##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



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FORM 10-Q

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

|                                         |  |                               
|---------------------------------------- |  | ------------------------------
|For the quarter ended
September 30, 2002 |  | Commission File No.
No. 1-9767

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

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

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

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

The registrant had 10,841,657 shares of common stock outstanding as of
October 21, 2002.





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TABLE OF CONTENTS



|                             |                                                                                               |                                                 |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION
|                             | Item 1. Consolidated Financial Statements                                                    
|                             |                                                                                               | CONSOLIDATED BALANCE SHEETS                    
|                             |                                                                                               | CONSOLIDATED STATEMENTS OF INCOME              
|                             |                                                                                               | CONSOLIDATED STATEMENTS OF INCOME              
|                             |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS          
|                             |                                                                                               | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|                             |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     
|                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                             | Item 3. Quantitative And Qualitative Disclosures About Market Risk.                          
|                             | Item 4. Disclosure Controls and Procedures                                                   
|PART II OTHER INFORMATION   
|                             | Item 1. Legal Proceedings.                                                                   
|                             | Item 6. Exhibits And Reports On Form 8-K.                                                    
|SIGNATURE                   
|EXHIBIT INDEX               
|EXHIBIT 99.1                
|EXHIBIT 99.2                



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##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

INDEX TO FORM 10-Q

Three and Nine Months Ended September 30, 2002

|                               |                                                                                                |                                                 |  |    |      |  | 
|------------------------------ | ---------------------------------------------------------------------------------------------- | ----------------------------------------------- |  | -- | ---- |  | 
|                               |                                                                                                |                                                 |  |    | Page
|                               |                                                                                                |                                                 |  |    |     
|PART I  FINANCIAL INFORMATION |                                                                                                |                                                 |  |   
|                               | Item 1                                                                                        | Consolidated Financial Statements               |  |    |      | 
|                               |                                                                                                | Consolidated Balance Sheets                     |  |    | 2    | 
|                               |                                                                                                | Consolidated Statements of Income               |  |    | 3    | 
|                               |                                                                                                | Consolidated Statements of Cash Flows           |  |    | 5    | 
|                               |                                                                                                | Consolidated Statements of Comprehensive Income |  |    | 6    | 
|                               |                                                                                                | Notes to Consolidated Financial Statements      |  |    | 7    | 
|                               | Item 2  Managements Discussion and Analysis of
Financial Condition and Results of Operations |                                                 |  | 13 |     
|                               | Item 3  Quantitative and Qualitative Disclosure
About Market Risk                             |                                                 |  | 19 |     
|                               | Item 4  Disclosure Controls and Procedures                                                    |                                                 |  | 19 |     
|PART II  OTHER INFORMATION    |                                                                                                |                                                 |  |   
|                               | Item 1  Legal Proceedings                                                                     |                                                 |  | 19 |     
|                               | Item 6  Exhibits and Reports on Form 8-K                                                      |                                                 |  |    |     
|                               | (a) Exhibits                                                                                   |                                                 |  | 20 |     
|                               | (b) Reports on Form 8-K                                                                        |                                                 |  | 20 |     
|                               | SIGNATURE                                                                                      |                                                 |  | 20 |     

1



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##### Table of Contents






PART I
FINANCIAL INFORMATION




Item 1. Consolidated Financial Statements




INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS

Assets

|                                                                                                              |                                                  |                                            |                            |   |            |                  |             |                 |            |            |  | 
|------------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------ | -------------------------- | - | ---------- | ---------------- | ----------- | --------------- | ---------- | ---------- |  | 
|                                                                                                              |                                                  |                                            |                            |   |            | At September 30, |             | At December 31,
|                                                                                                              |                                                  |                                            |                            |   |            | 2002             |             | 2001           
|                                                                                                              |                                                  |                                            |                            |   |            |                  |             |                
|                                                                                                              |                                                  |                                            |                            |   |            | (unaudited)      |             |                 |            |           
|Current assets:                                                                                               |                                                  |                                            |                            |   |            |                  |             |                
|Cash and cash equivalents                                                                                     |                                                  | $                                          | 1,792,510                  |   |            | $                | 2,312,451   |                
|Accounts receivable, net of allowance for doubtful
accounts of $230,360 in 2002 and $286,127 in 2001          |                                                  |                                            | 4,652,516                  |   |            |                  | 4,838,252   |                
|Inventories                                                                                                   |                                                  |                                            | 5,279,470                  |   |            |                  | 5,578,139   |                
|Prepaid expenses and other current assets                                                                     |                                                  |                                            | 351,754                    |   |            |                  | 268,348     |                
|Investments available for sale                                                                                |                                                  |                                            | 763,034                    |   |            |                  | 1,036,648   |                
|Deferred tax asset                                                                                            |                                                  |                                            | 1,240,382                  |   |            |                  | 1,568,466   |                
|                                                                                                              |                                                  |                                            |                            |   |            |                  |             |                
|                                                                                                              |                                                  | Total current assets                       |                            |   | 14,079,666 |                  |             |                 | 15,602,304 |           
|Property and equipment, at cost, net of accumulated depreciation
of $5,073,814 in 2002 and $4,638,676 in 2001 |                                                  |                                            | 2,557,611                  |   |            |                  | 1,666,226   |                
|Purchased intangibles, net of accumulated amortization
of $194,197 in 2002 and 2001                           |                                                  |                                            | 188,911                    |   |            |                  | 188,911     |                
|Software development costs, net of accumulated amortization of
$1,545,007 in 2002 and $1,532,011 in 2001      |                                                  |                                            | 1,738,049                  |   |            |                  | 1,146,204   |                
|Deferred tax asset                                                                                            |                                                  |                                            | 7,280,718                  |   |            |                  | 7,280,718   |                
|Loan to related party                                                                                         |                                                  |                                            | 125,000                    |   |            |                  |            |                
|Other assets                                                                                                  |                                                  |                                            | 634,466                    |   |            |                  | 618,677     |                
|                                                                                                              |                                                  |                                            |                            |   |            |                  |             |                
|                                                                                                              |                                                  | Total assets                               |                            | $ | 26,604,421 |                  |             | $               | 26,503,040 |           
|                                                                                                              |                                                  |                                            |                            |   |            |                  |             |                
|Liabilities And Shareholders Equity                                                                         
|Current
liabilities:                                                                                          |                                                  |                                            |                            |   |            |                  |             |                
|Short-term borrowings                                                                                         |                                                  | $                                          | 1,000,000                  |   |            | $                |            |                
|Current portion of long-term debt                                                                             |                                                  |                                            | 1,300,423                  |   |            |                  | 1,993,783   |                
|Accounts payable                                                                                              |                                                  |                                            | 1,728,416                  |   |            |                  | 2,295,637   |                
|Accrued expenses                                                                                              |                                                  |                                            | 1,977,937                  |   |            |                  | 1,792,829   |                
|Deferred income  service contracts and other                                                                 |                                                  |                                            | 999,742                    |   |            |                  | 883,819     |                
|                                                                                                              |                                                  |                                            |                            |   |            |                  |             |                
|                                                                                                              |                                                  | Total current liabilities                  |                            |   | 7,006,518  |                  |             |                 | 6,966,068  |           
|Long term debt                                                                                                |                                                  |                                            | 2,226,341                  |   |            |                  | 3,254,801   |                
|Deferred income  service contracts and other                                                                 |                                                  |                                            | 201,620                    |   |            |                  | 317,416     |                
|                                                                                                              |                                                  |                                            |                            |   |            |                  |             |                
|                                                                                                              |                                                  | Total liabilities                          |                            |   | 9,434,479  |                  |             |                 | 10,538,285 |           
|Shareholders equity:                                                                                         |                                                  |                                            |                            |   |            |                  |             |                
|Preferred stock, $.01 par value; Authorized: 3,000,000 shares;                                                |                                                  |                                            |                            |   |            |                  |             |                
|                                                                                                              | Callable Series B shares issued and outstanding: |                                            |                            |   |            |                  |             |                 |           
|                                                                                                              | 2001 - 205,000                                   |                                            |                            |   |            |                  |             |                 |           
|                                                                                                              | 2002 - none                                      |                                            |                            |  |            |                  |             | 2,050           |           
|Common stock, $.01 par value; Authorized: 50,000,000 shares                                                   |                                                  |                                            |                            |   |            |                  |             |                
|Shares
issued and outstanding: 2002  10,836,394 and 2001  10,264,926                                        |                                                  |                                            | 108,362                    |   |            |                  | 102,648     |                
|Additional paid-in capital                                                                                    |                                                  |                                            | 41,874,975                 |   |            |                  | 41,311,847  |                
|Unearned compensation                                                                                         |                                                  |                                            | (16,718                    | ) |            |                  | (54,343     | )              
|Accumulated other comprehensive income                                                                        |                                                  |                                            | (91,333                    | ) |            |                  | 72,835      |                
|Accumulated deficit                                                                                           |                                                  |                                            | (24,705,344                | ) |            |                  | (25,470,282 | )              
|                                                                                                              |                                                  |                                            |                            |   |            |                  |             |                
|                                                                                                              |                                                  |                                            | Total shareholders equity |   |            | 17,169,942       |             |                 |            | 15,964,755 | 
|                                                                                                              |                                                  |                                            |                            |   |            |                  |             |                
|                                                                                                              |                                                  | Total liabilities and shareholders equity |                            | $ | 26,604,421 |                  |             | $               | 26,503,040 |           
|                                                                                                              |                                                  |                                            |                            |   |            |                  |             |                



---

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

2



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##### Table of Contents






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

|                                                     |           |                        |           |                                          |          |      |           |            |          |  
|---------------------------------------------------- | --------- | ---------------------- | --------- | ---------------------------------------- | -------- | ---- | --------- | ---------- | -------- | -
|                                                     |           |                        |           | For the three months ended September 30,
|                                                     |           |                        |           |                                         
|                                                     |           |                        |           | 2002                                     |          | 2001
|                                                     |           |                        |           |                                          |          |     
|Sales of IVD systems                                 |           | $                      | 1,522,700 |                                          |          | $    | 1,313,877 |           
|Sales of IVD supplies and services                   |           |                        | 3,945,963 |                                          |          |      | 3,722,723 |           
|Sales of small instruments and supplies              |           |                        | 1,455,107 |                                          |          |      | 1,747,799 |           
|Royalties and licensing revenues                     |           |                        | 148,372   |                                          |          |      | 127,336   |           
|                                                     |           |                        |           |                                          |          |      |           |           
|Net revenues                                         |           |                        | 7,072,142 |                                          |          |      | 6,911,735 |           
|                                                     |           |                        |           |                                          |          |      |           |           
|Cost of goods  IVD systems                          |           |                        | 1,015,922 |                                          |          |      | 788,520   |           
|Cost of goods  IVD supplies and services            |           |                        | 1,592,736 |                                          |          |      | 1,445,552 |           
|Cost of goods  small instruments and supplies       |           |                        | 715,198   |                                          |          |      | 807,044   |           
|                                                     |           |                        |           |                                          |          |      |           |           
|Cost of goods sold                                   |           |                        | 3,323,856 |                                          |          |      | 3,041,116 |           
|                                                     |           |                        |           |                                          |          |      |           |           
|Gross margin                                         |           |                        | 3,748,286 |                                          |          |      | 3,870,619 |           
|                                                     |           |                        |           |                                          |          |      |           |           
|Marketing and selling                                |           |                        | 1,063,659 |                                          |          |      | 874,211   |           
|General and administrative                           |           |                        | 1,263,434 |                                          |          |      | 1,102,538 |           
|Research and development, net                        |           |                        | 1,150,280 |                                          |          |      | 1,192,902 |           
|Amortization of intangibles                          |           |                        | 26,914    |                                          |          |      | 36,480    |           
|                                                     |           |                        |           |                                          |          |      |           |           
|Total operating expenses                             |           |                        | 3,504,287 |                                          |          |      | 3,206,131 |           
|                                                     |           |                        |           |                                          |          |      |           |           
|Operating income                                     |           |                        | 243,999   |                                          |          |      | 664,488   |           
|Other income (expense):                              |           |                        |           |                                          |          |      |           |           
|                                                     |           | Interest income        |           |                                          | 13,578   |      |           |            | 21,013   |  
|                                                     |           | Interest expense       |           |                                          | (120,881 | )    |           |            | (218,113 | )
|                                                     |           | Other income (expense) |           |                                          | 36,294   |      |           |            | (1,447   | )
|                                                     |           |                        |           |                                          |          |      |           |           
|Income before income taxes                           |           |                        | 172,990   |                                          |          |      | 465,941   |           
|Income taxes                                         |           |                        | 69,196    |                                          |          |      | 186,377   |           
|                                                     |           |                        |           |                                          |          |      |           |           
|Net income                                           |           | $                      | 103,794   |                                          |          | $    | 279,564   |           
|                                                     |           |                        |           |                                          |          |      |           |           
|Net income per common share                          |           |                        |           |                                          |          |      |           |           
|                                                     |  basic   |                        | $         | 0.01                                     |          |      | $         | 0.03       |         
|                                                     |           |                        |           |                                          |          |      |           |           
|                                                     |  diluted |                        | $         | 0.01                                     |          |      | $         | 0.02       |         
|                                                     |           |                        |           |                                          |          |      |           |           
|Weighted average number of common shares outstanding |           |                        |           |                                          |          |      |           |           
|                                                     |  basic   |                        |           | 10,688,591                               |          |      |           | 9,989,751  |         
|                                                     |           |                        |           |                                          |          |      |           |           
|                                                     |  diluted |                        |           | 11,501,501                               |          |      |           | 11,220,087 |         
|                                                     |           |                        |           |                                          |          |      |           |           



---

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

3



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##### Table of Contents






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

|                                                     |           |                        |            |                                         |          |      |            |      |          |  
|---------------------------------------------------- | --------- | ---------------------- | ---------- | --------------------------------------- | -------- | ---- | ---------- | ---- | -------- | -
|                                                     |           |                        |            | For the nine months ended September 30,
|                                                     |           |                        |            |                                        
|                                                     |           |                        |            | 2002                                    |          | 2001
|                                                     |           |                        |            |                                         |          |     
|Sales of IVD systems                                 |           | $                      | 3,957,620  |                                         |          | $    | 4,238,022  |     
|Sales of IVD supplies and services                   |           |                        | 12,169,609 |                                         |          |      | 11,637,947 |     
|Sales of small instruments and supplies              |           |                        | 4,274,014  |                                         |          |      | 5,070,372  |     
|Royalties and licensing revenues                     |           |                        | 404,291    |                                         |          |      | 249,302    |     
|                                                     |           |                        |            |                                         |          |      |            |     
|Net revenues                                         |           |                        | 20,805,534 |                                         |          |      | 21,195,643 |     
|                                                     |           |                        |            |                                         |          |      |            |     
|Cost of goods  IVD systems                          |           |                        | 2,383,442  |                                         |          |      | 2,501,758  |     
|Cost of goods  IVD supplies and services            |           |                        | 4,697,793  |                                         |          |      | 4,519,974  |     
|Cost of goods  small instruments and supplies       |           |                        | 2,088,103  |                                         |          |      | 2,410,126  |     
|                                                     |           |                        |            |                                         |          |      |            |     
|Cost of goods sold                                   |           |                        | 9,169,338  |                                         |          |      | 9,431,858  |     
|                                                     |           |                        |            |                                         |          |      |            |     
|Gross margin                                         |           |                        | 11,636,196 |                                         |          |      | 11,763,785 |     
|                                                     |           |                        |            |                                         |          |      |            |     
|Marketing and selling                                |           |                        | 3,084,335  |                                         |          |      | 2,725,737  |     
|General and administrative                           |           |                        | 3.595,200  |                                         |          |      | 3,221,938  |     
|Research and development, net                        |           |                        | 3,250,425  |                                         |          |      | 3,462,362  |     
|Amortization of intangibles                          |           |                        | 82,460     |                                         |          |      | 108,504    |     
|                                                     |           |                        |            |                                         |          |      |            |     
|Total operating expenses                             |           |                        | 10,012,420 |                                         |          |      | 9,518,541  |     
|                                                     |           |                        |            |                                         |          |      |            |     
|Operating income                                     |           |                        | 1,623,776  |                                         |          |      | 2,245,244  |     
|Other income (expense):                              |           |                        |            |                                         |          |      |            |     
|                                                     |           | Interest income        |            |                                         | 42,563   |      |            |      | 102,837  |  
|                                                     |           | Interest expense       |            |                                         | (429,012 | )    |            |      | (654,942 | )
|                                                     |           | Other income (expense) |            |                                         | 37,570   |      |            |      | (462     | )
|                                                     |           |                        |            |                                         |          |      |            |     
|Income before income taxes                           |           |                        | 1,274,897  |                                         |          |      | 1,692,677  |     
|Income taxes                                         |           |                        | 509,959    |                                         |          |      | 677,071    |     
|                                                     |           |                        |            |                                         |          |      |            |     
|Net income                                           |           | $                      | 764,938    |                                         |          | $    | 1,015,606  |     
|                                                     |           |                        |            |                                         |          |      |            |     
|Net income per common share                          |           |                        |            |                                         |          |      |            |     
|                                                     |  basic   |                        | $          | 0.07                                    |          |      | $          | 0.10 |         
|                                                     |           |                        |            |                                         |          |      |            |     
|                                                     |  diluted |                        | $          | 0.07                                    |          |      | $          | 0.09 |         
|                                                     |           |                        |            |                                         |          |      |            |     
|Weighted average number of common
shares outstanding |           |                        |            |                                         |          |      |            |     
| basic                                              |           |                        | 10,472,553 |                                         |          |      | 9,957,016  |     
|                                                     |           |                        |            |                                         |          |      |            |     
| diluted                                            |           |                        | 11,552,302 |                                         |          |      | 10,883,833 |     
|                                                     |           |                        |            |                                         |          |      |            |     



---

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

4



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##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.




CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

|                                                                      |                                                                         |                                                         |            |                                         |            |      |            |           |             |  
|--------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------------------- | ---------- | --------------------------------------- | ---------- | ---- | ---------- | --------- | ----------- | -
|                                                                      |                                                                         |                                                         |            | For the nine months ended September 30,
|                                                                      |                                                                         |                                                         |            |                                        
|                                                                      |                                                                         |                                                         |            | 2002                                    |            | 2001
|                                                                      |                                                                         |                                                         |            |                                         |            |     
|Operating activities:                                                 |                                                                         |                                                         |            |                                         |            |      |            |          
|                                                                      | Net income                                                              |                                                         | $          | 764,938                                 |            |      | $          | 1,015,606 |            
|                                                                      | Adjustments to reconcile net income to net cash provided by
operations: |                                                         |            |                                         |            |      |            |           |            
|                                                                      |                                                                         | Deferred tax benefit                                    |            |                                         | 437,531    |      |            |           | 652,141     |  
|                                                                      |                                                                         | Depreciation and amortization                           |            |                                         | 751,826    |      |            |           | 767,002     |  
|                                                                      |                                                                         | Common stock and stock option compensation amortization |            |                                         | 47,625     |      |            |           | 161,007     |  
|                                                                      |                                                                         | Changes in assets and liabilities:                      |            |                                         |            |      |            |           |             |  
|                                                                      |                                                                         | Accounts receivable  trade and other                   |            |                                         | 300,918    |      |            |           | 221,977     |  
|                                                                      |                                                                         | Service contracts, net                                  |            |                                         | (115,055   | )    |            |           | (210,882    | )
|                                                                      |                                                                         | Inventories                                             |            |                                         | 298,669    |      |            |           | (765,503    | )
|                                                                      |                                                                         | Prepaid expenses and other current assets               |            |                                         | (83,406    | )    |            |           | (60,818     | )
|                                                                      |                                                                         | Loan to related party                                   |            |                                         | (125,000   | )    |            |           |            |  
|                                                                      |                                                                         | Other assets                                            |            |                                         | (147,832   | )    |            |           | (20,763     | )
|                                                                      |                                                                         | Accounts payable                                        |            |                                         | (567,221   | )    |            |           | (571,627    | )
|                                                                      |                                                                         | Accrued expenses                                        |            |                                         | 210,884    |      |            |           | (777,604    | )
|                                                                      |                                                                         |                                                         |            |                                         |            |      |            |          
|Net cash provided by operating activities                             |                                                                         |                                                         | 1,773,877  |                                         |            |      | 410,536    |          
|                                                                      |                                                                         |                                                         |            |                                         |            |      |            |          
|Investing activities:                                                 |                                                                         |                                                         |            |                                         |            |      |            |          
|                                                                      |                                                                         | Acquisition of property and equipment                   |            |                                         | (1,361,410 | )    |            |           | (534,630    | )
|                                                                      |                                                                         | Software development costs                              |            |                                         | (604,841   | )    |            |           | (465,360    | )
|                                                                      |                                                                         |                                                         |            |                                         |            |      |            |          
|Net cash used by investing activities                                 |                                                                         |                                                         | (1,966,251 | )                                       |            |      | (999,990   | )        
|                                                                      |                                                                         |                                                         |            |                                         |            |      |            |          
|Financing activities:                                                 |                                                                         |                                                         |            |                                         |            |      |            |          
|                                                                      |                                                                         | Borrowings under line of credit                         |            |                                         | 3,500,000  |      |            |           | 12,969,118  |  
|                                                                      |                                                                         | Repayments of line of credit                            |            |                                         | (2,500,000 | )    |            |           | (13,256,183 | )
|                                                                      |                                                                         | Borrowings under term loan                              |            |                                         | 1,500,000  |      |            |           | 3,000,000   |  
|                                                                      |                                                                         | Repayments of term loan                                 |            |                                         | (2,483,332 | )    |            |           | (833,332    | )
|                                                                      |                                                                         | Repayment of notes payable                              |            |                                         | (875,250   | )    |            |           | (3,597,250  | )
|                                                                      |                                                                         | Payments of capital lease obligations                   |            |                                         | (25,776    | )    |            |           | (24,037     | )
|                                                                      |                                                                         | Issuance of common stock and warrants for cash          |            |                                         | 556,791    |      |            |           | 166,050     |  
|                                                                      |                                                                         |                                                         |            |                                         |            |      |            |          
|Net cash used in financing activities                                 |                                                                         |                                                         | (327,567   | )                                       |            |      | (1,575,634 | )        
|                                                                      |                                                                         |                                                         |            |                                         |            |      |            |          
|Net decrease in cash and cash equivalents                             |                                                                         |                                                         | (519,941   | )                                       |            |      | (2,165,088 | )        
|Cash and cash equivalents at beginning of period                      |                                                                         |                                                         | 2,312,451  |                                         |            |      | 3,661,310  |          
|                                                                      |                                                                         |                                                         |            |                                         |            |      |            |          
|Cash and cash equivalents at end of period                            |                                                                         | $                                                       | 1,792,510  |                                         |            | $    | 1,496,222  |          
|                                                                      |                                                                         |                                                         |            |                                         |            |      |            |          
|Supplemental schedule of non-cash investing and financing activities: |                                                                         |                                                         |            |                                         |            |      |            |          
|                                                                      |                                                                         | Issuance of warrants in connection with debt financing  |            |                                         |           |      |            |           | 374,768     |  
|                                                                      |                                                                         | Issuance of common stock in exchange for services       |            |                                         | 10,000     |      |            |           | 10,000      |  
|Supplemental disclosure of cash flow information:                     |                                                                         |                                                         |            |                                         |            |      |            |          
|                                                                      |                                                                         | Cash paid for interest                                  |            | $                                       | 224,741    |      |            | $         | 638,551     |  
|                                                                      |                                                                         | Cash paid for income taxes                              |            |                                         | 64,680     |      |            |           | 39,602      |  



---

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

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##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.




CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

|                                               |  |                                          |          |      |  |   |          |  
|---------------------------------------------- |  | ---------------------------------------- | -------- | ---- |  | - | -------- | -
|                                               |  | For the three months ended September 30,
|                                               |  |                                         
|                                               |  | 2002                                     |          | 2001
|                                               |  |                                          |          |     
|Net income                                     |  | $                                        | 103,794  |      |  | $ | 279,564  |  
|Unrealized losses on investments, net of taxes |  |                                          | (224,289 | )    |  |   | (231,222 | )
|                                               |  |                                          |          |      |  |   |          |  
|Comprehensive income (loss)                    |  | $                                        | (120,495 | )    |  | $ | 48,342   |  
|                                               |  |                                          |          |      |  |   |          |  

|                                               |  |                                         |          |      |  |   |           |  
|---------------------------------------------- |  | --------------------------------------- | -------- | ---- |  | - | --------- | -
|                                               |  | For the nine months ended September 30,
|                                               |  |                                        
|                                               |  | 2002                                    |          | 2001
|                                               |  |                                         |          |     
|Net income                                     |  | $                                       | 764,938  |      |  | $ | 1,015,606 |  
|Unrealized losses on investments, net of taxes |  |                                         | (164,168 | )    |  |   | (567,651  | )
|                                               |  |                                         |          |      |  |   |           |  
|Comprehensive income                           |  | $                                       | 600,770  |      |  | $ | 447,955   |  
|                                               |  |                                         |          |      |  |   |           |  



---

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

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INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Formation and Business of the Company.

International Remote Imaging Systems, Inc., (collectively IRIS or the
Company) was incorporated in California in 1979 and reincorporated during
1987 in Delaware. International Remote Imaging Systems, Inc. and its
subsidiaries design, develop, manufacture and market in vitrodiagnostic
(IVD) equipment, including IVD imaging systems based on patented and
proprietary automated intelligent microscopy (AIM) technology, as well as
special purpose centrifuges and other small instruments for automating
microscopic procedures performed in clinical laboratories.

2. Summary of Significant Accounting Policies.

Basis of Presentation of Unaudited Interim Financial Statements:

In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of the Company as of September 30, 2002
and 2001 and the results of its operations for the three and nine month periods
then ended. These financial statements should be read in conjunction with the
financial statements and notes included in the Companys latest annual report
on Form 10-K. Interim results are not necessarily indicative of results for a
full year.

Use of Estimates:

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

Principles of Consolidation:

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

Recent Accounting Pronouncements:

In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Statements (SFAS) No. 143, Accounting for
Asset Retirement Obligations. This Statement is effective for fiscal years
beginning after June 15, 2002. SFAS No. 143 provides accounting requirements
for obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. Under the Statement, the asset
retirement obligation is recorded at fair value in the period in which it is
incurred by increasing the carrying amount of the related long-lived asset. The
liability is accreted to its present value in each subsequent period and the
capitalized cost is depreciated over the useful life of the related asset.
International Remote Imaging Systems, Inc. is currently evaluating the impact
of SFAS No. 143 on its consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income
statement. Instead, such gains and losses will be classified as extraordinary
items only if they are deemed to be unusual and infrequent, in accordance with
the current GAAP criteria for extraordinary classification. In addition, SFAS
145 eliminates an inconsistency in lease accounting by requiring that
modifications of capital leases that result in reclassification as operating
leases be accounted for consistent with sale-leaseback accounting rules. The
statement also contains other nonsubstantive corrections to authoritative
accounting literature. The changes related to debt extinguishment will be
effective for fiscal years beginning after May 15, 2002, and the changes
related to lease accounting will be effective for transactions occurring after
May 15, 2002. Adoption of this standard will not have any immediate effect on
International Remote Imaging Systems, Inc.s consolidated financial

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statements. International Remote Imaging Systems, Inc. will apply this guidance
prospectively.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force (EITF) Issue No. 94-3. International
Remote Imaging Systems, Inc. will adopt the provisions of SFAS No. 146 for
restructuring activities initiated after December 31, 2002. SFAS No. 146
requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF No. 94-3, a
liability for an exit cost was recognized at the date of a companys commitment
to an exit plan. SFAS No. 146 also establishes that the liability should
initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may
affect the timing of recognizing future restructuring costs as well as the
amount recognized.

Reclassifications:

Certain reclassifications have been made to the 2001 financial statements
to conform to the 2002 presentation.

3. Comprehensive Income.

The Companys components of comprehensive income are net income and
unrealized losses on investments. Income tax effects allocated to the
unrealized losses on available for sale securities for the three and nine
months ended September 30, 2002 were benefits of $149,526 and $109,445,
respectively.

The following is a reconciliation of accumulated other comprehensive
income balance for the three and nine months ended September 30, 2002:

|                      |  |              |          |             |  |   |          |  
|--------------------- |  | ------------ | -------- | ----------- |  | - | -------- | -
|                      |  | Three months |          | Nine months
|                      |  |              |          |            
|Beginning balance     |  | $            | 132,956  |             |  | $ | 72,835   |  
|Current period change |  |              | (224,289 | )           |  |   | (164,168 | )
|                      |  |              |          |             |  |   |          |  
|Ending balance        |  | $            | (91,333  | )           |  | $ | (91,333  | )
|                      |  |              |          |             |  |   |          |  

4. Inventories.

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

|                                        |  |                       |           |                      |  |   |            |  
|--------------------------------------- |  | --------------------- | --------- | -------------------- |  | - | ---------- | -
|                                        |  | At September 30, 2002 |           | At December 31, 2001
|                                        |  |                       |           |                     
|Finished goods                          |  | $                     | 1,753,224 |                      |  | $ | 2,270,973  |  
|Work-in-process                         |  |                       | 326,200   |                      |  |   | 479,809    |  
|Raw materials, parts and sub-assemblies |  |                       | 4,050,476 |                      |  |   | 4,042,659  |  
|                                        |  |                       |           |                      |  |   |            |  
|                                        |  |                       | 6,129,900 |                      |  |   | 6,793,441  |  
|Reserved for obsolescence               |  |                       | (850,430  | )                    |  |   | (1,215,302 | )
|                                        |  |                       |           |                      |  |   |            |  
|Net inventories                         |  | $                     | 5,279,470 |                      |  | $ | 5,578,139  |  
|                                        |  |                       |           |                      |  |   |            |  

5. Related Party Transaction

In April 2002, the Company made a $125,000 loan to Dr. John A. OMalley,
the Chairman, CEO and President of the Company, in accordance with his current
employment agreement. The loan bears interest at the rate of five percent per
annum and has a term of five years. 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 future sale 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 remaining unpaid balance will be settled by the forfeiture by Dr.
OMalley of the remaining shares held by the Company as security. Pursuant to
the agreement, Dr. OMalley paid $1,392 of interest in the third quarter of
2002.

6. Purchased Intangibles

The Company adopted Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets effective January 1, 2002. Under
SFAS No. 142, goodwill and indefinite life intangible assets are no longer
amortized but are subject to periodic impairment tests. Other intangible assets
with finite lives

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continue to be amortized over their useful lives. In accordance with SFAS No.
142, the Company completed the transitional intangible asset test upon adoption
of SFAS No. 142 and the transitional impairment test during the six months
ended June 30, 2002. The transitional intangible asset test did not result in a
change in the useful lives of the Companys definite life intangible assets or
an impairment of the Companys definite life intangible assets (patents.) The
transitional impairment test did not result in an impairment of our indefinite
life intangibles.

In connection with the adoption of SFAS No. 142, prior period amounts were not
restated. A reconciliation of the previously reported net income and earnings
per share for the nine months ended September 30, 2001 to the amounts adjusted
for the elimination of amortization expense recorded on indefinite life
intangible assets prior to the adoption of SFAS No. 142, net of income taxes,
is as follows:

|                                        |  |            |           |           |  |             |      |  |  |   |      | 
|--------------------------------------- |  | ---------- | --------- | --------- |  | ----------- | ---- |  |  | - | ---- | 
|                                        |  | Net Income |           | Basic EPS |  | Diluted EPS
|                                        |  |            |           |           |  |            
|Reported amount                         |  | $          | 1,015,606 |           |  | $           | 0.10 |  |  | $ | 0.09 | 
|Add back: intangible asset amortization |  |            | 15,611    |           |  |             | 0.00 |  |  |   | 0.00 | 
|                                        |  |            |           |           |  |             |      |  |  |   |      | 
|Adjusted amount                         |  | $          | 1,031,217 |           |  | $           | 0.10 |  |  | $ | 0.09 | 
|                                        |  |            |           |           |  |             |      |  |  |   |      | 

The net carrying value of intangible assets as of September 30, 2002 is
comprised of indefinite life assets of $188,911 related to its small
instruments segment, and patents of $276,067 and $97,991 respectively related
to its urinalysis and small instruments segments.

The change in the net carrying amount of indefinite life intangible assets and
patents during the nine months ended September 30, 2002 is due to increases to,
and amortization of, patents.

The net amount of the patents of $374,058 included in other assets on the
accompanying September 30, 2002 balance sheet, subject to amortization,
comprise a gross carrying amount of $1,538,400, net of accumulated amortization
of $1,164,342.

Amortization expense for the patents was $82,000 for the nine months ended
September 30, 2002. Annual estimated amortization expense for each of the five
succeeding fiscal years is expected to approximate $110,000 per year.

7. Short-Term Borrowings and Notes Payable.

In February 2002, the Company refinanced its existing credit facility and
replaced it with a new $8.0 million credit facility with California Bank and
Trust. The new facility consists of a $500,000 term loan, a $1.0 million term
loan and a $6.5 million revolving line of 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 $6.5 million credit line matures in June
2004. Borrowings under the line of credit are limited to a percentage of
eligible receivables and inventory. The entire credit facility bears interest
at the lenders prime rate (4.75% at September 30, 2002), or LIBOR rate plus
2.0%. The Company is subject to certain financial covenants under the debt
agreements with California Bank and Trust. As of September 30, 2002, the
Company was in compliance with the covenants under the debt agreements.

At September 30, 2002, the outstanding amounts under the Companys credit
facility consist of $433,000 under the first term loan, $1.0 million under the
second term loan and $1.0 million under the revolving line of credit. An
additional $2.9 million was available under the line of credit at that date.

At September 30, 2002, the outstanding principal balance on the unsecured
Subordinated Note Payable was $2.2 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 (4.75% on September 30, 2002) plus 2.0%
and matures on July 31, 2004.

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8. Capital Stock.

Conversion of Preferred Stock:

On August 3, 2002, the Companys Series B Preferred Stock automatically
converted into common stock at the ratio of 1.21 shares of common stock for
each share of preferred stock, a total of 248,050 common shares. The conversion
ratio represents the ratio of the liquidation value of each preferred share
($3.00 per share) divided by the average daily closing price of the common
stock for the five trading days ending three trading days prior to the August
3, 2002 conversion date ($2.47 per share).

Stock Issuances:

During the nine months ended September 30, 2002, the Company (i) issued
267,150 shares of common stock from the exercise of warrants, (ii) issued
options to purchase 514,030 shares of common stock under the Companys stock
option plans and (iii) cancelled options to purchase 76,192 shares of common
stock. Options for 47,650 shares of common stock were exercised during the
period. At September 30, 2002, options to purchase 2,718,535 shares of common
stock were issued and outstanding under the Companys stock options plans. The
outstanding options expire by the end of 2012. The exercise price for these
options ranges from $0.69 to $4.38 per share. At September 30, 2002, there
were 123,742 shares of common stock available for the granting of future
options under the Companys stock option plans.

Warrants:

As of September 30, 2002, 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 

9. Income Taxes.

The income tax provision for the nine-month period ended September 30,
2002 was $509,959 as compared to $677,071 for the comparable period last year.
The income tax provision differs from the federal statutory rate due primarily
to state income taxes and permanent differences between income reported for
financial statement and income tax purposes.

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

10. Earnings Per Share (EPS).

The computation of per share amounts for the three and nine months ended
September 30, 2002 and 2001 is based on the average number of common shares
outstanding for the period. Options and warrants to purchase 628,830 and
185,670 shares of common stock outstanding during the three months ended
September 30, 2002 and 2001, respectively, were not considered in the
computation of diluted EPS because their inclusion would have been
antidilutive. Options and warrants to purchase 430,830 and 239,270 shares of
common stock outstanding

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during the nine months ended September 30, 2002 and nine months ended September
30, 2001, respectively, were not considered in the computation of diluted EPS
because their inclusion would have been antidilutive.

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

|                                            |                 |  |                    |         |                    |  |            |         | 
|------------------------------------------- | --------------- |  | ------------------ | ------- | ------------------ |  | ---------- | ------- | 
|                                            |                 |  | Three Months Ended
|                                            |                 |  |                   
|                                            |                 |  | September 30, 2002 |         | September 30, 2001
|                                            |                 |  |                    |         |                   
|Weighted average number of shares  basic   |                 |  | 10,688,591         |         |                    |  | 9,989,751  |        
|Effects of Dilutive Securities              |                 |  |                    |         |                    |  |            |        
|                                            | Options         |  |                    | 524,835 |                    |  |            | 557,234 | 
|                                            | Warrants        |  |                    | 208,046 |                    |  |            | 394,920 | 
|                                            | Preferred Stock |  |                    | 80,029  |                    |  |            | 278,182 | 
|                                            |                 |  |                    |         |                    |  |            |        
|Weighted average number of shares  diluted |                 |  | 11,501,501         |         |                    |  | 11,220,087 |        
|                                            |                 |  |                    |         |                    |  |            |        

|                                            |                 |  |                    |         |                    |  |            |         | 
|------------------------------------------- | --------------- |  | ------------------ | ------- | ------------------ |  | ---------- | ------- | 
|                                            |                 |  | Nine Months Ended 
|                                            |                 |  |                   
|                                            |                 |  | September 30, 2002 |         | September 30, 2001
|                                            |                 |  |                    |         |                   
|Weighted average number of shares  basic   |                 |  | 10,472,553         |         |                    |  | 9,957,016  |        
|Effects of Dilutive Securities              |                 |  |                    |         |                    |  |            |        
|                                            | Options         |  |                    | 580,079 |                    |  |            | 417,583 | 
|                                            | Warrants        |  |                    | 302,944 |                    |  |            | 203,234 | 
|                                            | Preferred Stock |  |                    | 196,726 |                    |  |            | 306,000 | 
|                                            |                 |  |                    |         |                    |  |            |        
|Weighted average number of shares  diluted |                 |  | 11,552,302         |         |                    |  | 10,883,833 |        
|                                            |                 |  |                    |         |                    |  |            |        

11. Segment and Geographic Information.

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

The urinalysis segment designs, develops, manufactures and markets IVD
imaging systems based on patented and proprietary AIM technology for automating
microscopic procedures for urinalysis. The segment also provides ongoing sales
of supplies and service necessary for the operation of installed urinalysis
workstations. In the United States, these products are sold through our direct
sales force; internationally, these products are sold through distributors.

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

The accounting policies of the segments are the same as those described in
the Summary of Significant Accounting Policies included in the Companys
report on Form 10-K for the year ended December 31, 2001. The Company evaluates
the performance of its segments and allocates resources to them based on
earnings before income taxes, excluding corporate charges (Segment Profit).

The tables below present information about reported segments for the three
and nine month periods ended September 30, 2002 and 2001:

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Three Months Ended September 30, 2002:

|                                |  |            |            |                   |  |                    |           |       |  |             |           |   |  |   |            | 
|------------------------------- |  | ---------- | ---------- | ----------------- |  | ------------------ | --------- | ----- |  | ----------- | --------- | - |  | - | ---------- | 
|                                |  |            |            |                   |  |                    |           |       |  | Unallocated |           |   |  |  
|                                |  | Urinalysis |            | Small Instruments |  | Corporate Expenses |           | Total
|                                |  |            |            |                   |  |                    |           |      
|Revenues                        |  | $          | 5,617,035  |                   |  | $                  | 1,455,107 |       |  |             |          |   |  | $ | 7,072,142  | 
|Interest income                 |  | $          | 13,134     |                   |  |                    | 444       |       |  |             |          |   |  | $ | 13,578     | 
|Interest expense                |  | $          | 1,608      |                   |  |                    |          |       |  | $           | 119,273   |   |  | $ | 120,881    | 
|Depreciation and amortization   |  | $          | 246,091    |                   |  | $                  | 20,765    |       |  | $           | 13,019    |   |  | $ | 279,875    | 
|Segment profit (loss)           |  | $          | 506,431    |                   |  | $                  | 396,475   |       |  | $           | (729,916  | ) |  | $ | 172,990    | 
|Segment assets                  |  | $          | 15,741,009 |                   |  | $                  | 2,342,312 |       |  | $           | 8,521,100 |   |  | $ | 26,604,421 | 
|Investment in long-lived assets |  | $          | 739,650    |                   |  | $                  | 9,380     |       |  |             |          |   |  | $ | 749,030    | 

Three Months Ended September 30, 2001:

|                                |  |            |            |                   |  |                    |           |       |  |             |           |   |  |   |            | 
|------------------------------- |  | ---------- | ---------- | ----------------- |  | ------------------ | --------- | ----- |  | ----------- | --------- | - |  | - | ---------- | 
|                                |  |            |            |                   |  |                    |           |       |  | Unallocated |           |   |  |  
|                                |  | Urinalysis |            | Small Instruments |  | Corporate Expenses |           | Total
|                                |  |            |            |                   |  |                    |           |      
|Revenues                        |  | $          | 5,163,936  |                   |  | $                  | 1,747,799 |       |  |             |          |   |  | $ | 6,911,735  | 
|Interest income                 |  | $          | 21,013     |                   |  |                    |          |       |  |             |          |   |  | $ | 21,013     | 
|Interest expense                |  | $          | 1,765      |                   |  |                    |          |       |  | $           | 216,348   |   |  | $ | 218,113    | 
|Depreciation and amortization   |  | $          | 231,442    |                   |  | $                  | 31,808    |       |  | $           | 40,308    |   |  | $ | 303,558    | 
|Segment profit (loss)           |  | $          | 647,845    |                   |  | $                  | 577,837   |       |  | $           | (759,741  | ) |  | $ | 465,941    | 
|Segment assets                  |  | $          | 14,479,265 |                   |  | $                  | 2,460,698 |       |  | $           | 9,058,285 |   |  | $ | 25,998,248 | 
|Investment in long-lived assets |  | $          | 329,122    |                   |  | $                  | 14,393    |       |  |             |          |   |  | $ | 343,515    | 

Nine Months Ended September 30, 2002:

|                                |  |            |            |                   |  |                    |           |       |  |             |            |   |  |   |            | 
|------------------------------- |  | ---------- | ---------- | ----------------- |  | ------------------ | --------- | ----- |  | ----------- | ---------- | - |  | - | ---------- | 
|                                |  |            |            |                   |  |                    |           |       |  | Unallocated |            |   |  |  
|                                |  | Urinalysis |            | Small Instruments |  | Corporate Expenses |           | Total
|                                |  |            |            |                   |  |                    |           |      
|Revenues                        |  | $          | 16,431,520 |                   |  | $                  | 4,374,014 |       |  |             |           |   |  | $ | 20,805,534 | 
|Interest income                 |  | $          | 41,406     |                   |  |                    | 1,157     |       |  |             |           |   |  | $ | 42,563     | 
|Interest expense                |  | $          | 4,634      |                   |  |                    |          |       |  | $           | 424,378    |   |  | $ | 429,012    | 
|Depreciation and amortization   |  | $          | 694,227    |                   |  | $                  | 62,293    |       |  | $           | 42,931     |   |  | $ | 799,451    | 
|Segment profit (loss)           |  | $          | 2,286,433  |                   |  | $                  | 1,171,376 |       |  | $           | (2,182,912 | ) |  | $ | 1,274,897  | 
|Investment in long-lived assets |  | $          | 1,939,894  |                   |  | $                  | 26,357    |       |  |             |           |   |  | $ | 1,966,251  | 

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Nine Months Ended September 30, 2001:

|                                |  |            |            |                   |  |                    |           |       |  |             |            |   |  |   |            | 
|------------------------------- |  | ---------- | ---------- | ----------------- |  | ------------------ | --------- | ----- |  | ----------- | ---------- | - |  | - | ---------- | 
|                                |  |            |            |                   |  |                    |           |       |  | Unallocated |            |   |  |  
|                                |  | Urinalysis |            | Small Instruments |  | Corporate Expenses |           | Total
|                                |  |            |            |                   |  |                    |           |      
|Revenues                        |  | $          | 16,125,271 |                   |  | $                  | 5,070,372 |       |  |             |           |   |  | $ | 21,195,643 | 
|Interest income                 |  | $          | 102,837    |                   |  |                    |          |       |  |             |           |   |  | $ | 102,837    | 
|Interest expense                |  | $          | 5,580      |                   |  |                    |          |       |  | $           | 649,362    |   |  | $ | 654,942    | 
|Depreciation and amortization   |  | $          | 685,977    |                   |  | $                  | 99,197    |       |  | $           | 142,835    |   |  | $ | 928,009    | 
|Segment profit (loss)           |  | $          | 2,631,973  |                   |  | $                  | 1,439,219 |       |  | $           | (2,378,515 | ) |  | $ | 1,692,677  | 
|Investment in long-lived assets |  | $          | 949,298    |                   |  | $                  | 50,692    |       |  |             |           |   |  | $ | 999,990    | 

Long-lived assets were all located in the United States and totaled
$5,119,037 at September 30, 2002, and $3,620,018 at December 31, 2001.




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

Overview

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

The nature of our business requires that we make significant investments
in research and development for new products and enhancements to existing
products. We fund our research and development primarily from internal
sources, but, through our subsidiary, Advanced Digital Imaging Research, LLC
(ADIR), we also receive partial funding from time to time under grants from
the National Institutes of Health and joint development projects with third
parties.

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

|                                                                   |  |                    |           |                   |  |      |           |      |  |   |           |  |  |   |           | 
|------------------------------------------------------------------ |  | ------------------ | --------- | ----------------- |  | ---- | --------- | ---- |  | - | --------- |  |  | - | --------- | 
|                                                                   |  | Three Months Ended |           | Nine Months Ended
|                                                                   |  | September 30,      |           | September 30,    
|                                                                   |  |                    |           |                  
|                                                                   |  | 2002               |           | 2001              |  | 2002 |           | 2001
|                                                                   |  |                    |           |                   |  |      |           |     
|Research and development expense, net                              |  | $                  | 1,150,000 |                   |  | $    | 1,193,000 |      |  | $ | 3,250,000 |  |  | $ | 3,462,000 | 
|Capitalized software development costs                             |  |                    | 169,000   |                   |  |      | 164,000   |      |  |   | 605,000   |  |  |   | 465,000   | 
|Reimbursed costs for research and
development grants and contracts |  |                    | 214,000   |                   |  |      | 349,000   |      |  |   | 697,000   |  |  |   | 902,000   | 
|                                                                   |  |                    |           |                   |  |      |           |      |  |   |           |  |  |   |           | 
|Total product technology expenditures                              |  | $                  | 1,533,000 |                   |  | $    | 1,706,000 |      |  | $ | 4,552,000 |  |  | $ | 4,829,000 | 
|                                                                   |  |                    |           |                   |  |      |           |      |  |   |           |  |  |   |           | 

Results of Operations

Comparison of Quarter Ended September 30, 2002 to Quarter Ended September
30, 2001

Net revenues for the quarter ended September 30, 2002 increased to $7.1
million from $6.9 million last year, an increase of 2%. Sales of IVD imaging
systems increased $209,000 to $1.5 million from $1.3 million in the same
period last year. This represented the sale of 2 more workstations than in the
prior period. IVD imaging system sales consist of sales of our urinalysis
workstations. We plan to introduce a significantly upgraded model in November,
2002, based on a new operating platform. This model, named the iQ200, received
clearance from the Food and Drug Administration on October 21, 2002. However,
revenues from the sale of this product are not

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anticipated until the end of the first quarter of 2003. The failure to make a
successful and timely transition to this upgraded model would have a material
and adverse affect on IVD imaging system sales. This is an inherent risk in any
major upgrade to products in our industry.

Sales of IVD imaging system supplies and services increased to $3.9
million from $3.7 million, an increase of $223,000 or 6% over the same period
last year, primarily due to the larger installed base of urinalysis work
stations. Sales of small instruments and supplies decreased $293,000 to $1.5
million, a decrease of 17%. The decline is due primarily to decreased sales to
OEM customers. Royalties and licensing revenues increased to $148,000 from
$127,000 in the comparable period from the prior year.

Revenues from the urinalysis segment totaled $5.6 million in the current
period as compared to $5.2 million in the comparable period last year, an
increase of $453,000 or 9%. This increase is due to both higher systems sales
and higher supplies and services sales, as explained in the preceding
paragraphs. Revenues from the small instruments segment decreased $293,000
from the comparable period last year to $1.5 million. This decline is due
primarily to decreased sales of small instruments and supplies to OEM
customers.

Cost of goods for IVD imaging systems as a percentage of sales of IVD
imaging systems totaled 67% in the current period as compared to 60% in the
comparable period from last year. This increase is due primarily to a change in
product mix, with a greater proportion of the current periods sales comprised
of lower margin instruments than in the year ago period. Cost of goods for IVD
imaging system supplies and services as a percentage of sales of such products
were 40% for the current period as compared to 39% in the same period last
year. Cost of goods for small instruments and supplies as a percentage of
sales of such products totaled 49% for the current period, as compared to 46%
in the third quarter of last year. This increase is due primarily to increased
costs resulting from smaller production runs in the current period. The
aggregate gross margin totaled 53% for the quarter ended September 30, 2002 as
compared to 56% in the comparable period of the prior year.

Cost of goods sold as a percentage of revenues from the urinalysis segment
totaled 46%, as compared to 43% in the third quarter of last year. Cost of
goods for small instruments as a percentage of revenues totaled 49% in the
current period, as compared to 46% in the third quarter of the prior year.

Marketing and selling expenses totaled $1.1 million, compared to $874,000
for the comparable prior year period, an increase of $189,000, or 22%. This
increase is due primarily to the addition of a senior sales management person
as well as increased marketing efforts for our products. Marketing and selling
expenses as a percentage of net revenues were 15% in the quarter ended
September 30, 2002, as compared to 13% in the same period last year.

General and administrative expenses were $1.3 million, compared to $1.1
million in the comparable period in the prior year, an increase of $161,000 or
15%. The increase is due primarily to the addition of senior management in
2002. General and administrative expenses for the period as a percentage of
net revenue were 18% as compared to 16% in the same period in the prior year.

Net research and development expenses were $1.1 million for the quarter
ended September 30, 2002, down slightly from the level of the third quarter of
last year. Net research and development expenses as a percentage of revenues
were 16% in the quarter ended September 30, 2002, as compared to 17% 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 $173,000 from the
prior year to $1.5 million. This decline was due primarily to a reduction in
the amount of work done under research and development grants and contracts at
our ADIR subsidiary. The continued high level of total product technology
expenditures is due primarily to the iQ200 project begun in 1999 to improve our
urinalysis workstation product line, and for which we recently received
clearance from the Food and Drug Administration We believe that this project is
important to maintaining our competitive position in the urinalysis market. We
expect our net research and development expenses to continue at current levels
for the remainder of 2002.

Amortization of intangible assets is lower in the current quarter than in
the year ago comparable period. This is due to the fact that the balance in
the current quarter includes only the amortization of patents, whereas the year
ago amounts also included the amortization of acquired intangible assets. The
Company ceased amortization of acquired intangible assets in 2002 in accordance
with SFAS 142.

Operating income for the quarter ended September 30, 2002 decreased to
$244,000 as compared to $664,000 in the comparable quarter of the prior year,
primarily as a result of higher marketing and selling expenses and higher
general and administrative expenses in the current period.

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Interest expense decreased to $121,000 in the quarter ended September 30,
2002 from $218,000 in the comparable quarter of the prior year as a result of
significantly lower interest rates on the revised credit facility associated
with the change in bankers, and reduced indebtedness.

For the quarter ended September 30, 2002, urinalysis segment profits
decreased to $506,000 from $648,000 in the comparable quarter of the prior
year. This decrease is attributable to higher marketing and selling expenses
in the current quarter. Segment profits for the small instruments segment
totaled $396,000, as compared to $578,000 in the comparable quarter of the
prior year. The decrease results from lower sales volume in that segment.
Unallocated corporate expenses totaled $730,000 in the current period as
compared to $760,000 in the same period last year.

The income tax provision for the quarter ended September 30, 2002 totaled
$69,000, as compared to $186,000 in the quarter ended September 30, 2001. The
decrease is a function of the taxable income.

Net income decreased to $104,000, or $0.01 per diluted share, for the
quarter ended September 30, 2002, as compared to $280,000, or $0.02 per diluted
share, for the same period of the prior year.

Comparison of Nine Months Ended September 30, 2002 to Nine Months Ended September 30, 2001

Net revenues for the nine months ended September 30, 2002 decreased to
$20.8 million from $21.2 million, a decrease of $390,000 or 2% from the same
period last year. Sales of IVD imaging systems decreased to $4.0 million from
$4.2 million, a decrease of $280,000 or 7% from the same period last year. The
decrease is due to lower instrument sales primarily to international
distributors, but also domestically, as the Company positions itself for
transition to its next generation operating platform. Sales of IVD imaging
systems supplies and services increased to $12.2 million from $11.6 million, an
increase of $532,000 or 5% over the same period last year, primarily due to the
larger installed base of urinalysis workstations. Sales of small instruments
and supplies decreased $796,000 to $4.3 million, a decrease of 16%. The
decline is due primarily to lower sales of small instruments to OEM customers.
Royalties and licensing revenues increased $155,000 from the year ago period,
due primarily to a new $100,000 royalty earned by our StatSpin subsidiary
during the current period.

Revenues from the urinalysis segment totaled $16.4 million in the current
period as compared to $16.1 million in the same period last year, a slight
increase which resulted from lower instrument sales being more than offset by
higher levels of supplies and services revenue, as discussed in the previous
paragraph. Revenues from the small instruments segment decreased $696,000
from the comparable period last year to $4.4 million. This decline is due
primarily to lower sales, partially offset by the $100,000 royalty.

Cost of goods sold for IVD imaging systems as a percentage of sales of
those systems totaled 60% in the current period as compared to 59% in the same
period last year. Cost of goods sold for IVD imaging system supplies and
services as a percentage of sales of such products was 39% which was the same
as for the first nine months of 2001. Cost of goods sold for small instruments
and supplies as a percentage of sales of small instruments and supplies totaled
49% for the current period as compared to 48% in the year ago period. The
aggregate gross margin totaled 56% for the first nine months of 2002 which was
the same as in the comparable period of last year.

Cost of goods sold as a percentage of revenues from the urinalysis segment
totaled 43% as compared to 44% in the first nine months of 2002. Cost of goods
for small instruments as a percentage of revenues totaled 48% in the current
period which was the same as in the year ago period.

Marketing and selling expenses totaled $3.1 million in the current period
as compared to $2.7 million for the comparable period last year, an increase of
$359,000 or 13%. This increase was primarily due to the addition of a senior
sales management person as well as increased marketing efforts. Marketing and
selling expenses as a percentage of net revenues were 15% in the current period
as compared to 13% last year.

General and administrative expenses were $3.6 million, an increase of
$373,000 or 12% from the comparable period in the prior year. This increase is
due primarily to the addition of senior management. General and administrative
expenses for the period as a percentage of net revenues were 17% as compared to
15% in the same period of the prior year.

Net research and development expenses decreased to $3.3 million for the
first nine months of 2002 as compared to $3.5 million in the same period of
2001, a decrease of $212,000 or 6%. Net research and

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development expenses as a
percentage of revenues was 16% in the current period, the same as in the
comparable period of the prior year. Total product technology expenditures,
including capitalized software development costs and reimbursed costs under
research and development grants and contracts at our ADIR facility was down
$277,000 in the current period as compared to the year ago period, which was
consistent with the aforementioned decrease in net research and development
expenses. Still, total product technology expenditures continued at a high
level due primarily to the iQ200 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. We expect
our net research and development expenses to continue at current levels during
2002.

Amortization of intangible assets is lower in the current period than in
the same period last year. This is due to the fact that the balance in the
current period includes only the amortization of patents, whereas the year ago
amounts also included the amortization of acquired intangible assets. The
Company ceased amortization of acquired intangible assets in 2002 in accordance
with SFAS 142.

Operating income for the first nine months of 2002 decreased to $1.6
million as compared to $2.2 million in the first nine months of 2001,
principally as a result of higher marketing and selling and general and
administrative expenses in 2002.

Interest expense decreased to $429,000 in the current period from $655,000
in the prior year as a result of lower interest rates on the revised credit
facility associated with the change in bankers, and reduced indebtedness.

For the first nine months of 2002, urinalysis segment profits decreased to
$2.3 million from $2.6 million in the comparable period of 2001. This decrease
is attributable to higher marketing and selling expenses in the current period.
Segment profits for the small instruments segment totaled $1.2 million as
compared to $1.4 million in the comparable period last year. This decrease
resulted from lower sales volume in that segment. Unallocated corporate
expenses totaled $2.2 million in the current period as compared to $2.4 million
in the same period last year. The decrease was primarily due to reduced
charges incurred for legal services in the current period.

The income tax provision for the first nine months of 2002 totaled
$510,000 as compared to $677,000 in the first nine months of 2001. The
decrease reflects the decreased taxable income experienced by the Company in
2002.

Net income decreased to $765,000 or $0.07 per diluted share for the first
nine months of 2002 as compared to $1.0 million or $0.09 per diluted share for
the same period of the prior year.

Liquidity and Capital Resources

Cash and cash equivalents decreased to $1.8 million at September 30, 2002
from $2.3 million at December 31, 2001. Cash flow provided by operations for
the nine months ended September 30, 2002 increased to $1.8 million from
$411,000 for the comparable period last year. This increase is due primarily
to payments of lower accrued bonuses in the current year than in the prior year
and decreases in inventories in the current year. Our primary source of
liquidity is cash from operations, which depends heavily on sales of our
urinalysis workstations. We plan to introduce the iQ200 model, built on a new
operating platform, in late November 2002. We received clearance from the Food
and Drug Administration on October 21, 2002. However revenues from the sale of
this product are not anticipated until the end of the first quarter of 2003.
The failure to make a successful and timely transition to this upgraded model
would have a material and adverse affect on workstation sales, and,
consequently, our liquidity. This is an inherent risk in any major upgrade to
products in our industry.

Cash used by investing activities totaled $2.0 million for the nine months
ended September 30, 2002, as compared to $1.0 million in the same period last
year. The increase is due primarily to the increase in expenditures for
property and equipment as part of our efforts to expand and upgrade our
facilities, as well as increased software development costs under our research
and development program.

Net cash used by financing activities totaled $328,000 and consisted
primarily of principal payments made on the subordinated note, and net
principal payments made on the term loans and revolving line of credit under
our credit facility, partially offset by funds received from the exercise of
stock options and warrants. As of September 30, 2002, we owed $1.4 million on
the term loans and $1.0 million on the revolving line of credit and were
eligible to borrow an additional $2.9 million under the revolving credit line.

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In February 2002, we refinanced our existing credit facility and replaced
it with a new $8.0 million credit facility with California Bank and Trust. The
new facility consists of a $500,000 term loan, a $1.0 million term loan and a
$6.5 million revolving line of credit. The $500,000 term loan is payable in 60
equal monthly installments. The $1.0 million term loan carries interest only
for the first 12 months, followed by 48 months of equal principal payments plus
interest. The $6.5 million credit line matures in June 2004. Borrowings under
the line of credit are limited to a percentage of eligible receivables and
inventory. The entire credit facility bears interest at the lenders prime
rate, or LIBOR rate plus 2.0%. At September 30, 2002, the Company was in
compliance with all its covenants signed with the Bank.

We expect to continue to incur high levels of research and development
expenditures for the balance of the year. We plan to continue to fund this
project with cash generated from operations.

We reduced our outstanding debt by more than $700,000 in the first nine
months of 2002 and, after considering the effect of the refinancing discussed
above, our scheduled principal payments total $1.4 million during the next
twelve months. We believe that our current cash on hand, together with cash
generated from operations and cash available under the credit facility will be
sufficient to fund normal operations and pay principal and interest on
outstanding debt for at least a year.

Shareholder Rights Plan

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

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to our valuation of inventory and our allowance for
uncollectible accounts receivable. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following
critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements:



| |  |  | Inventory is evaluated on a continual basis and reserve adjustments
are made based on managements estimate of future sales value, if any,
of specific inventory items. Reserve adjustments are made for the
difference between the cost of the inventory and the estimated market
value and charged to operations in the period in which the facts that
give rise to the adjustments become known.                                                                                                                
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Accounts receivable balances are evaluated on a continual basis and
allowances are provided for potentially uncollectible accounts based on
managements estimate of the collectability of customer accounts. If the
financial condition of a customer were to deteriorate, resulting in an
impairment of their ability to make payments, an additional allowance
may be required. Allowance adjustments are charged to operations in the
period in which the facts that give rise to the adjustments become
known.

Net deferred tax assets are evaluated on a continual basis. The carrying
value of the Companys net deferred tax assets assumes that the Company will be
able to generate sufficient future taxable income in certain tax jurisdictions,
based on estimates and assumptions. If these estimates and related assumptions
change in the
future, the Company may be required to record additional valuation allowances
against its deferred tax assets resulting in additional income tax expense in
the Companys consolidated statement of operations. Management evaluates the
realizability of the deferred tax assets quarterly and assesses the need for
additional valuation allowances quarterly.

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Recent Issued Accounting Standards

In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Statements (SFAS) No. 143, Accounting for
Asset Retirement Obligations. This Statement is effective for fiscal years
beginning after June 15, 2002. SFAS No. 143 provides accounting requirements
for obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. Under the Statement, the asset
retirement obligation is recorded at fair value in the period in which it is
incurred by increasing the carrying amount of the related long-lived asset. The
liability is accreted to its present value in each subsequent period and the
capitalized cost is depreciated over the useful life of the related asset.
International Remote Imaging Systems, Inc. is currently evaluating the impact
of SFAS No. 143 on its consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income
statement. Instead, such gains and losses will be classified as extraordinary
items only if they are deemed to be unusual and infrequent, in accordance with
the current GAAP criteria for extraordinary classification. In addition, SFAS
145 eliminates an inconsistency in lease accounting by requiring that
modifications of capital leases that result in reclassification as operating
leases be accounted for consistent with sale-leaseback accounting rules. The
statement also contains other nonsubstantive corrections to authoritative
accounting literature. The changes related to debt extinguishment will be
effective for fiscal years beginning after May 15, 2002, and the changes
related to lease accounting will be effective for transactions occurring after
May 15, 2002. Adoption of this standard will not have any immediate effect on
International Remote Imaging Systems, Inc.s consolidated financial statements.
International Remote Imaging Systems, Inc. will apply this guidance
prospectively.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force (EITF) Issue No. 94-3. International
Remote Imaging Systems, Inc. will adopt the provisions of SFAS No. 146 for
restructuring activities initiated after December 31, 2002. SFAS No. 146
requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF No. 94-3, a
liability for an exit cost was recognized at the date of a companys commitment
to an exit plan. SFAS No. 146 also establishes that the liability should
initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may
affect the timing of recognizing future restructuring costs as well as the
amount recognized.

Inflation

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

Healthcare Reform Policies

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

We May Face Interruption of Production and Services Due to Increased Security
Measures in Response to Terrorism

Our business depends on the free flow of products and services through the
channels of commerce. Recently, in response to terrorists activities and
threats aimed at the United States, transportation, mail, financial and other
services have been slowed or stopped altogether. Further delays or stoppages
in transportation, mail, financial or other services could have a material
adverse effect on our business, results of operations and financial condition.
Furthermore, we may experience an increase in operating costs, such as costs
for transportation, insurance and
security as a result of the activities and potential activities. We may also
experience delays in receiving payments from payers that may have been affected
by the terrorist activities and potential activities and any economic downturn
could adversely impact our results of operations, impair our ability to raise
capital or otherwise adversely affect our ability to grow our business.

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Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements,
which reflect our current views about future events and financial results. We
have made these statements in reliance upon the safe harbor of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements include,
but are not limited to, the Companys views on future commercial revenues,
financial results, financing sources, product development,, market growth,
capital requirements, and new product introductions; and are inherently subject
to uncertainties and other factors, which could cause the actual results to
differ materially from the forward-looking statements. These statements are
generally identified by phrases such as,anticipates, believes, estimates,
expects, intends, plans and similar words. These uncertainties and other
factors include, among other things,



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

We have attempted to identify additional significant uncertainties and
other factors affecting forward-looking statements in Exhibit 99 to our 2001
Annual Report on Form 10-K. Stockholders should understand that the
uncertainties and other factors identified in this Quarterly Report and in
Exhibit 99 to the Annual Report are not a comprehensive list of all the
uncertainties and other factors which may affect forward-looking statements.
We do not undertake any obligation to update or revise any forward-looking
statements or the list of uncertainties and other factors which could affect
those statements.




Item 3. Quantitative And Qualitative Disclosures About Market Risk.

There was no material change in the Companys exposure to market risk on
September 30, 2002 as compared to its market risk exposure on December 31,
2001. See Managements Discussion and Analysis of Financial Condition and
Results of Operations  Market Risk in our Annual Report on Form 10-K for the
year ended December 31, 2001.




Item 4. Disclosure Controls and Procedures

(a)  Evaluation of Disclosure Controls and Procedures. The Companys
Chief Executive Officer and its Chief Financial Officer, after evaluating the
effectiveness of the Companys disclosure controls and procedures (as defined
in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of a
date within 90 days of the filing date of this quarterly report on Form 10-Q
(the Evaluation Date)), have concluded that as of the Evaluation Date, the
Companys disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company and its consolidated
subsidiaries would be made known to them by others within those entities,
particularly during the period in which this quarterly report on Form 10-Q was
being prepared.

(b)  Changes in Internal Controls. There were no significant changes in
the Companys internal controls or in other factors that could significantly
affect the Companys disclosure controls and procedures subsequent to the
Evaluation Date, nor any significant deficiencies or material weaknesses in
such disclosure controls and procedures requiring corrective actions. As a
result, no corrective actions were taken.




PART II
OTHER INFORMATION




Item 1. Legal Proceedings.

We are not presently involved in any litigation.

19



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##### Table of Contents






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

(a)  Exhibits

|               |  |                                                                                                    |  |           |    |  
|-------------- |  | -------------------------------------------------------------------------------------------------- |  | --------- | -- | -
|               |  |                                                                                                    |  | Reference
|Exhibit Number |  | Description                                                                                        |  | Document 
|               |  |                                                                                                    |  |          
|3.1(a)         |  | Certificate of Incorporation, as amended                                                           |  |           | (1 | )
|3.1(b)         |  | Certificate of Designations of Series A Convertible Preferred Stock                                |  |           | (2 | )
|3.1(c)         |  | Certificate of Designations of Series B Callable Preferred Stock                                   |  |           | (3 | )
|3.1(d)         |  | Certificate of Designations, Preferences and Rights of Series C
Preferred Stock                    |  |           | (4 | )
|3.1(e)         |  | Certificate of Amendment of Certificate of Incorporation                                           |  |           |    |  
|3.2            |  | Restated Bylaws                                                                                    |  |           | (5 | )
|4.1            |  | Specimen of Common Stock Certificate                                                               |  |           | (6 | )
|4.2            |  | Certificate of Designations of Series A Convertible Preferred Stock                                |  |           | (2 | )
|4.3            |  | Certificate of Designations of Series B Callable Preferred Stock                                   |  |           | (3 | )
|4.4            |  | Certificate of Designations, Preferences and Rights of Series C
Preferred Stock                    |  |           | (4 | )
|99.1           |  | Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 By Principal Executive Officer |  |           |    |  
|99.2           |  | Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 By Principal Financial Officer |  |           |    |  

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



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

(b)  Reports on Form 8-K

The Company did not file any reports on Form 8-K during the quarter ended
September 30, 2002.




SIGNATURE

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

|                       |  |                                            |  |                                                                         
|---------------------- |  | ------------------------------------------ |  | ------------------------------------------------------------------------
|Date: November 7, 2002 |  | INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
|                      
|                       |  | By:                                        |  | /s/ John Caloz                                                          
|                       |  |                                            |  |                                                                         
|                       |  |                                            |  | John Caloz
Corporate Vice President, Finance
And Chief Financial Officer

20



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##### Table of Contents



Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
By
Principal Executive Officer
Regarding Facts and Circumstances Relating to Exchange Act Filings

I, John A. OMalley, certify that:

1. I have reviewed this quarterly report on Form 10-Q of International Remote
Imaging Systems, Inc.;

2. Based on my knowledge, this quarterly 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 quarterly 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 90 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;

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; and

6. The registrants other certifying officer and I have indicated in this
quarterly 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: November 7, 2002

| |  |                                                                 
| |  | ----------------------------------------------------------------
| |  |                                                                 
| |  | /s/ John A. OMalley                                            
| |  |                                                                 
| |  | John A. OMalley
Chairman, President and Chief Executive
Officer

21



---



##### Table of Contents



Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
By
Principal Financial Officer
Regarding Facts and Circumstances Relating to Exchange Act Filings

I, John Y. Caloz, certify that:

1. I have reviewed this quarterly report on Form 10-Q of International Remote
Imaging Systems, Inc.;

2. Based on my knowledge, this quarterly 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 quarterly 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 90 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;                                                                                                                        

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; and                                                                                                                                        

6. The registrants other certifying officer and I have indicated in this
quarterly 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: November 7, 2002

| |  |                                                                                       
| |  | --------------------------------------------------------------------------------------
| |  |                                                                                       
| |  | /s/ John Y. Caloz                                                                     
| |  |                                                                                       
| |  | John Y. Caloz
Corporate Vice President, Finance, Chief Financial
Officer and Secretary

22



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##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

EXHIBITS

TO

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2002

COMMISSION FILE NO. 1-9767

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.





---



##### Table of Contents






EXHIBIT INDEX

|               |  |                                                                                                    |  |           |    |  
|-------------- |  | -------------------------------------------------------------------------------------------------- |  | --------- | -- | -
|               |  |                                                                                                    |  | Reference
|Exhibit Number |  | Description                                                                                        |  | Document 
|               |  |                                                                                                    |  |          
|3.1(a)         |  | Certificate of Incorporation, as amended                                                           |  |           | (1 | )
|3.1(b)         |  | Certificate of Designations of Series A Convertible Preferred Stock                                |  |           | (2 | )
|3.1(c)         |  | Certificate of Designations of Series B Callable Preferred Stock                                   |  |           | (3 | )
|3.1(d)         |  | Certificate of Designations, Preferences and Rights of Series C
Preferred Stock                    |  |           | (4 | )
|3.1(e)         |  | Certificate of Amendment of Certificate of Incorporation                                           |  |           |    |  
|3.2            |  | Restated Bylaws                                                                                    |  |           | (5 | )
|4.1            |  | Specimen of Common Stock Certificate                                                               |  |           | (6 | )
|4.2            |  | Certificate of Designations of Series A Convertible Preferred Stock                                |  |           | (2 | )
|4.3            |  | Certificate of Designations of Series B Callable Preferred Stock                                   |  |           | (3 | )
|4.4            |  | Certificate of Designations, Preferences and Rights of Series C
Preferred Stock                    |  |           | (4 | )
|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 are incorporated by reference
to the similarly numbered Company document cited below:



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