     Unusual charges                                                1,047,310            31,641
     Acquisition of in-process research and development             7,250,000                --
                                                                   ----------         ---------
     Total operating expenses                                      12,098,288         3,033,741
                                                                   ----------         ---------

     Operating income (loss)                                       (9,734,193)          578,575

     Other income (expense):
        Interest income                                                45,124             8,182
        Interest expense                                             (242,694)         (307,670)
        Other income                                                    9,870            64,822
                                                                  -----------          --------
     Income (loss) before provision (benefit) for income taxes     (9,921,893)          343,909

     Provision (benefit) for income taxes                          (3,671,059)          129,528
                                                                  -----------          --------
     Net income (loss)                                            $(6,250,834)         $214,381
                                                                  ============         ========


     Net income (loss) per common share                                 ($.98)             $.03
                                                                        ======             ====
     Weighted average number of common shares and common
       share equivalents outstanding for the period                  6,383,543        7,210,037
                                                                     =========        =========
</TABLE>

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

                                        3


<PAGE>   5

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


<TABLE>
<CAPTION>
                                                     For the nine months ended September 30,
                                                     ---------------------------------------
                                                                   1996             1997
                                                                   ----             ----
<S>                                                           <C>               <C>         
Sales of IVD imaging systems                                  $  3,957,864      $  8,344,745
Sales of IVD imaging supplies and services                       6,598,176         7,883,636
Sales of small instruments and supplies                          3,714,959         3,296,899
Royalties and licensing revenues                                    42,923           565,751
                                                              ------------      ------------
Net revenues                                                    14,313,922        20,091,031
                                                              ------------      ------------

Cost of goods - IVD imaging systems                              2,055,767         4,290,092
Cost of goods - IVD imaging supplies and services                3,618,566         4,012,071
Cost of goods - small instruments and supplies                   1,990,301         1,832,738
                                                              ------------      ------------
Cost of goods sold                                               7,664,634        10,134,901
                                                              ------------      ------------

Gross margin                                                     6,649,288         9,956,130

Marketing and selling                                            3,229,417         3,795,167
General and administrative                                       2,343,546         2,633,682
Research and development, net                                    1,249,487         1,575,307
Intangibles amortization                                           446,466           948,979
Unusual charges                                                  1,317,415           129,662
Acquisition of in-process research and development               7,250,000                --
                                                              ------------      ------------
Total operating expenses                                        15,836,331         9,082,797
                                                              ------------      ------------

Operating income (loss)                                         (9,187,043)          873,333

Other income (expense):
   Interest income                                                 181,764            41,833
   Interest expense                                               (248,060)         (899,908)
   Other income, net                                                19,762            62,730
                                                              ------------      ------------
Income (loss) before provision (benefit) for income taxes       (9,233,577)           77,988

Provision (benefit) for income taxes                            (3,540,771)           48,352
                                                              ------------      ------------
Net income (loss)                                               (5,692,806)           29,636

Less imputed preferred stock dividend                                   --          (450,000)
                                                              ------------      ------------
Net loss available to common shareholders                     $ (5,692,806)     $   (420,364)
                                                              ============      ============


Net loss per common share, after deduction for
  required dividend on preferred stock                               ($.90)            $(.07)
                                                                     =====             =====

Weighted average number of common shares and common
  share equivalents outstanding for the period                   6,343,723         5,988,562
                                                              ============      ============
</TABLE>

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

                                        4

<PAGE>   6



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

<TABLE>
<CAPTION>
                                                             For the nine months ended September 30,
                                                             ---------------------------------------
                                                                           1996             1997
                                                                           ----             ----
<S>                                                                    <C>               <C>    
Cash flow from operating activities:
    Net income (loss)                                                $ (5,692,806)     $     29,636
    Adjustments to reconcile net income (loss) to cash provided 
     by operations:
     Deferred tax benefit                                               (3,540,468)          (35,444)
     Depreciation and amortization                                       1,165,879         2,002,387
     Common stock and stock option compensation amortization               100,994           199,981
     Write-off of acquired in-process research and development           7,250,000                --
    Changes in assets and liabilities:
     Accounts receivable - trade and other                                (976,113)          158,165
     Service contracts, net                                                238,114           343,821
     Inventories                                                        (1,097,433)          427,595
     Prepaid expenses and other current assets                              55,867           (22,964)
     Other assets                                                         (185,883)          (32,497)
     Accounts payable                                                    1,518,763        (1,299,206)
     Accrued expenses                                                     (287,485)         (236,406)
     Deferred income - other                                               192,421           (52,495)
                                                                      ------------      ------------ 
Net cash provided (used) by operating activities                        (1,258,150)        1,482,573
                                                                      ------------      ------------

Cash flow from investing activities:
    Acquisition of property and equipment                                 (880,744)         (426,613)
    Acquisition of product line                                        (10,134,044)               --
    Software development costs                                            (558,674)         (388,438)
    Acquisition of other assets                                                 --           (30,000)
    Decrease in short-term investments                                   2,283,625           642,589
                                                                      ------------      ------------
Net cash (used in) investing activities                                 (9,289,837)         (202,462)
                                                                      ------------      ------------ 
Cash flow from financing activities:
    Borrowings under credit facility                                     1,300,000         3,235,000
    Repayments of credit facility                                               --        (3,519,755)
    Proceeds from notes payable                                          7,800,000                --
    Repayment of notes payable                                            (310,623)       (2,300,000)
    Repurchase of common stock                                                  --          (545,057)
    Issuance of common stock for cash                                       34,623            22,960
    Issuance of common stock for cash under Employee Stock
       Purchase Plan                                                       250,851           116,079
    Deferred offering costs                                                     --          (411,893)
                                                                      ------------      ------------ 
Net cash provided (used) by financing activities                         9,074,851        (3,402,666)
                                                                      ------------      ------------

Effect of foreign currency fluctuation on cash and cash               
equivalents                                                                     --           (10,757)
                                                                      ------------      ------------ 
Net decrease in cash and cash equivalents                               (1,473,136)       (2,133,312)
Cash and cash equivalents at beginning of period                         1,511,395         3,602,535
                                                                      ------------      ------------ 
Cash and cash equivalents at end of period                            $     38,259      $  1,469,223
                                                                      ============      ============

Supplemental schedule of non-cash activities:
    Issuance of common stock in exchange for services                 $    125,426      $    116,079
    Issuance of common stock in satisfaction of accounts payable                --           283,699
    Issuance of warrants to purchase common stock                               --           216,180
    Issuance of notes payable for accrued liabilities                           --         1,042,027
    Issuance of warrants and subordinated note for asset purchase        7,927,000                --
    Repurchase of warrants in connection with development agreements      (273,207)               --
    Accrual for treasury stock purchase                                  2,132,141                --
Supplemental disclosure of cash flow information:
    Cash paid for interest                                                  68,714           839,261
    Cash paid for income taxes                                                  --            50,075
</TABLE>


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

                                        5



<PAGE>   7



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

1.   Formation and Business of the Company.

     International Remote Imaging Systems, Inc. was incorporated in California
in 1979 and reincorporated during 1987 in Delaware. International Remote Imaging
Systems, Inc. and its subsidiaries (collectively "IRIS" or the "Company")
operate primarily in one segment. The Company designs, develops, manufactures
and markets in vitro diagnostic ("IVD") imaging systems based on patented and
proprietary automated intelligent microscopy ("AIM") technology, and special
purpose centrifuges and other small instruments for specimen preparation in
microscopic and other procedures performed in clinical laboratories.

     On July 31, 1996, the Company, through a wholly owned subsidiary, PSI
Acquisition Corp., acquired the IVD imaging business of Perceptive Scientific
Instruments, Inc. for $9.5 million in cash (including $400,000 in acquisition
costs), issuance of a $7.0 million 8.50% subordinated note ("Subordinated Note")
and a five year warrant to purchase 875,000 shares of the Company's common stock
at $8.00 per share (valued for accounting purposes at $927,000,) ("the PSI
Acquisition"). The cash portion of the purchase price was paid primarily with
funds obtained from a bank under a $7.8 million term loan ("Term Loan") and a
new $1.5 million revolving line of credit ("Credit Facility"). The Company
subsequently changed the name of PSI Acquisition Corp. to Perceptive Scientific
Instruments, Inc. ("PSI").

     PSI designs, develops, manufactures and markets IVD imaging systems for
clinical and research applications. Primarily, PSI provides cytogenetic analysis
instrumentation and related services through worldwide sales of its proprietary
PowerGene product line. The PowerGene product line is used in various procedures
for chromosome analysis, including karyotyping and DNA probe and comparative
genomic hybridization analysis via fluorescent in-situ hybridization methods.
The PowerGene system is marketed in the Western Hemisphere from PSI's Houston
headquarters and in other parts of the world through its U.K. subsidiary.

     The PSI Acquisition has been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
purchased and the liabilities assumed based upon their estimated fair value at
the date of acquisition. The operating results of the acquired business of PSI
are included in the consolidated statement of operations from the date of
acquisition, August 1, 1996. Accordingly, PSI financial results are included in
the consolidated statement of operations for the quarter and nine months ended
September 30, 1997 but are only included in the consolidated statement of
operations for the comparable periods in the prior year for operations from
August 1, 1996 to September 30, 1996.

2.   Summary of Significant Accounting Policies.

Basis of Presentation of Unaudited Interim Financial Statements:

    In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of the Company and subsidiaries as of
September 30, 1997 and 1996 and the results of their operations for the three
and nine month periods then ended. These financial statements should be read in
conjunction with the financial statements and notes included in the latest
Company's annual report on Form 10-K. Interim results are not necessarily
indicative of results for a full year.

Use of Estimates:

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

Principles of Consolidation:

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

Reclassifications:

    Certain reclassifications have been made to the 1996 financial statements to
conform with the 1997 presentation.

                                       6



<PAGE>   8

3.   Inventories.

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

<TABLE>
<CAPTION>
                                                      At December 31, 1996   At September 30, 1997
                                                      --------------------   ---------------------
<S>                                                             <C>                    <C>     
       Finished goods                                           $  631,116             $  763,383
       Work-in-process                                             646,031                601,949
       Raw materials, parts and sub-assemblies                   3,561,059              3,038,529
                                                                ----------             ----------
                                                                $4,838,206             $4,403,861
                                                                ==========             ==========
</TABLE>

4.   Purchased Intangibles.

    Purchased intangibles, at cost, consist of the following:

<TABLE>
<CAPTION>
                                                      At December 31, 1996   At September 30, 1997
                                                      --------------------   ---------------------
<S>                                                             <C>                  <C>       
       Goodwill                                                $ 1,377,973           $1,377,973
       International distribution channel                        5,571,728            5,571,728
       Acquired technology and know-how                          3,960,904            3,960,904
                                                               -----------           ----------
                                                                10,910,605           10,910,605
       Less accumulated amortization                              (585,845)          (1,352,613)
                                                               -----------           ----------
       Total                                                   $10,324,760           $9,557,992
                                                               ===========           ==========
</TABLE>

5.   Short Term Borrowings and Notes Payable.

    The Company financed the purchase price for the PSI Acquisition with the
Subordinated Note ($7.0 million), the Term Loan ($7.8 million) and a portion of
the Credit Facility ($1.3 million). The Term Loan and Credit Facility impose
certain operating and financial covenants on the Company. Due to an inability
to comply with these financial covenants, the Company was in default on both
loans at September 30 and December 31, 1996. In April of 1997, the bank waived
the default, amended the financial covenants and extended the maturity of both
loans. In exchange, the Company agreed to increase the interest rates on both
loans and to issue the bank a three year warrant to purchase 50,000 shares of
Common Stock at $3.875 per share and additional warrants if the Term Loan is
outstanding on June 1 and July 1, 1997. On June 1 and July 1, 1997, the Company
issued three year warrants to purchase 25,000 shares each of common stock at
$4.25 and $4.375 per share, respectively. The warrants were valued at a total of
$32,500 each for accounting purposes, which is being amortized to interest
expense over the remaining life of the Term Loan.

    On September 30, 1997 the outstanding principal balance of the Term Loan was
$3.7 million. The Term Loan is collateralized by a first priority lien on all
the assets of the Company and bears interest monthly at the bank's prime rate
(8.50% on September 30, 1997) plus 2.0%. The Company is required to pay $100,000
of principal each month, and the balance is due April 15, 1998. The Company may
prepay the Term Loan at any time without premium or penalty.

    The outstanding principal balance on the Credit Facility was $1,050,000 on
September 30, 1997. Under the terms of the Credit Facility, the Company can
borrow and reborrow up to a maximum principal amount of $1.5 million at a
variable interest rate equal to the bank's prime rate plus 2.0%. The Credit
Facility matures April 15, 1998 and is collateralized by a first priority lien
on all of the assets of the Company. 

     On June 30 and September 30, 1997 the Company exchanged two one year 8%
promissory notes in the amounts of $545,057 and $496,970, respectively for
amounts due relating to the repurchase of its common stock from an affiliate of
Boehringer Mannheim Corporation.

    The outstanding principal balance on the Subordinated Note was $7.0 million
on September 30, 1997. The Subordinated Note bears interest at a fixed rate of
8.5% per annum, payable in quarterly installments. The entire principal is due
on or before July 31, 2001.

    The Company is presently pursuing additional financing to repay principal on
its outstanding indebtedness and to fund its future business strategy. The
Company may not be able to secure adequate additional financing on favorable
terms, if at all.


                                       7
<PAGE>   9

6.   Capital Stock.

Stock Issuances:

     During the nine months ended September 30, 1997, the Company issued 55,925
shares of common stock in exchange for $218,242 in cash and services under the
Employee Stock Purchase Plan. Also, for the nine months ended September 30,
1997, options to purchase 196,100 shares of common stock were granted under the
1994 and 1997 Stock Option Plans. Options for 10,234 shares of common stock were
exercised and options for 45,700 shares of common stock were canceled. At
September 30, 1997, options to purchase 1,164,200 shares of common stock were
issued and outstanding under the Company's stock options plans. The outstanding
options expire by the end of 2007. The exercise price for these options ranges
from $2.90 to $6.22 per share, for an aggregate of approximately $3.8 million.
At September 30, 1997, there were 230,967 shares of common stock available for
the granting of future options.

     In connection with the merger of StatSpin Inc. each outstanding option and
warrant of StatSpin was converted into an option to purchase IRIS common stock.
These options were scheduled to expire in March 1997, but were extended one
additional year. At September 30, 1997, options to purchase 85,213 shares remain
outstanding at exercise prices from $3.66 to $4.58 per share. None have been
exercised in the current year.

     For the nine months ended September 30, 1997, 75,376 shares of common stock
were issued in satisfaction of accounts payable totaling $270,700.

Warrants:

     At September 30, 1997, the following warrants were outstanding and
exercisable:

<TABLE>
<CAPTION>
         Number of Warrants              Price              Expiration Date
         ------------------              -----              ---------------
<S>                                      <C>                <C> 
         75,000                          $8.125             March 30, 1998
         512,000                         6.50               September 29, 1998
         150,000                         7.80               September 28, 2000
         875,000                         8.00               July 31, 2001
         84,270                          3.56               December 31, 2001
         50,000                          3.875              January 15, 2000
         25,000                          4.25               May 31, 2000
         10,000                          4.31               May 15, 2002
         25,000                          4.375              June 30, 2000
</TABLE>

     On November 11, 1997 the Company made an exercise offer to certain warrant
holders. These holders have warrants to purchase an aggregate of 662,000 shares
of common stock at prices ranging from $6.50 to $7.80 per share with expiration
dates ranging from September 1998 to September 2000. The Company will
temporarily lower the exercise price of the warrants to the then current market
price for approximately ten days. Any holder exercising part or all of his
warrant at the lower price will receive a new warrant at the lower exercise
price with, in most cases, a duration of 18 months longer than the old warrant.
The new warrant will entitle the holder to buy the same number of shares as
purchased through the exercise offer, and the unexercised portion of the old
warrant will be canceled. Warrant holders that do not elect to participate in
the exercise offer will retain their old warrants without any change to their
current terms.

     As part of the purchase price for the PSI Acquisition, the Company issued
the seller a five-year warrant to purchase 875,000 shares of common stock at
$8.00 per share. Following the Company's restatement in the third quarter of
1996 of financial results for certain prior periods, the Company received a
request from the seller for a reduction in the exercise price of the warrant. In
its request, the seller asserted that it had relied on the prior financial
information and suffered material damage as a result. The Company has declined
to consider the seller's request. The seller may pursue this request in the
Company's pending arbitration against it, but has not filed such a claim with
the American Arbitration Association. See Part 2, Item 1 - Legal Procedures to
this Form 10-Q.


                                       8
<PAGE>   10




7. Research and Development Grants and Contracts.

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

<TABLE>
<CAPTION>
                                           Three Months Ended              Nine Months Ended
                                              September 30,                  September 30,
                                           ------------------              -----------------
                                           1996         1997               1996          1997
                                           ----         ----               ----          ----
<S>                                      <C>          <C>              <C>             <C>     
                Reimbursements           $383,022     $253,316         $1,327,271      $903,625
                Costs                     336,431      210,737          1,300,568       976,441
                                         --------     --------          ---------      --------
                Net costs 
                 (reimbursements)        ($46,591)    ($42,579)          ($26,703)     $ 72,816
                                         ========     ========          =========      ========
</TABLE>


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

8.   Unusual Charges.

     The results of operations for the nine month period ended September 30,
1997 include unusual charges totaling $129,662 and are primarily legal expenses
relating to the recently completed Intelligent Medical Imaging Inc. patent
litigation and a pending arbitration matter. See Part 2, Item 1 - Legal
Proceedings to this report on Form 10-Q. The unusual charges in the comparable
period in the prior year totaled $1,317,415 and primarily related to the
write-off of deferred offering costs, litigation expenses, reductions in the net
realizable value of inventory and other assets and StatSpin merger expenses.

9.   Income Taxes

     The income tax provision for the three and nine month periods ended
September 30, 1997 was $129,528 and $48,352, respectively, as compared to an
income tax benefit of $(3,671,059) and $(3,540,771), respectively, for the
comparable periods in the prior year. The income tax provision for the nine
month period ended September 30, 1997 differs from the federal statutory rate
due to state, local and foreign income taxes incurred and permanent differences
between income reported for financial statement and income tax purposes.

10.  Earnings Per Share.

    The computations of share amounts for the three and nine month periods ended
September 30, 1997 and 1996 are based on the weighted average number of shares
outstanding for the period and common share equivalents unless antidilutive.

    The staff of the Securities and Exchange Commission ("staff") recently
announced a new position on accounting for convertible preferred stock which is
potentially convertible at a discount to the market price of the common stock,
even if the potential for a discount is only a possibility. The staff has taken
the position, that solely for purposes of calculating earnings per share the
potential discount is an imputed dividend to the preferred stockholders which
reduces the amount of earnings available to common stockholders. Accordingly,
the issuance of the Series A Preferred Stock resulted in a one-time reduction in
earnings available to common shareholders of $450,000 or $0.08 per share in the
nine month period ended September 30, 1997. The staff's position is limited to
calculations of earnings per common share and will not have any effect on the
Company's net income and cash flow.

11.  Recently Issued Accounting Standards.

     In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
No. 128"). SFAS No. 128 requires dual presentation of newly defined basic and
diluted earnings per share on the face of the income statement for all entities
with complex capital structures. This method is considered more compatible with
International Accounting Standards. SFAS No. 128 is effective for all fiscal
years ending after December 15, 1997. Due to the net loss available to common
shareholders, the adoption of SFAS No. 128 for the nine month period ended
September 30, 1997 would not have had an impact on net loss per share. The
Company has not determined the impact of SFAS No. 128 for the three month period
ended September 30, 1997.


                                       9

<PAGE>   11

    In June 1997, the FASB issued SFAS No. 130, "Comprehensive Income". SFAS No.
130 becomes effective in 1998 and requires reclassification of earlier financial
statements for comparative purposes. SFAS No. 130 requires that changes in the
amounts of certain items, including foreign currency translation adjustments and
gains and losses on certain securities, be shown in the financial statements.
SFAS No. 130 does not require a specific format for the financial statement in
which comprehensive income is reported, but does require that an amount
representing total comprehensive income be reported in that statement. The
Company has not determined the effect, if any, of SFAS No. 130 on the
consolidated financial statements.

    Also in June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
Of An Enterprise and Related Information". SFAS No. 131 will change the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the products and service an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. The Company has not determined the effect, if any, of SFAS No. 131 on
the consolidated financial statements.

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

OVERVIEW

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

     Until recently, the Company generated most of its revenues from sales of
two models of The Yellow IRIS urinalysis workstation and related supplies and
services. These two models differ mainly by their speed and price. In 1996, the
Company introduced a third model of The Yellow IRIS, the Model 900UDx urine
pathology system, which is a higher capacity more automated urinalysis
workstation designed especially for the high-volume testing requirements of
large hospitals and reference laboratories.

    The Company received FDA clearance to market the Model 900UDx in March 1996
and began sales in May of that year. The Company also received FDA clearance to
market The White IRIS leukocyte differential analyzer in May 1996 and began
commercial display of this system in July 1997. Finally, the Company began
selling the PowerGene family of genetic analyzers in August 1996 after
completing the Acquisition.

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

<TABLE>
<CAPTION>
                                                   Three Months Ended           Nine Months Ended
                                                      September 30,               September 30,
                                                   ------------------           -----------------
                                                   1996          1997          1996           1997
                                                   ----          ----          ----           ----
<S>                                             <C>           <C>           <C>           <C>       
Research and development expense, net           $  658,000    $  440,000    $1,249,000    $1,575,000
Capitalized software development costs             271,000       145,000       559,000       388,000
Reimbursed costs for research and
  development grants and contracts                 383,000       253,000     1,327,000       904,000
                                                ----------    ----------    ----------    ----------
       Total product technology expenditures    $1,312,000    $  838,000    $3,135,000    $2,867,000
                                                ==========    ==========    ==========    ==========
</TABLE>

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

RESULTS OF OPERATIONS

    The consolidated financial statements reflect the consummation of the
PSI Acquisition on July 31, 1996 which was accounted for using the purchase
method of accounting. Accordingly, the financial results of the acquired
business are included in the consolidated statement of operations for the three
and nine months ended September 30, 1997, but are only included in the
consolidated statements of operations for the comparable periods in the prior
year for the period from August 1 to September 30, 1996.

                                       10

<PAGE>   12

    Comparison of Quarter Ended September 30, 1997 to Quarter Ended September
30, 1996

    Net revenues for the quarter ended September 30, 1997 increased to $7.2
million from $5.6 million, an increase of $1.6 million or 29% over the
comparable period in the prior year. Sales of IVD imaging systems increased to
$3.0 million from $1.8 million, an increase of $1.2 million or 71% over the
comparable period in the prior year. The increase is due to increased sales
related to The Yellow IRIS family of urinalysis workstations and the PowerGene 
line of genetic analyzers.

    Sales of IVD imaging system supplies and services increased to $2.7 million
from $2.4 million, an increase of $233,000 or 10% over the comparable period in
the prior year, primarily due to the larger installed base of IVD imaging
systems. Sales of small instruments and supplies decreased to $1.1 million from
$1.3 million, a decrease of $201,000 or 15%, over the comparable period in the
prior year. The decrease generally reflects lower sales levels of the StatSpin
products primarily due to rescheduled purchases from one of its major
distributors.

    The Company believes that the ongoing consolidation in the healthcare
industry may be adversely affecting sales of The Yellow IRIS as some hospitals
and reference laboratories appear to be postponing large capital investment
decisions due to the resulting uncertainty. The Company also believes that there
is a growing trend among potential customers for The Yellow IRIS toward leasing
these systems on a cost-per-test basis rather than purchasing them. This trend
is expected to spread the revenue from system placements over several years.

    Royalties and licensing revenues for the quarter ended September 30, 1997
increased to $363,000 from $21,000 in the prior year. The increase is largely
due to the receipt of an initial fee earned for the license of certain
technology.

    Cost of goods for IVD imaging systems decreased as a percentage of sales of
IVD imaging systems to 52% for the quarter ended September 30, 1997 from 53% for
the comparable period in the prior year. The decrease is primarily due to fixed
costs being absorbed by increased sales of The Yellow IRIS, partially offset by
increased cost of goods sold relating to the PowerGene analyzer sales. Cost of
goods for IVD imaging system supplies and services as a percentage of sales
decreased to 50% for the current period as compared to 63% for the same period
in the prior year. The decrease is primarily due to improved margins on supply
and service sales resulting from decreased costs and increased prices. Cost of
goods for small instruments and supplies as a percentage of sales of small
instruments and supplies totaled 58% for the current quarter compared to 55% for
the comparable period in the prior year. The increase is primarily due to a
change in the sales mix and decreased sales levels. The net result of these
changes and increased royalties and licensing revenues was an increase in 
aggregate gross margin to 50% for the quarter ended September 30, 1997, as 
compared to 42% in the comparable period in the prior year.

    Marketing and selling expenses decreased to $1.3 million for the quarter
ended September 30, 1997 from $1.5 million, an decrease of $227,000 or 15% over
the comparable period in the prior year, due to the decreased marketing and
selling expenses related to The Yellow IRIS partially offset by increased
expenses relating to addition of the sales force from the PSI acquisition.
Marketing and selling expenses as a percentage of net revenues amounted to 18%
in the current quarter as compared to 28% in the prior period.

    General and administrative expenses decreased to $930,000 for the quarter
ended September 30, 1997 from $1.3 million, a decrease of $412,000 or 31% over
the comparable period in the prior year. This decrease is mainly the result of
the reduced expenses relating to the restructuring implemented in the fourth
quarter of 1996, partially offset by the addition of administrative functions
following the PSI acquisition. General and administrative expenses as a
percentage of net revenues decreased from 24% to 13%.

    Net research and development expenses decreased to $440,000 for the quarter
ended September 30, 1997 from $658,000, a decrease of $218,000 or 33% over the
comparable period in the prior year. Reimbursements under joint development
programs decreased to $253,000 from $383,000. Total product technology
expenditures decreased to $838,000 from $1.3 million, a decrease of $474,000 or
36% as compared to the comparable period in the prior year, due primarily to the
completion of the development of The White IRIS partially offset by the addition
of research and development staff from the PSI Acquisition. Net research and
development expenses as a percentage of revenues decreased from 12% to 6%.

    Amortization of intangible assets reflects the amortization of deferred
expenses for warrants issued in connection with a joint development project and
intangible assets arising from acquisitions and patents. Amortization of
intangible assets for the quarter ended September 30, 1997 increased to $324,000
from $266,000, an increase of $58,000 or 22% over the comparable period in the
prior year, primarily as a result of the acquisition of intangible assets in the
PSI Acquisition being included for the full quarter.


                                       11

<PAGE>   13
     The results of operations for the quarter ended September 30, 1997 include
certain unusual charges to earnings of $32,000, relating to a pending
arbitration matter. See Part 2, Item 1 -- Legal Proceedings to this report on
Form 10-Q. The unusual charges in the comparable period in the prior year
totaled $1,047,000, related primarily to the write-off of deferred offering
costs, litigation expenses and reduction in the net realizable value of
inventory and other assets.

    Interest expense increased to $308,000 for the quarter ended September 30,
1997 from $243,000 for the comparable period in the prior year due to the
indebtedness incurred to finance the PSI Acquisition being included for the
entire quarter and increased interest rates on bank debt, partially offset
by a lower outstanding balance.

    Other income increased due to the receipt of government grant funds for
reimbursement of expenses incurred in prior periods.

    The income tax provision for the quarter ended September 30, 1997 was
approximately $130,000, as compared to ($3.7) million benefit for 1996 due to
the increase in taxable income.

    The above factors contributed to a net income of $214,000 or $0.03 per share
for the quarter ended September 30, 1997 as compared to a net loss of ($6.3)
million or ($0.98) per share for the quarter ended September 30, 1996.

Comparison of Nine Months Ended September 30, 1997 to Nine Months Ended
September 30, 1996

    Net revenues for the nine months ended September 30, 1997 increased to $20.1
million from $14.3 million, an increase of $5.8 million or 40% over the
comparable period in the prior year. Sales of IVD imaging systems increased to
$8.3 million from $4.0 million, an increase of $4.3 million or 111% over the
comparable period in the prior year. The increase was due primarily to the
addition of the PowerGene family of genetic analyzers to the Company's product
line in August 1996 as a result of the PSI Acquisition and increased sales of
The Yellow IRIS.

    Sales of IVD imaging system supplies and services increased to $7.9 million
from $6.6 million, an increase of $1.3 million or 19% over the comparable period
in the prior year, due to the larger installed base of IVD imaging systems and
the conversion of The Yellow IRIS installed base to the new CHEMSTRIP/IRIStrip
urine test strips marketed exclusively by the Company. Sales of small
instruments and supplies decreased to $3.3 million from $3.7 million, a decrease
of $418,000 or 11%, over the comparable period in the prior year. The decrease
reflects generally lower sales levels of the StatSpin products primarily due to
rescheduled purchases from one of its major distributors.

    Royalties and licensing revenues for the nine months ended September 30,
1997 increased to $566,000 from $43,000, an increase of $523,000 over the
comparable period in the prior year. The increase is primarily the result of
increased royalties received, the receipt of previously disputed royalties
relating to the fourth quarter of 1996 and initial fees earned for the license
of certain technology.

    Cost of goods for IVD imaging systems decreased as a percentage of sales of
IVD imaging systems to 51% for the nine months ended September 30, 1997 from 52%
for the comparable period in the prior year due primarily to the addition to the
Company's product line of the higher-margin PowerGene family of genetic
analyzers following the PSI Acquisition and an increase in the average selling
price of the Model 900UDx following the conclusion of its introductory sales
program. These factors were partially offset by a change in the product mix and
amortization of increased fixed costs for IVD imaging systems. Although the
Model 900UDx currently has a lower gross margin than other models of The Yellow
IRIS due to an OEM component on which the Company recognizes minimal gross
margin, the Company expects the Model 900UDx to generate higher sales of
CHEMSTRIP/IRIStrips and other supplies. Cost of goods for IVD imaging system
supplies and services decreased as a percentage of sales of such products to 51%
for the nine months ended September 30, 1997 from 55% for the comparable period
in the prior year. The decrease is principally due to decreased costs and
increased sales prices. This decrease was partially offset by lower gross
margins realized on the sales of PowerGene service and supplies. Cost of goods
for small instruments and supplies as a percentage of sales of small instruments
and supplies totaled 56% for the nine months ended September 30, 1997, an
increase as compared with 54% for the comparable period in the prior year
primarily due to a shift in the sales mix and lower sales volumes. The net
result of these changes and increased royalties and licensing revenues was an
increase in gross margin for the nine months ended September 30, 1997 to 50%, 
an increase as compared to the gross margin realized in the nine months ended 
September 30, 1996 of 46%.

    Marketing and selling expenses increased to $3.8 million for the nine months
ended September 30, 1997 from $3.2 million, an increase of $566,000 or 18% over
the comparable period in the prior year, primarily due to the addition of the
sales force from the PSI Acquisition partially offset by decreased marketing and
selling expenses related to The Yellow IRIS. Marketing and selling expenses as a
percentage of net revenues decreased from 23% in the prior period to 19% in the
current period.

                                       12

<PAGE>   14

    General and administrative expenses increased to $2.6 million for the nine
months ended September 30, 1997 from $2.3 million, an increase of $290,000 or
12% over the comparable period in the prior year. This increase is the result of
the addition of administrative functions following the PSI Acquisition,
partially offset by decreased expenses resulting from the restructuring
implemented in the fourth quarter of 1996. General and administrative expenses
as a percentage of net revenues decreased from 16% to 13% in the current period.

    Net research and development expenses increased to $1.6 million for the nine
months ended September 30, 1997 from $1.2 million, an increase of $326,000 or
26% over the comparable period in the prior year, and decreased as a percentage
of net revenues from 9% to 8%. Reimbursements under joint development programs
decreased to $904,000 from $1.3 million. Total product technology expenditures
decreased to $2.9 million from $3.1 million, a decrease of $268,000 or 9% over
the comparable period in the prior year, due primarily to completion of the
development of The White IRIS and the addition of research and development staff
from the PSI Acquisition.

    Amortization of intangible assets for the nine months ended September 30,
1997 increased to $949,000 from $446,000, an increase of $503,000 or 113% over
the comparable period in the prior year, primarily as a result of the
acquisition of intangible assets in the PSI Acquisition and the Censlide product
line acquisition.

    The results of operations for the nine months ended September 30, 1997
include certain unusual charges to earnings of $130,000, primarily legal
expenses relating to the recently completed Intelligent Medical Imaging, Inc.
patent litigation and a pending arbitration matter. See Part 2, Items--Legal
Proceedings of this report on Form 10-Q. The unusual charges in the comparable
period in the prior year totaled $1,317,000 and related primarily to the
write-off of deferred offering costs, litigation expenses, reduction in the net
realizable value of inventory and other assets and StatSpin merger expenses.

    Interest income decreased to $42,000 for the nine months ended September 30,
1997 from $182,000 for the comparable period in the prior year, primarily as the
result of decreased amounts of invested cash in 1997.

    Interest expense increased to $900,000 for the nine months ended September
30, 1997 from $248,000 for the comparable period in the prior year due to the
indebtedness incurred to finance the PSI Acquisition and increased interest 
rates on bank debt.

    Other income increased due to the receipt of government grant funds for
reimbursement of expenses incurred in prior periods.

    The income tax provision for the nine months ended September 30, 1997 was
$48,000, as compared to an income tax benefit of ($3.5) million for 1996. The
income tax provision for the nine months ended September 30, 1997 differs from
the federal statutory rate due to state, local and foreign income taxes and
permanent differences between income reported for financial statement and
income tax purposes.

    The staff of the Securities and Exchange Commission recently announced a new
position on accounting for convertible preferred stock which is potentially
convertible at a discount to the market price of the common stock, even if the
potential for a discount is only a possibility. The staff has taken the position
that, solely for purposes of calculating earnings per share, the potential
discount is an imputed dividend to the preferred stockholders which reduces the
amount of income available to common stockholders. As a result of the staff's
new accounting position, the issuance of the Series A Preferred Stock resulted
in a one-time reduction in earnings available to common shareholders of $450,000
or $0.08 per share in the first quarter of 1997. The staff's position is limited
to the calculation of earnings per share and did not have any effect on the
Company's net income or cash flow.

    The above factors contributed to a net income of $30,000. However, due to
the imputed dividend discussed above, the loss per common share amounted to
($0.07) per share for the nine months ended September 30, 1997 as compared to a
net loss of ($5.7) million or ($0.90) per share for the nine months ended
September 30, 1996.

LIQUIDITY AND CAPITAL RESOURCES

    Cash, cash equivalents and short-term investments decreased to $1.5 million
at September 30, 1997 from $4.3 million at December 31, 1996. The decrease is
primarily attributable to principal payments on bank debt and an installment
payment for the repurchase of common stock. Inventory levels at September 30,
1997 decreased to $4.4 million from $4.8 million at December 31, 1996. This
decrease is primarily due to the implementation of an inventory reduction
program. Total accounts receivable decreased to $4.8 million at September, 1997
from $5.2 million at December 31, 1996 primarily the result of improved
collection efforts partially offset by the effect of increased sales.

    Accounts payable decreased to $3.0 million at September 30, 1997 from $4.6
million at December 31, 1996, primarily due to the application of the net
proceeds from the sale of the Series A Preferred Stock in late December 1996.
Cash provided by operations totaled $1.5 million for the nine months ended
September 30, 

                                       13

<PAGE>   15

1997, as compared to cash used by operations totaling $1.3 million for the
nine months ended September 30, 1996.

    In the nine months ended September 30, 1997, the Company expended $427,000
for capital equipment and $388,000 for capitalized software development. The
Company expended $881,000 for capital equipment and $559,000 for capitalized
software development in the comparable period of the prior year. The Company
does not presently have any material commitments for capital expenditures.

    During the nine months ended September 30, 1997, the Company generated cash
of $139,000 from stock sales to employees under the Company's stock option and
purchase plans.

    On September 30, 1997, the outstanding principal balance of the Term Loan
was $3.7 million. The Term Loan is collateralized by a first priority lien on
all the assets of the Company and bears interest monthly at the bank's prime
rate (8.50% on September 30, 1997) plus 2.0%. The Company is required to pay
$100,000 of principal each month, and the balance is due April 15, 1998. The
Company may prepay the Term Loan at any time without premium or penalty.

    The outstanding principal balance on the Credit Facility was $1.1 million on
September 30, 1997. Under the terms of the Credit Facility, the Company can
borrow and reborrow up to a maximum principal amount of $1.5 million at a
variable interest rate equal to the bank's prime rate plus 2.0%. The Credit
Facility, collateralized by a first priority lien on all assets, matures April
15, 1998.

        On June 30 and September 30, 1997 the Company exchanged two one year 8%
promissory notes in the amounts of $545,057 and $496,970, respectively, for
amounts due relating to the repurchase of common stock from an affiliate of
Boehringer Mannheim Corporation.

    The Company believes that its current cash on hand plus short-term
investments, together with cash generated by operations and cash available under
the Credit Facility, will be sufficient to fund normal operations and pay
principal and interest on outstanding debt obligations until the maturity of the
bank debt on April 15, 1998.

    The Company is presently pursuing additional financing to repay outstanding
principal on its outstanding indebtedness and to fund its future business
strategy. The Company may not be able to secure adequate additional financing on
favorable terms, if at all. Additional outside financing (or a restructuring of
existing indebtedness) could result in dilution to holders of Common Stock and
significant financial and operational restrictions on the Company.

    In September 1995, the Company and Poly UA Systems Inc. ("Poly"), entered
into a research and development agreement to develop the Poly products using the
Company's technology. The Company is funding the first $15,000 per month (up to
a maximum of $500,000) of the cost of the project, and Poly is reimbursing the
Company for the excess. The Company has an option to acquire all of the common
stock of Poly for an aggregate price of $5.1 million, payable in cash or shares
of Common Stock of the Company. If the Company elects to exercise its option,
the portion of the net cost of the acquisition allocated to completed products
would be capitalized and its subsequent amortization may impact future earnings
to the extent profits from products acquired do not cover these costs. For the
portion of the net cost of the acquisition allocated to in-process research and
development, the Company would record a nonrecurring, noncash (if purchased with
Common Stock) charge against then current earnings.

INFLATION

    The Company does not foresee any material impact on its 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 the Company's current
or future products and its ability to sell its products on a profitable basis.
Moreover, healthcare legislation is an area of extensive and dynamic change, and
the Company cannot predict future legislative changes in the healthcare field or
their impact on its business.

RECENTLY-ISSUED ACCOUNTING STANDARDS

    Recently issued accounting standards are described in Note 11 to the
financial statements.

                                       14

<PAGE>   16
FORWARD-LOOKING STATEMENTS

    The foregoing discussion, as well as the other sections of this Quarterly
Report on Form 10-Q, contain various forward-looking statements which reflect
the Company's current views with respect to future events and financial results.
Forward-looking statements usually include the verbs "anticipates," "believes,"
"estimates," "expects," "intends," "plans," "projects," "understands" and other
verbs suggesting uncertainty. The Company reminds stockholders that
forward-looking statements are merely predictions and therefore inherently
subject to uncertainties and other factors which could cause the actual results
to differ materially from the forward-looking statement. The Company has
attempted to identify some of these uncertainties and other factors in its
Exhibit 99 to its Quarterly Report on Form 10-Q for the period ended June 30,
1997 and in its 1996 Annual Report on Form 10-K.


PART 2      OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

    The Company acquired the digital imaging business of Perceptive Scientific
Instruments, Inc. (the "PSI Acquisition") from Digital Imaging Technologies,
Inc. ("DITI") in July 1996. On August 25, 1997, the Company filed a demand for
arbitration against DITI with the American Arbitration Association. The
Company's demand for arbitration alleges material breaches of the
representations, warranties and covenants in the purchase agreement for the PSI
Acquisition and seeks, among other things, monetary damages of more than 
$5,000,000.
    
    As part of the purchase price for the PSI Acquisition, the Company issued
to DITI a five-year warrant to purchase 875,000 shares of Common Stock at $8.00
per share. DITI has previously requested a reduction in the exercise price of
the warrant on the theory that it suffered material damage as a result of the
Company's restatement in the third quarter 1996 of financial results for
certain prior periods. DITI may pursue this request in the arbitration
proceeding but has not yet filed such a claim with the American Arbitration 
Association.

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


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

    (a)    Exhibits

<TABLE>
<CAPTION>
  No.             Description
  ---             -----------
<S>            <C>
  3.1(a)       -- Certificate of Incorporation, as amended (1)
  3.1(b)       -- Certificate of Designations of Series A Convertible Preferred 
                  Stock (2)
  3.2          -- Restated Bylaws (3)
  4.1          -- Specimen of Common Stock Certificate (4)
  4.2          -- Certificate of Designations of Series A Convertible Preferred 
                  Stock (2)
  11           -- Statement re: Computation of Per Share Earnings
  27           -- Financial Data Schedule
</TABLE>
----------
The following items are incorporated by reference to the cited Company
documents.

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

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

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

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

    (b)    Reports on Form 8-K

    None filed during the period covered.


    SIGNATURE

    Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in Chatsworth, California, on November
11, 1997.


                                    INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.



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


                                       15