SECURITIES ANDEXCHANGE COMMISSION

WASHINGTON,D.C.20549

 

______________________

 

 

**FORM10-Q**

 

 

QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIESEXCHANGE ACT OF 1934

 

 

 

| For the quarter  ended |   | Commission File  No. |
|------------------------|--------|----------------------|
| March 31, 2003         |   | No. 1-9767           |

 

 

 

INTERNATIONALREMOTE IMAGING SYSTEMS, INC.

(Exact Name ofRegistrant as Specified in Its Charter)

 

 

 

| 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) |
|                                                 |       |
| Registrant's  Telephone Number:  (818) 709-1244 |

 

 

 

            Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.                                             Yes        X                                                                                   No                   

 

         Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of the

Exchange Act).                                                                  Yes__________       No_____X______

 

            The registrant had 11,050,457 shares of commonstock outstanding as ofApril 25, 2003.

 

 

 

INTERNATIONALREMOTE IMAGING SYSTEMS, INC.

 

 

INDEX TO FORM 10-Q

 

 

Three Months EndedMarch 31, 2003

 

| PART I - FINANCIAL INFORMATION | Page                                                                                                                     |
|--------------------------------|--------------------------------------------------------------------------------------------------------------------------|
|                                | Item 1 - Consolidated Financial Statements                                                                               |  |
|                                |                                                                                                                          | Consolidated Balance Sheets ............................................................................. | 2 |
|                                |                                                                                                                          | Consolidated Statements of Operations ............................................................... | 3 |
|                                |                                                                                                                          | Consolidated Statements of Cash Flows ............................................................. | 4 |
|                                |                                                                                                                          | Consolidated Statements of Comprehensive Income ............................................. | 5 |
|                                |                                                                                                                          | Notes to Consolidated Financial Statements ........................................................ | 6 |
|                                | Item 2 - Management's Discussion and Analysis of                                                                         |  |
|                                |                                                                                                                          | Financial Condition and Results of Operations ...................................................... | 11 |
|                                | Item 3 - Quantitative and Qualitative Disclosure                                                                         |  |
|                                |                                                                                                                          | About Market Risk ............................................................................................. | 15 |
|                                | Item 4 - Controls and Procedures ...................................................................................     | 17 |
|                                |                                                                                                                          |  |  |
| PART II - OTHER INFORMATION    |                                                                                                                          |
|                                | Item 1 - Legal Proceedings ...........................................................................................   | 17 |
|                                | Item 6 - Exhibits and Reports on Form 8-K                                                                                |  |
|                                |                                                                                                                          | (a) Exhibits ....................................................................................................... | 17 |
|                                |                                                                                                                          | (b) Reports on Form 8-K ..................................................................................... | 17 |
|                                |                                                                                                                          |  |  |
|                                | SIGNATURE .............................................................................................................. | 17 |

 

 

 

 

**PARTI**

**FINANCIALINFORMATION**

** **

**Item1.  Consolidated Financial Statements**

 

**INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.**

**CONSOLIDATED BALANCE SHEETS**

 

**Assets**

 

|                                                                                                                   | At March 31,

                   2003

    (unaudited) | At December 31,

                 2002

  |
|------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|
| **Current assets:**                                                                                                    |                                                                                                                                                            |                                                                                                                                |
| Cash and cash equivalents                                                                                              | $1,284,366                                                                                                                                                      | $2,336,973                                                                                                                          |
| Accounts receivable, net of allowance for doubtful

  accounts of $271,803 in 2003 and $298,324 in 2002           |  

3,946,682                                                                                                                                               |  

4,312,965                                                                                                                   |
| Inventories                                                                                                            | 5,426,375                                                                                                                                                       | 5,423,684                                                                                                                           |
| Prepaid expenses and other current assets                                                                              | 500,340                                                                                                                                                         | 330,245                                                                                                                             |
| Investments available for sale                                                                                         | 362,249                                                                                                                                                         | 847,816                                                                                                                             |
| Deferred tax asset                                                                                                     |    998,663                                                                                                                                            |       998,663                                                                                              |
|      Total current assets                                                                          | 12,518,675                                                                                                                                                      | 14,250,346                                                                                                                          |
|                                                                                                                   |                                                                                                                                                            |                                                                                                                                |
| Property and equipment, at cost, net of accumulated  depreciation

  of $5,186,463 in 2003 and $5,050,140 in 2002 |  

3,278,762                                                                                                                                               |  

2,896,008                                                                                                                   |
| Goodwill                                                                                                               | 188,911                                                                                                                                                         | 188,911                                                                                                                             |
| Software development costs, net of accumulated  amortization of

  $1,545,007 in 2003 and 2002                    |  

2,052,207                                                                                                                                               |  

1,907,782                                                                                                                   |
| Deferred tax asset                                                                                                     | 7,813,550                                                                                                                                                       | 7,280,718                                                                                                                           |
| Loan to related party                                                                                                  | 125,000                                                                                                                                                         | 125,000                                                                                                                             |
| Other assets                                                                                                           |       524,192                                                                                                                          |        574,729                                                                                        |
| **      Total assets**                                                                             | $26,501,297                                                                                                                                                     | $27,223,494                                                                                                                         |

** **

**Liabilities And Shareholders' Equity**

 

| **Current liabilities:**                                                                                                                                                   |                                                                                                                                          |                                                                                                                                   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|
| Short-term borrowings                                                                                                                                                      | $  1,000,000                                                                                                                             | $  1,000,000                                                                                                                      |
| Current portion of long-term debt                                                                                                                                          | 1,445,128                                                                                                                                     | 1,383,192                                                                                                                              |
| Accounts payable                                                                                                                                                           | 2,390,406                                                                                                                                     | 2,654,076                                                                                                                              |
| Accrued expenses                                                                                                                                                           | 2,121,721                                                                                                                                     | 1,857,164                                                                                                                              |
| Deferred income - service contracts and other                                                                                                                              | 1,112,502                                                                                                                                     |     910,515                                                                                                             |
|      Total current liabilities                                                                                                                         | 8,069,757                                                                                                                                     | 7,804,947                                                                                                                              |
|                                                                                                                                                                       |                                                                                                                                          |                                                                                                                                   |
| Long term debt                                                                                                                                                             | 1,472,310                                                                                                                                     | 1,862,276                                                                                                                              |
| Deferred income - service contracts and other                                                                                                                              |    170,222                                                                                                                          |     206,982                                                                                                             |
|      Total liabilities                                                                                                                                 | 9,712,289                                                                                                                                     | 9,874,205                                                                                                                              |
|                                                                                                                                                                       |                                                                                                                                          |                                                                                                                                   |
| Shareholders' equity:                                                                                                                                                      |                                                                                                                                          |                                                                                                                                   |
| Common stock, $.01 par value; Authorized:  50,000,000 shares

    Shares issued and outstanding:   2003 – 11,007,857 and 2002 – 10,844,990 | 110,077                                                                                                                                       | 108,448                                                                                                                                |
| Additional paid-in capital                                                                                                                                                 | 42,159,298                                                                                                                                    | 41,891,355                                                                                                                             |
| Unearned compensation                                                                                                                                                      |                        (66,422) |                      (16,378) |
| Accumulated other comprehensive  income (loss)                                                                                                                             | (331,804)                                                                                                                                     |                      (40,464) |
| Accumulated deficit                                                                                                                                                        |                (25,082,141)                                        |                 (24,593,672)                           |
|            Total shareholders' equity                                                                                    |   16,789,008                                                                                                                             | 17,349,289                                                                                                                             |
|     **Total liabilities and shareholders' equity**                                                                                                     | $26,501,297                                                                                                                                   | $27,223,494                                                                                                                            |

_______________

The accompanying notes are an integralpart of these consolidated financial statements.

**INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(unaudited)

 

|                                 |                                                                         |
|--------------------------------------|------------------------------------------------------------------------------|
| For the three months ended March 31, |
|                                 |             2003 |             2002 |

 

| Sales of IVD systems                                          | $   584,292          | $1,134,980         |
|---------------------------------------------------------------|--------------------------------|--------------------|
| Sales of IVD supplies and services                            | 4,130,216                      | 3,991,316          |
| Sales of small instruments and supplies                       | 1,290,029                      | 1,534,957          |
| Royalties and licensing revenues                              | 129,603                        | 79,973             |
|                                                          |                                |                    |
| Net revenues                                                  | 6,134,140                      | 6,741,226          |
|                                                          |                           |               |
| Cost of goods – IVD systems                             | 806,241                        | 684,510            |
| Cost of goods - IVD supplies and services                     | 1,474,596                      | 1,521,161          |
| Cost of goods – small instruments and supplies          | 685,857                        | 724,421            |
|                                                          |                                |               |
| Cost of goods sold                                            | 2,966,694                      | 2,930,092          |
|                                                          |                           |               |
| Gross margin                                                  | 3,167,446                      | 3,811,134          |
|                                                          |                           |               |
| Marketing and selling                                         | 968,918                        | 905,145            |
| General and administrative                                    | 1,777,000                      | 1,179,809          |
| Research and development, net                                 | 1,154,024                      | 1,010,370          |
|                                                          |                           |               |
| Total operating expenses                                      | 3,899,942                      | 3,095,324          |
|                                                          |                           |               |
| Operating income (loss)                                       | (732,496)                      | 715,810            |
|                                                          |                           |               |
| Other income (expense):                                       |                           |               |
|    Interest income                                  | 13,032                         | 15,150             |
|    Interest expense                                 | (94,649)                       | (181,172)          |
|                                                          |    ____________ | ______________     |
| Income  (loss) before income taxes                            | (814,113)                      | 549,788            |
|                                                          |                                |               |
| Income tax provision (benefit)                                | (325,645)                      | 219,915            |
|                                                          |                           |               |
| Net income  (loss)                                            | $(488,468)                     | $329,873           |
|                                                          |                           |               |
| Net income (loss) per common share

 - basic             | $(0.04)                        | $0.03              |
|                                                               |                           |               |
|  - diluted                                               | $(0.04)                        | $0.03              |
|                                                          |                           |               |
| Weighted average number of common shares outstanding

- basic |  

10,953,229             |  

10,327,979 |
|  

- diluted                                             |  

10,953,229             |  

11,374,948 |

    _______________

     The accompanying notes are anintegral part of these consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

**INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(unaudited)

 

|                                                                                                                                                                                | For the three months ended March 31, |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------|--------|
|                                                                                                                                                                                | 2003                                 |   | 2002 |   |
| **Operating activities:**                                                                                                                                                           |                                 |   |   |   |
|      Net income  (loss)                                                                                                                                         | $(488,468)                           |        | $329,873 |   |
| Adjustments to reconcile net  income (loss) to net cash provided (used) by operations:                                                                                              |                                 |   |   |   |
|                                                                                                                                                                                |                                 |   |   |   |
|             Deferred  taxes                                                                                                  | (338,605)                            |        | 211,918 |   |
|             Depreciation  and amortization                                                                                   | 203,747                              |   | 257,009 |   |
|             Common  stock and stock option compensation amortization                                                         | 20,356                               |   | 18,167 |   |
|               Allowance for doubtful accounts                                                                           | (26,521)                             |        | -- |   |
|             Changes  in assets and liabilities:                                                                              |                                 |   |   |   |
|             Accounts  receivable - trade and other                                                                           | 518,400                              |   | 75,279 |   |
|             Service  contracts, net                                                                                          | 39,630                               |   | 58,013 |   |
|             Inventories                                                                                                      | (2,691)                              |        | (343,619) |  |
|             Prepaid  expenses and other current assets                                                                       | (170,095)                            |        | (327,991) |  |
|             Other  assets                                                                                                    | 13,496                               |   | (8,777) |  |
|             Accounts  payable                                                                                                | (263,670)                            |        | 208,437 |   |
|             Accrued  expenses                                                                                                | 276,870                              |   | 109,866 |  |
|                                                                                                                                                                                |                                      |   |   |   |
|                                                                                                                                                                                |                                      |   |   |   |
| Net cash  provided (used) by operating activities                                                                                                                                   | (217,551)                            |        | 588,175 |   |
|                                                                                                                                                                                |                                 |   |   |   |
| **Investing activities:**                                                                                                                                                           |                                 |   |   |   |
|             Acquisition  of property and equipment                                                                           | (519,073)                            |        | (250,305) |  |
|             Software  development costs                                                                                      | (144,425)                            |        | (288,554) |  |
|                                                                                                                                                                                |                                      |   |   |   |
| Net cash  used by investing activities                                                                                                                                              | (663,498)                            |        | (538,859) |  |
|                                                                                                                                                                                |                                 |   |   |   |
| **Financing activities:**                                                                                                                                                           |                                 |   |   |   |
|             Borrowings  under line of credit                                                                                 | 1,500,000                            |   | 2,000,000 |   |
|             Repayments  of line of credit                                                                                    | (1,500,000)                          |        | (500,000) |  |
|             Borrowings  under term loan                                                                                      | --                                   |   | 500,000 |   |
|             Repayments  of term loan                                                                                         | (66,667)                             |        | (2,425,000) |  |
|             Repayment  of notes payable                                                                                      | (291,750)                            |        | (291,750) |  |
|             Payments  of capital lease obligations                                                                           | (12,313)                             |        | (8,307) |  |
|             Issuance  of common stock and warrants for cash                                                                  |    199,172                 |   |    162,366 |   |
| Net cash  used in financing activities                                                                                                                                              |   (171,558)                     |        |   (562,691) |  |
|                                                                                                                                                                                |                                 |   |   |   |
| Net  decrease in cash and cash equivalents                                                                                                                                          | (1,052,607)                          |        | (513,375) |  |
| Cash and  cash equivalents at beginning of period                                                                                                                                   |  2,336,973                      |   | 2,312,451 |   |
|                                                                                                                                                                                |                                      |   |  |   |
| Cash and  cash equivalents at end of period                                                                                                                                         | $1,284,366                           |   | $1,799,076 |   |
|                                                                                                                                                                                |                                 |   |   |   |
| Supplemental  schedule of non-cash investing and financing activities:                                                                                                              |                                 |   |   |   |
|                      Issuance of common stock options  in exchange for services | 70,400                               |   | -- |   |
| Supplemental  disclosure of cash flow information:                                                                                                                                  |                                 |   |   |   |
|             Cash  paid for interest                                                                                          | $    60,288           |   | $    96,859 |   |
|             Cash  paid for income taxes                                                                                      | 15,699                               |   | 22,340 |   |
|                                                                                                                                                                                     |                                      |        |  |  |  |

 

______________________

The accompanying notes are anintegral part of these consolidated financial statements.

 

 

**INTERNATIONALREMOTE IMAGING SYSTEMS, INC.**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVEINCOME**

(unaudited)

 

 

 

 

|                                            | For the three months ended March 31, |
|-------------------------------------------------|--------------------------------------|
|                                            | 2003                                 |   | 2002 |   |
|                                            |                                 |   |   |   |
| Net income (loss)                               | $(488,468)                           |  | $329,873 |   |
|                                            |                                 |   |   |   |
| Unrealized losses on investments,  net of taxes | (291,340)                            |  | (64,603) |  |
|                                            |                                 |   |   |   |
| Comprehensive income (loss)                     | $(779,808)                           |  | $265,270 |   |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

__________________

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

**INTERNATIONALREMOTE IMAGING SYSTEMS, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

**1.   Formationand Business of the Company.**

 

      International Remote ImagingSystems, Inc., (collectively "IRIS" or the "Company") was incorporated inCalifornia in 1979 and reincorporated during1987 inDelaware. International Remote ImagingSystems, Inc. and its subsidiaries design, develop, manufacture and market*in vitro* diagnostic ("IVD") equipment,including IVD imaging systems based on patented and proprietary automatedintelligent microscopy ("AIM") technology, as well as special purposecentrifuges and other small instruments for automating microscopic proceduresperformed in clinical laboratories.

 

**2.   Summary of Significant AccountingPolicies.**

 

Basis of Presentation of UnauditedInterim Financial Statements:

 

      In the opinion of management, the accompanyingunaudited consolidated financial statements contain all normal recurringadjustments necessary to present fairly the financial position of the Companyas of March 31, 2003 and 2002 and the results of its operations for the threemonth periods then ended. These financial statements should be read inconjunction with the financial statements and notes included in the Company'slatest annual report on Form 10-K. Interim results are not necessarilyindicative of results for a full year.

 

Use of Estimates:

 

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

 

Principles of Consolidation:

 

      The consolidated financial statements include theaccounts of International Remote Imaging Systems, Inc. and its wholly-ownedsubsidiaries.  All significant intercompany accounts and transactions have beeneliminated in the consolidated financial statements.

 

Stock Based Compensation:

 

      The Company has adopted the disclosure only provisionsof SFAS No. 148, "Accounting for Stock-Based Compensation." SFAS 148 defines afair value based method of accounting for an employee stock option. Fair valueof the stock option is determined considering factors such as the exerciseprice, the expected life of the option, the current price of the underlying stockand its volatility, expected dividends on the stock, and the risk-free interestrate for the expected term of the option. Under the fair value based method,compensation cost is measured at the grant date based on the fair value of theaward and is recognized over the service period. Pro forma disclosures forentities that elect to continue to measure compensation cost under theintrinsic method provided by Accounting Principles Board Opinion No. 25 mustinclude the effects of all awards granted. The Company accounts for stock-basedawards to non-employees in accordance with SFAS 148. An expense is recognizedfor common stock, warrants or options issued or repriced, for services renderedby non-employees based on the estimated fair value of the security exchanged.

 

      IRIS has adopted the disclosure only provisions ofSFAS 148. If compensation expense for the stock options had been determinedusing "fair value" at the grant date for awards in the first quarter of 2003and 2002, consistent with the provisions of SFAS 148, the Company's net income(loss) and income (loss) per share would have been reduced to the pro formaamounts indicated below:

 

 

 

 

 

|                                                                                                                                           | For the Three Months							Ended March 31,              |
|------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------|
|                                                                                                                                           | 2003                                                    | 2002 |
| Net income (loss), as reported                                                                                                                 | $ (488,468)                                             | $ 329,873 |
| Add: stock-based employee compensation expense                                                                                                 |       12,214                   |      10,090 |
| Deduct: total stock-based employee compensation expense  determined under fair value based methods for all awards, net of related tax  effects |     140,488                              |      80,175 |
| Pro forma net income (loss)                                                                                                                    |    (616,742)                                  |    259,788 |
| Income (loss) per basic share as reported                                                                                                      |          (0.04) |         0.03 |
| Income (loss) per basic share pro forma                                                                                                        |          (0.06) |         0.03 |
| Income (loss) per diluted share as reported                                                                                                    |          (0.04) |         0.03 |
| Income (loss) per diluted share pro forma                                                                                                      |          (0.06) |         0.02 |

 

      The pro forma calculations above are for informationalpurposes only. Future calculations of the pro forma effects of stock optionsmay vary significantly due to changes in the assumptions described above aswell as future grants and forfeitures of stock options.

 

Recent Accounting Pronouncements:

 

 

      In December 2002, the FASB issued SFAS 148,"Accounting for Stock-Based Compensation – Transition and Disclosure – AnAmendment of FASB Statement 123". SFAS 148 amends SFAS 123, "Accounting forStock-Based Compensation", to provide alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedcompensation. In addition, SFAS 148 amends the disclosure requirements of SFAS123 to require prominent disclosures both in annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results. The Company is requiredto follow the prescribed format and provide the additional disclosures requiredby SFAS 148 in its annual financial statements for the year endedDecember 31, 2002 and must also provide thedisclosures in its quarterly reports containing condensed financial statementsfor interim periods beginning with the quarterly period endedMarch 31, 2003. The adoption of SFAS 148 did not have a material effect on the Company's financial position or results of operations. 

 

      In November 2002, the FASB issued Interpretation No.45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others," whose disclosures areeffective for financial statements issued afterDecember 15, 2002. While the Company has various guarantees included in contracts in the normal course of business, primarily in the form of warranties, these guarantees would only result in immaterial increases in future costs, but do not represent significant commitments or contingent liabilities of the indebtedness of others. 

 

      In January 2003, the FASB issued Interpretation No.46, "Consolidation of Variable Interest Entities," which requires consolidationof variable interest entities, as defined. FIN 46 is applicable to financialstatements to be issued by the Company after 2002. The Company does notcurrently have any variable interest entities, and so is not currently affectedby FIN 46.

 

 

Reclassifications:

 

      Certain reclassifications have been made to the 2002financial statements to conform to the 2003 presentation.

 

 

 

**3.   ComprehensiveIncome.**

 

      The Company's components ofcomprehensive income are net income and unrealized losses on investments.  Theincome tax effect allocated to the unrealized losses on available for salesecurities for the three months endedMarch 31, 2003 was a benefit of $194,227.

 

 

 

      The following is areconciliation of accumulated other comprehensive income balance for the threemonths endedMarch 31, 2003:

| Beginning balance     |   |  $(40,464) |
|-----------------------|--------|-----------------|
| Current period change |        |  (291,340) |
| Ending balance        |        | $(331,804)      |

 

 

**4.*  *Inventories*.***

 

      Inventoriesare carried at the lower of cost or market on a first-in first-out basis andconsist of the following:

 

|                                          |            | AtMarch 31, 2003 | AtDecember 31, 2002                            |
|------------------------------------------|------------|------------------|------------------------------------------------|
|                                     |       |             |                                           |   |
| Finished goods                           | $1,887,595 |             | $1,972,320                                     |   |
| Work-in-process                          | 186,128    |             | 167,839                                        |   |
| Raw materials, parts and  sub-assemblies | 4,285,551  |                  | 4,081,424                                      |  |
|                                     | 6,359,274  |             |        6,221,583 |   |
| Reserved for obsolescence                | (932,899)  |                  | (797,899)                                      |  |
| Net inventories                          | $5,426,375 |                  | $5,423,684                                     |  |
|                                          |            |                  |                                                |  |  |  |

 

                                                                                                                                                                                                                       

**5.    Related Party Transaction.**

** **

       InApril 2002, the Company made a $125,000 loan to Dr. John A. O'Malley, then theChairman, CEO and President of the Company (and currently, the Chairman of theBoard of the Company), in accordance with his employment agreement.  The loanbears interest at the rate of five percent per annum and has a term of fiveyears.  It is secured by 120,000 shares of the Company's stock owned by Dr.O'Malley.  The loan will be repaid firstly, from the proceeds of any futuresale of common shares of the Company by Dr. O'Malley and, secondly, at Dr.O'Malley's discretion.  At the end of the term of the loan, any remainingunpaid balance will be settled by the forfeiture by Dr. O'Malley of theremaining shares held by the Company as security. Pursuant to the agreement,Dr. O'Malley paid $1,575 of interest in the first quarter of 2003.

**6.    Short-TermBorrowings and Notes Payable**.

 

       The Company has an $8.0million credit facility with California Bank and Trust, which consists of a$500,000 term loan, a $1.0 million term loan and a $6.5 million revolving lineof credit. The $500,000 term loan is payable in 60 equal monthly installments.The $1.0 million term loan shall carry interest only for the first 12 months,followed by 48 months of equal principal payments plus interest. The $6.5million credit line matures in June 2004.  Borrowings under the line of creditare limited to a percentage of eligible receivables and inventory. The entirecredit facility bears interest at the lender's prime rate (4.25% atMarch 31, 2003), or LIBOR rate plus 2.0%

 

      AtMarch 31, 2003, the outstanding amounts under the Company's credit facility consist of $383,000 under the first term loan, $958,000 under the second term loan and $1.0 million under the revolving line of credit. An additional $2.5 million was available under the line of credit at that date.

 

      AtMarch 31, 2003, the outstanding principal balance on the unsecured Subordinated Note Payable was $1.7 million.  The note is payable in monthly installments of approximately $97,000 plus interest on the unpaid balance. The note bears interest at the prime rate (4.25% onMarch 31, 2003) plus 2.0% and matures onJuly 31, 2004.

 

**7.   Capital Stock.**

 

 

Stock and Stock Option Issuances:

 

      During the three months endedMarch 31, 2003, the Company (i) issued 162,867 shares of common stock from theexercise of options, (ii) issued options to purchase 175,000 shares of commonstock under the Company's stock option plans, (iii) issued options to purchase290,000 shares of common stock under special inducement grants and (iv)cancelled options to purchase 16,667 shares of common stock.  AtMarch 31, 2003, options to purchase 2,961,176 shares of common stock were issued and outstanding under the Company's stock options plans and special inducement grants. The outstanding options expire by the end of 2012.  The exercise price for these options ranges from $0.69 to $4.38 per share. **** AtMarch 31, 2003, there were 4,901 shares of common stock available for the granting of future options under the Company's stock option plans. 

 

Warrants:

 

      As ofMarch 31, 2003, the following warrants to purchase common stock were outstanding and exercisable: 

 

| Number of Shares    | Per Share Price   | Expiration Date                          |
|---------------------|-------------------|------------------------------------------|
|                |              |                                     |
| 853,040   | $1.90   |     July 31, 2004    |
| 50,000    | 2.13    |     October 31, 2005 |
| 45,045    | 2.22    |     October 1, 2006  |

 

**8.   IncomeTaxes.**

 

*     *The income tax provision for thethree-month period endedMarch 31, 2003 was a benefit of $325,645 as compared to an expense of $219,915 for thecomparable period last year. The income tax provision differs from the federalstatutory rate due primarily to state income taxes and permanent differencesbetween income reported for financial statement and income tax purposes.

 

      Realization of deferred taxassets associated with Net Operating Losses (NOL) and tax credit carryforwardsis dependent upon generating sufficient taxable income prior to theirexpiration.  Management believes that there is a risk that certain of these NOLand credit carryforwards may expire unused and accordingly, has established avaluation reserve against them.  Although realization is not assured for theremaining deferred tax assets, management believes it is more likely than notthat they will be realized through future taxable income or alternative taxstrategies.  However, the net deferred tax assets could be reduced in the nearterm if management's estimates of taxable income during the carryforward periodare significantly reduced or alternative tax strategies are not available.  TheCompany will continue to review its valuation allowances and make adjustments,if necessary.  Should the Company undergo an ownership change as defined inSection 382 of the Internal Revenue Code, the Company's NOL generated prior tothe ownership change would be subject to an annual limitation.  If thisoccurred, a further adjustment of the valuation allowance would be necessary.

 

**9.   Earnings Per Share (EPS).**

 

      The computation of per share amounts for the threemonths endedMarch 31, 2003 and2002 is based on the average number of common shares outstanding for theperiod.  Options and warrants to purchase 3,909,261 and 360,400 shares ofcommon stock outstanding during the three months endedMarch 31, 2003 and 2002, respectively, were notconsidered in the computation of diluted EPS because their inclusion would havebeen antidilutive.

 

      The following is a reconciliation of shares used incomputing basic and diluted earnings per share amounts for the three monthsendedMarch 31, 2003 and 2002.

 

|                                                                                                                                                            | 2003       | 2002                                               |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|
|                                                                                                                                                                 |            |
| Weighted average number of shares  - basic                                                                                                                      | 10,953,229 | 10,327,979                                         |
|                                                                                                                                                            |       |                                               |
| Effects of Dilutive Securities

      Options

      Warrants

      Preferred Stock | _________  | 527,893

268,056

     251,020 |
|                                                                                                                                                            |       |                                               |
| Weighted average number of shares - diluted                                                                                                                     | 10,953,229 | 11,374,948                                         |

 

 

 

**10.  Segment and Geographic Information.**

 

      The Company's operations areorganized on the basis of products and related services and under SFAS No.131operates in two segments: (1) urinalysis and (2) small instruments.

 

      The urinalysis segmentdesigns, develops, manufactures and markets IVD imaging systems based onpatented and proprietary AIM technology for automating microscopic proceduresfor urinalysis.  The segment also provides ongoing sales of supplies andservice necessary for the operation of installed urinalysis workstations. IntheUnited States, these products are sold throughour direct sales force; internationally, these products are sold throughdistributors.

 

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

 

      The accounting policies of thesegments are the same as those described in the "Summary of SignificantAccounting Policies" included in the Company's report on Form 10-K for the yearendedDecember 31, 2002. The Company evaluates the performance of its segments and allocates resources to them based on earnings before income taxes, excluding corporate charges ("Segment Profit"). 

 

 

      The tables below present information about reportedsegments for the three month periods endedMarch 31, 2003 and 2002:

 

     Three Months EndedMarch 31, 2003:

 

|                             | Urinalysis  |  

SmallInstruments | Unallocated  CorporateExpenses        | Total       |
|----------------------------------|-------------|--------------------------|---------------------------------------|-------------|
|                             |        |                     |                                  |        |
| Revenues                         | $4,844,111  | $1,290,029               | --                                    | $6,134,140  |
|                             |        |                     |                                  |        |
| Interest  income                 | $12,777     | 255                      | --                                    | $13,032     |
|                             |        |                     |                                  |        |
| Interest  expense                | $2,334      | --                       | $92,315                               | $94,649     |
|                             |        |                     |                                  |        |
| Depreciation  and amortization   | $181,567    | $22,234                  | $20,302                               | $224,103    |
|                             |        |                     |                                  |        |
| Segment  profit (loss)           | $221,766    | $206,800                 |      $(1,242,679) | $(814,113)  |
|                             |        |                     |                                  |        |
| Segment  assets                  | $15,696,945 | $1,992,139               | $8,812,213                            | $26,501,297 |
|                             |        |                     |                                  |        |
| Investment in  long-lived assets | $638,853    | $24,645                  | --                                    | $663,498    |

 

     Three Months EndedMarch 31, 2002:

 

|                             | Urinalysis  |  

Small Instruments | Unallocated  CorporateExpenses                                               | Total       |
|----------------------------------|-------------|---------------------------|------------------------------------------------------------------------------|-------------|
|                             |        |                      |                                                                         |        |
| Revenues                         | $5,206,269  | $1,534,957                | --                                                                           | $6,741,226  |
|                             |        |                      |                                                                         |        |
| Interest  income                 | $14,886     | 264                       | --                                                                           | $15,150     |
|                             |        |                      |                                                                         |        |
| Interest  expense                | $1,564      | --                        | $179,608                                                                     | $181,172    |
|                             |        |                      |                                                                         |        |
| Depreciation  and amortization   | $237,700    | $20,764                   | $16,712                                                                      | $275,176    |
|                             |        |                      |                                                                         |        |
| Segment  profit (loss)           | $867,231    | $428,608                  |            $(746,051) | $549,788    |
|                             |        |                      |                                                                         |        |
| Segment  assets                  | $15,646,673 | $2,299,764                | $8,680,336                                                                   | $26,626,773 |
|                             |        |                      |                                                                         |        |
| Investment  in long-lived assets | $530,870    | $7,989                    | --                                                                           | $538,859    |
|                             |        |                      |                                                                         |        |

 

 

      Long-lived assets were alllocated in theUnited  States andtotaled $6,044,072 atMarch 31, 2003, and $5,567,430 atDecember 31, 2002.

 

** **

**Item 2.  Management's Discussion andAnalysis of Financial Condition and Results of Operations**

 

**Overview**

 

      We generate revenues primarilyfrom sales of our urinalysis workstations, an*invitro* diagnostic, or IVD, imaging system based on our patented andproprietary AIM technology, and the related supplies and service required tooperate this workstation.  We also earn revenues from sales of ancillary linesof small instruments and supplies.

 

      We make significantinvestments in research and development for new products and enhancements toexisting products.  We fund our research and development primarily frominternal sources, but we also receive partial funding from time to time undergrants from the National Institute of Health and joint development projectswith third parties. 

 

      The following table summarizestotal product technology expenditures for the periods indicated:

 

 

|                                                                                                            |   | Three Months Ended

March 31, |
|-----------------------------------------------------------------------------------------------------------------|--------|-------------------------------|
|                                                                                                            |        |                               | 2003 | 2002 |
|                                                                                                            |   |                          |   |   |
| Research and development expense, net                                                                           |   |                          | $1,154,000 | $1,010,000 |
| Capitalized software development  costs                                                                         |   |                          | 144,000 | 289,000 |
| Reimbursed costs for research and

   development grants and contracts                                |        |                               | 174,000 | 290,000 |
|  

Total product technology expenditures            |        |                               | $1,472,000 | $1,589,000 |

 

           

**Resultsof Operations**

** **

***      Comparisonof Quarter Ended***March 31, 2003 to Quarter Ended March 31, 2002

 

      Net revenues for the quarter ended March 31, 2003 decreased to $6.1 million from $6.7 million last year, a decrease of 9%.  Sales of IVD imaging systems decreased to  $584,000 from $1.1 million in the same period last year, a decrease of $551,000 or 49%.  This decline in IVD imaging system sales was expected and reflects a slowdown in orders for the current models of our urinalysis workstation as customers await the availability of our new upgraded iQ ä 200 System.  The iQ200 is expected to be available for sale by the end of the second quarter of 2003. The failure to make a successful and timely transition to this upgraded model would have a material and adverse affect on future IVD imaging system sales. This is an inherent risk in any major upgrade to products in our industry.

  

Sales of IVD imaging system suppliesand services increased to $4.1 million from $4.0 million, an increase of$139,000 or 3% over the same period last year, primarily due to the largerinstalled base of urinalysis workstations.  Sales of small instruments andsupplies decreased $245,000 to $1.3 million, a decrease of 16%.  The decline isdue primarily to decreased sales to two OEM customers.  Royalties and licensingrevenues increased to $130,000 from $80,000 in the comparable period from theprior year.

 

      Revenuesfrom the urinalysis segment totaled $4.8 million in the current period ascompared to $5.2 million in the comparable period last year, a decrease of$362,000 or 7%.  This decrease is due to lower systems sales partially offsetby higher supplies and services sales, as explained in the precedingparagraphs.   Revenues from the small instruments segment decreased $245,000from the comparable period last year to $1.3 million.  This decline is dueprimarily to decreased sales of small instruments and supplies to two OEMcustomers.

 

      Cost of goods for IVD systems as a percentage of salesof IVD imaging systems totaled 138% in the current period as compared to 60% inthe comparable period from last year. Lower production levels in the currentperiod provided a smaller volume of product over which production overhead,which included significant start-up costs associated with the iQ200 System,could be absorbed. Other factors include low margin international sales ofrefurbished instruments; there were no international instrument sales in theyear ago period, and an increase in our reserve for inventory obsolescence by13% in the current period.  Cost of goods for IVD imaging system supplies andservices as a percentage of sales of such products was 36% for the currentperiod as compared to 38% in the same period last year.  This decrease isprimarily due to efficiencies in the manufacture of chemical reagents resultingfrom the improvements made to the production facilities over the past year.Cost of goods for small instruments and supplies as a percentage of sales ofsuch products totaled 53% for the current period, as compared to 47% in thefirst quarter of last year.  This increase is due primarily to increased costsresulting from smaller production runs in the current period. The aggregategross margin totaled 52% for the quarter endedMarch 31, 2003 as compared to 57% in thecomparable period of the prior year.

 

      Cost of goods sold as a percentage of revenues fromthe urinalysis segment totaled 47%, as compared to 42% in the first quarter oflast year.  Cost of goods for small instruments as a percentage of revenuestotaled 53% in the current period, as compared to 47% in the first quarter ofthe prior year. 

 

      Marketing and selling expenses totaled $969,000,compared to $905,000 for the comparable prior year period, an increase of$64,000, or 7%.  This increase is due primarily to the addition of a seniorsales management person as well as increased marketing efforts for ourproducts.  Marketing and selling expenses as a percentage of net revenues were16% in the quarter endedMarch 31, 2003, as compared to 13% in the same period last year. 

 

      General and administrative expenses were $1.8 million,compared to $1.2 million in the comparable period in the prior year, anincrease of $597,000 or 51%.  The increase is due primarily to non-recurringcosts of $400,000 associated with the change in the Company's CEO, and includes$285,000 accrual for retirement benefits, duplicate salaries during thetransition, and relocation costs. The balance of approximately $200,000 was dueto increased legal and auditing fees, insurance premiums, investor relationsand Board related expenses.  General and administrative expenses for the periodas a percentage of net revenue were 29% as compared to 18% in the same periodin the prior year.

 

      Net research and development expenses were $1.2million for the quarter endedMarch 31, 2003, up $144,000 or 14% from the level of the first quarter of last year.  Net research and development expenses as a percentage of revenues were 19% in the quarter endedMarch 31, 2003, as compared to 15% in the same period in the prior year.  Total product technology expenditures, including capitalized software development costs and reimbursed costs under research and development grants and contracts, were down $117,000 from the prior year to $1.5 million.  This decline was due primarily to a temporary reduction in the amount of work done under research and development grants and contracts. The continued high level of total product technology expenditures is due primarily to a major project begun in 1999 to improve our urinalysis workstation product line. We believe that this project is important to maintaining our competitive position in the urinalysis market; failure to complete this project on schedule could have a material and adverse effect on our business.  We expect our net research and development expenses to peak in the second quarter and then commence a gradual decline through the end of the year. 

 

      For the quarter, the Company had a loss fromoperations of $732,000 as compared to a net income of $716,000 for thecomparable quarter of the prior year, primarily as a result of lower profitmargins and higher operating expenses in the current period.

 

      Interest expense decreased to$95,000 in the quarter endedMarch 31, 2003 from $181,000 in the comparablequarter of the prior year as a result of lower interest rates and reducedindebtedness.

 

      Forthe quarter ended March 31, 2003, urinalysis segment profitsdecreased to $222,000 from $867,000 in the comparable quarter of the prioryear.  This decrease is attributable to lower profit margins and higheroperating expenses in the current quarter.  Segment profits for the smallinstruments segment totaled $207,000, as compared to $429,000 in the comparablequarter of the prior year.  The decrease results from lower sales volume inthat segment.  Unallocated corporate expenses totaled $1.2 million in thecurrent period as compared to $746,000 in the same period last year.  The increase in 2003 is due to thetransitional and other expenses detailed previously.

 

      The income tax provision forthe quarter endedMarch 31, 2003 was abenefit of $326,000, as compared to an expense of $220,000 in the quarter endedMarch 31, 2002.  The change is a function of thetaxable income or loss.

 

      Net income decreased to a loss of $488,000, or $0.04per diluted share, for the quarter endedMarch 31, 2003, as compared to a profit of$330,000, or $0.03 per diluted share, for the same period of the prior year.

 

 

 

**ContractualObligations and Contingent Liabilities and Commitments**

** **

The following table aggregates theCompany's expected contractual obligations and commitments subsequent toMarch 31, 2003:

 

|                               | **Payments Due by Period (in Thousands)** |
|------------------------------------|-------------------------------------------|
| Contractual Obligations            | **2003**                                  | **2004** | **2005** | **2006** | **2007** | **Totals** |
|                               |                                      |   |   |   |   |   |
| Long term debt                     | $1,138                                    | $1,000 | $350 | $350 | $ 60 | $2,898 |
| Capital lease commitments          | $     46              | $     61 | $  40 | $  18 | $   3 | $   168 |
| Operating lease commitments        | $   410                         | $   523 | $462 | $428 | -- | $1,823 |
|                               |                                      |   |   |   |   |   |
| Total Contractual cash commitments | $1,594                                    | $1,584 | $852 | $796 | $ 63 | $4,889 |
|                               |                                      |   |   |   |   |   |

 

 

***     ***

**Liquidityand Capital Resources**

 

     Cash and cash equivalents decreasedto $1.3 million atMarch 31, 2003 from $2.3 million atDecember 31, 2002.  Operating activities resulted in a net use of cash in the amount of $218,000 for the three months endedMarch 31, 2003 as compared to net cash provided of$588,000 in the comparable period last year.  This decrease in cash provided byoperations is due primarily to the net loss experienced in the currentquarter.  Our primary source of liquidity is cash from operations, whichdepends on sales of our urinalysis workstations. We plan to begin selling theiQ200, our new, significantly upgraded model on a new operating platform by theend of the second quarter of 2003.  The failure to make a successful and timelytransition to this upgraded model would have a material and adverse affect onworkstation sales, and, consequently, our liquidity. This is an inherent riskin any major upgrade to products in our industry.

 

      During the first quarter of 2003, our working capitaldecreased by $2.0 million. This was primarily caused by the $1.0 milliondecrease in cash discussed above, along with a $366,000 decrease in accountsreceivable, which was consistent with our reduced revenues, and a $485,000reduction in the market value of our investment in Applied Imaging Corporation,which was primarily caused by weakness and volatility in the stock market.

 

      Cash used by investingactivities totaled $663,000 for the three months endedMarch 31, 2003, as compared to $539,000 in the same period last year.  The increase is due to the increase in expenditures for property and equipment as part of our efforts to expand and upgrade our facilities, which more than offset the reduction in software development costs in the current period.

     

      Net cash used by financingactivities totaled $172,000 and consisted primarily of principal payments madeon the subordinated note, and net principal payments made on the term loans andrevolving line of credit under our credit facility, partially offset by fundsreceived from the exercise of stock options.  As ofMarch 31, 2003, we owed $1.3 million on the term loans and $1.0 million on the revolving line of credit and were eligible to borrow an additional $2.5 million under the revolving credit line. 

 

      We have an $8.0 million credit facility withCalifornia Bank and Trust which consists of a $500,000 term loan, a $1.0million term loan and a $6.5 million revolving line of credit.  The $500,000term loan is payable in 60 equal monthly installments.  The $1.0 million termloan carries interest only for the first 12 months, followed by 48 months ofequal principal payments plus interest.  The $6.5 million credit line maturesin June 2004.  Borrowings under the line of credit are limited to a percentageof eligible receivables and inventory.  The entire credit facility bearsinterest at the lender's prime rate, or the LIBOR rate plus 2.0%.

 

      We expect to continue to incur high levels of researchand development expenditures in 2003.  We plan to fund these expendituresprimarily with cash generated from operations.

       

      We reduced our outstandingdebt by more than $300,000 in the first three months of 2003. Our scheduledprincipal payments total $1.5 million during the next twelve months. We believethat our current cash on hand, together with cash generated from operations andcash available under the credit facility will be sufficient to fund normaloperations and pay principal and interest on outstanding debt for at least ayear.

 

 

 

**Critical Accounting Policies and Estimates**

 

            Our critical accounting policies uponwhich our financial position and results of operations depend are those relatedto revenue recognition, inventory valuation, and income tax assets andliabilities. We summarize our most critical accounting policies below.

 

**Revenue recognition ** Werecognize revenue when goods are shipped and title passes to the customerprovided that: there are no uncertainties regarding customer acceptance;persuasive evidence of an arrangement exists; the sales price is fixed ordeterminable; and collectibility is probable. Revenue is recognized net of anallowance for discounts when the sale is recorded.

 

IRISderives revenue from the sale of IVD imaging systems, sales of supplies andservices for its IVD imaging systems and sales of small instruments and relatedsupplies. For sales of supplies and small instruments, IRIS generallyrecognizes product revenues once all of the following conditions have been met:a) an authorized purchase order has been received in writing, b) customercredit worthiness has been established, and c) delivery of the product based onshipping terms.

 

       Certainof IRIS's domestic IVD system sales generally require installation and trainingto be performed.  Management believes that installation and training is notessential to the functionality of the product and accordingly, the Companyrecognizes revenue on delivery based on shipping terms, provided title hastransferred, collectibility of the resulting receivable is probable, theCompany has received an authorized purchase order and the price is fixed anddeterminable.  The estimated fair value of installation and training isdeferred and recognized as these services are performed.  Sales of IVD systemsinternationally are recognized on delivery based on shipping terms, providedcollectibility of the resulting receivable is probable, the Company hasreceived an authorized purchase order and the price is fixed and determinable.

 

            IRIS recognizes service revenues ratablyover the term of the service period, which typically ranges from twelve tosixty months. Payments for service contracts are generally made in advance.Deferred revenue represents the revenues to be recognized over the remainingterm of the service contracts.

 

**Inventory valuation**We value inventories at the lower of cost or market value. Inventory costs arebased on standard costs, which are updated periodically and supported by actualcost data. We include materials, labor and manufacturing overhead in the costof inventories. In determining inventory market values, we give substantialconsideration to the expected product selling price based on historicalrecovery rates. In determining our expected selling prices, we consider variousfactors including estimated quantities of slow-moving inventory by reviewingon-hand quantities, outstanding purchase obligations and forecasted sales. Wethen estimate expected selling prices based on our historical recovery rates forsale of slow-moving inventory through various channels and other factors, suchas market conditions and current customer preferences. Our estimates may differfrom actual results due to the quantity and mix of products in inventory,customer preferences and economic conditions.

 

**Income tax assets and liabilities**.In establishing our deferred income tax assets and liabilities, we makejudgments and interpretations based on enacted tax laws and published taxguidance that are applicable to our operations. We record deferred tax assetsand liabilities and evaluate the need for valuation allowances to reduce thedeferred tax assets to realizable amounts. The likelihood of a material changein our expected realization of these assets is dependent on future taxableincome, our ability to use tax credit carryforwards and the effectiveness ofour tax planning strategies in the various relevant jurisdictions. We are alsosubject to examination of our income tax returns for multiple years by theInternal Revenue Service and other tax authorities. We periodically assess thelikelihood of adverse outcomes resulting from these examinations to determinethe adequacy of our provision for income taxes. Changes to our income taxprovision or in the valuation of the deferred tax assets and liabilities mayaffect our annual effective income tax rate.

 

 

 

 

**Inflation**

 

      We do not foresee any materialimpact on our operations from inflation.

 

**HealthcareReform Policies**

 

      In recent years, an increasingnumber of legislative proposals have been introduced or proposed in Congressand in some state legislatures that would effect major changes in thehealthcare system, nationally, at the state level or both.  Future legislation,regulation or payment policies of Medicare, Medicaid, private health insuranceplans, health maintenance organizations and other third-party payors couldadversely affect the demand for our current or future products and our abilityto sell our products on a profitable basis.  Moreover, healthcare legislationis an area of extensive and dynamic change, and we cannot predict futurelegislative changes in the healthcare field or their impact on our business.

 

**We May Face Interruption of Production and ServicesDue to Increased Security Measures in Response to Terrorism**

** **

      Our business depends on the free flow of products andservices through the channels of commerce. Recently, in response to terrorists'activities and threats aimed at theUnited States, transportation, mail, financial and other serviceshave been slowed or stopped altogether.  Further delays or stoppages intransportation, mail, financial or other services could have a material adverseeffect on our business, results of operations and financial condition.Furthermore, we may experience an increase in operating costs, such as costsfor transportation, insurance and security as a result of the activities andpotential activities. We may also experience delays in receiving payments frompayers that may have been affected by the terrorist activities and potentialactivities and any economic downturn could adversely impact our results ofoperations, impair our ability to raise capital or otherwise adversely affectour ability to grow our business.

 

**Forward-LookingStatements**

 

      This Quarterly Report on Form10-Q contains forward-looking statements, which reflect our current views aboutfuture events and financial results.  We have made these statements in relianceon the safe harbor created by the Private Securities Litigation Reform Act of1995.  Forward-looking statements include our views on future financialresults, financing sources, product development, capital requirements, marketgrowth and the like, and are generally identified by phrases such as"anticipates," "believes," "estimates,""expects," "intends," "plans" and similar words. Forward-looking statements are merely predictions and therefore inherentlysubject to uncertainties and other factors which could cause the actual resultsto differ materially from the forward-looking statement.  These uncertaintiesand other factors include, among other things,

 

·     unexpectedtechnical and marketing difficulties inherent in major product developmentefforts such as our current project to improve our urinalysis workstationproduct line,

·     thepotential need for changes in our long-term strategy in response to futuredevelopments,

·     futureadvances in diagnostic testing methods and procedures, as well as potentialchanges in government regulations and healthcare policies, both of which couldadversely affect the economics of the diagnostic testing procedures automatedby our products,

·     rapidtechnological change in the microelectronics and software industries, and

·     increasingcompetition from imaging and non-imaging based in-vitro diagnostic products.

 

      We have attempted to identifyadditional significant uncertainties and other factors affectingforward-looking statements in Exhibit 99 to our 2002 Annual Report on Form10-K.  Stockholders should understand that the uncertainties and other factorsidentified in this Quarterly Report and in Exhibit 99 to the Annual Report arenot a comprehensive list of all the uncertainties and other factors which mayaffect forward-looking statements.  We do not undertake any obligation toupdate or revise any forward-looking statements or the list of uncertaintiesand other factors which could affect those statements.

 

** **

**Item3.  Quantitative And Qualitative Disclosures About Market Risk.**

 

      There was no material changein the Company's exposure to market risk onMarch 31, 2003 as compared to its market riskexposure onDecember 31, 2002.  See "Management's Discussion and Analysis of Financial Condition and Results of Operations – Market Risk" in our Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

**Item 4. Controls and Procedures.**

            The Company maintains controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC and to approve, summarize and disclose this information within the time periods specified in the rules of the SEC. The Company's Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining these procedures, and, as required by the rules of the SEC, evaluate their effectiveness. Based on their evaluation of the Company's disclosure controls and procedures which took place as of a date within 90 days of the filing date of this report, the Chief Executive and Chief Financial Officers believe that these procedures are adequate and effective to ensure that the Company is able to collect, process and disclose the information it is required to disclose in the reports it files with the SEC within the required time periods. 

 

Changes in Internal Controls 

  

            The Company maintains a system of internal controls designed to provide reasonable assurance that transactions are executed in accordance with management's general or specific authorization; transactions are recorded as necessary (1) to permit preparation of financial statements in conformity with generally accepted accounting principles, (2) to maintain accountability for assets, and (3) to ensure that access to assets is permitted only in accordance with management's general or specific authorization; and the recorded accountability for access is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 

  

Since the date of the most recent evaluation of the Company's internal controls by the Chief Executive Officer and Chief Financial Officers, there have been no significant changes in such controls or in other factors that could have significantly affected those controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 

 

** **

** **

**PART II**

**OTHERINFORMATION**

 

**Item 1.  Legal Proceedings.**

 

      We are not presently involvedin any litigation.

 

 

**Item6.  Exhibits And Reports On Form 8-K.**

 

      (a) Exhibits

 

| ExhibitNumber | Description                                                                                         | Reference

Document |
|---------------|-----------------------------------------------------------------------------------------------------|---------------------|
| 3.1(a)        | Certificate of  Incorporation, as amended                                                           | (1)                 |
| 3.1(b)        | Certificate of  Designations of Series A Convertible Preferred Stock                                | (2)                 |
| 3.1(c)        | Certificate of  Designations of Series B Callable Preferred Stock                                   | (3)                 |
| 3.1(d)        | Certificate of  Designations, Preferences and Rights of Series C Preferred Stock                    | (4)                 |
| 3.1(e)        | Certificate of  Amendment of Certificate of Incorporation                                           |                |
| 3.2           | Restated Bylaws                                                                                     | (5)                 |
| 4.1           | Specimen of  Common Stock Certificate                                                               | (6)                 |
| 4.2           | Certificate of  Designations of Series A Convertible Preferred Stock                                | (2)                 |
| 4.3           | Certificate of  Designations of Series B Callable Preferred Stock                                   | (3)                 |
| 4.4           | Certificate of  Designations, Preferences and Rights of Series C Preferred Stock                    | (4)                 |
| 99.1          | Statement Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 By Principal Executive Officer |                |
| 99.2          | Statement Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 By Principal Financial Officer |                |

 

      Exhibits followed by a number in parenthesis areincorporated by reference to the similarly numbered Company document citedbelow: 

 

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

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

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

(4)     Current Report on Form 8-K dated January 26, 2000.

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

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

 

      (b) Reports on Form 8-K

 

               The Company did not file any reports on Form8-K during the quarter ended March 31, 2003.

 

**SIGNATURE**

 

      Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

Date:  May 9, 2003 

                                                                                      INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. 

 

 

                        By: /s/ John Caloz                               

      John Caloz

                              CorporateVice President, Finance

                              AndChief Financial Officer

**StatementPursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

**By**

**PrincipalExecutive Officer**

**Regarding Factsand Circumstances Relating to Exchange Act Filings**

 

I, Kshitij Mohan, certify that: 

1.  I have reviewed the10-Q of International Remote Imaging Systems, Inc. for the first quarter ended March 31, 2003; 

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 

4.  The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: 

a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; 

b)  evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 60 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 

c)  presented in this quarterly annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 

5.  The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): 

a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. 

6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 

Date:  May 9, 2003 

/s/ Kshitij Mohan                                              

Kshitij Mohan 

President and Chief Executive Officer 

 

**StatementPursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

**By**

**PrincipalFinancial Officer**

**Regarding Factsand Circumstances Relating to Exchange Act Filings**

I,John Y. Caloz, certify that:

1. I have reviewed the10-Q of International Remote Imaging Systems, Inc. for thefirst quarter ended March 31, 2003;

2. Based on my knowledge, this report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report; 

3. Based on my knowledge, the financial statements, and other financial informationincluded in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report; 

4. The registrant's other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)  designed such disclosure controls and proceduresto ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

b)  evaluated the effectiveness of the registrant'sdisclosure controls and procedures as of a date within 60 days prior to thefiling date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

c)  presented in this quarterly annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on ourmost recent evaluation, to the registrant's auditors and the audit committee ofregistrant's board of directors (or persons performing the equivalentfunction):

a)  all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant'sability to record, process, summarize and report financial data and haveidentified for the registrant's auditors any material weaknesses in internalcontrols; and

b)  any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant'sinternal controls.

6.The registrant's other certifying officer and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

Date: May 9, 2003 

 /s/ John Y. Caloz                                             

                                                                       John Y. Caloz 

            Corporate VicePresident, Finance, Chief Financial Officer and Secretary

 

 

 

 

**SIGNATURE**

 

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

 

 

Date: May 9, 2003

                                                                                     INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

 

 

 

                      By:  _________________________________

                             JohnY. Caloz

                             CorporateVice President, Finance,

                              ChiefFinancial Officer and Secretary