##### Table of Contents



---

---

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



---



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, 2001 |  | 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)   |  | 94-2579751
(I.R.S. Employer
Identification No.)
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          |  |                                                
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|9162 Eton Avenue, Chatsworth CA.
(Address of principal executive offices) |  | 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 BOX)      No (BOX)

The registrant had 10,006,559 shares of common stock outstanding as of
October 31, 2001.



---

---





---

TABLE OF CONTENTS



|                             |                                                                                               |                                                 |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION
|                             | Item 1. Consolidated Financial Statements                                                    
|                             |                                                                                               | Consolidated Balance Sheets                    
|                             |                                                                                               | Consolidated Statements of Operations          
|                             |                                                                                               | Consolidated Statements of Operations          
|                             |                                                                                               | 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.                          
|PART II OTHER INFORMATION   
|                             | Item 1. Legal Proceedings.                                                                   
|                             | Item 6. Exhibits And Reports On Form 8-K.                                                    
|                             |                                                                                               | (a) Exhibits                                   
|                             |                                                                                               | (b) Reports on Form 8-K                        
|SIGNATURE                   
|EXHIBIT INDEX               



---



##### Table of Contents



INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

INDEX TO FORM 10-Q

Three and Nine Months Ended September 30, 2001

|                               |                                                                                                |                                                 |                         |    |      |    | 
|------------------------------ | ---------------------------------------------------------------------------------------------- | ----------------------------------------------- | ----------------------- | -- | ---- | -- | 
|                               |                                                                                                |                                                 |                         |    | Page
|                               |                                                                                                |                                                 |                         |    |     
|PART I  FINANCIAL INFORMATION |                                                                                                |                                                 |                         |   
|                               |                                                                                                |                                                 |                         |    |     
|                               | Item 1 - Consolidated Financial Statements                                                     |                                                 |                         |    |     
|                               |                                                                                                |                                                 |                         |    |     
|                               |                                                                                                | Consolidated Balance Sheets                     |                         |    | 2    |   
|                               |                                                                                                |                                                 |                         |    |     
|                               |                                                                                                | Consolidated Statements of Operations           |                         |    | 3    |   
|                               |                                                                                                |                                                 |                         |    |     
|                               |                                                                                                | Consolidated Statements of Cash Flows           |                         |    | 6    |   
|                               |                                                                                                |                                                 |                         |    |     
|                               |                                                                                                | Consolidated Statements of Comprehensive Income |                         |    | 7    |   
|                               |                                                                                                |                                                 |                         |    |     
|                               |                                                                                                | Notes to Consolidated Financial Statements      |                         |    | 8    |   
|                               |                                                                                                |                                                 |                         |    |     
|                               | 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 |     
|                               |                                                                                                |                                                 |                         |    |     
|PART II  OTHER INFORMATION    |                                                                                                |                                                 |                         |   
|                               |                                                                                                |                                                 |                         |    |     
|                               | Item 1 - Legal Proceedings                                                                     |                                                 |                         | 19 |     
|                               |                                                                                                |                                                 |                         |    |     
|                               | Item 6 - Exhibits and Reports on Form 8-K                                                      |                                                 |                         |    |     
|                               |                                                                                                |                                                 |                         |    |     
|                               |                                                                                                |                                                 | (a) Exhibits            |    |      | 19 | 
|                               |                                                                                                |                                                 | (b) Reports on Form 8-K |    |      | 20 | 
|                               |                                                                                                |                                                 |                         |    |     
|                               | SIGNATURE                                                                                      |                                                 |                         | 20 |     

1



---



##### Table of Contents






PART I
FINANCIAL INFORMATION




Item 1. Consolidated Financial Statements




INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS



|                                                                                                                |                                                                                                   |                           |                                            | Assets                               |            |                 |             |                  |            |             |  | 
|--------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------ | ------------------------------------ | ---------- | --------------- | ----------- | ---------------- | ---------- | ----------- |  | 
|                                                                                                                |                                                                                                   |                           |                                            |                                      |            | At December 31, |             | At September 30,
|                                                                                                                |                                                                                                   |                           |                                            |                                      |            | 2000            |             | 2001            
|                                                                                                                |                                                                                                   |                           |                                            |                                      |            |                 |             |                 
|                                                                                                                |                                                                                                   |                           |                                            |                                      |            |                 |             |                  |            | (unaudited)
|Current assets:                                                                                                 |                                                                                                   |                           |                                            |                                      |            |                 |             |                 
|Cash and cash equivalents                                                                                       |                                                                                                   | $                         | 3,661,310                                  |                                      |            | $               | 1,496,222   |                 
|Accounts receivable, net of allowance for doubtful
accounts of $334,696 in 2000 and $267,027 in 2001            |                                                                                                   |                           | 5,446,466                                  |                                      |            |                 | 5,422,019   |                 
|Inventories                                                                                                     |                                                                                                   |                           | 5,184,272                                  |                                      |            |                 | 5,949,775   |                 
|Prepaid expenses and other current assets                                                                       |                                                                                                   |                           | 507,604                                    |                                      |            |                 | 568,422     |                 
|Investments available for sale                                                                                  |                                                                                                   |                           | 1,396,970                                  |                                      |            |                 | 450,884     |                 
|Deferred tax asset                                                                                              |                                                                                                   |                           | 983,812                                    |                                      |            |                 | 1,362,247   |                 
|                                                                                                                |                                                                                                   |                           |                                            |                                      |            |                 |             |                 
|                                                                                                                |                                                                                                   | Total current assets      |                                            |                                      | 17,180,434 |                 |             |                  | 15,249,569 |            
|Property and equipment, at cost, net of accumulated depreciation
of $4,061,861 in 2000 and $4,428,939 in 2001   |                                                                                                   |                           | 1,344,418                                  |                                      |            |                 | 1,395,741   |                 
|Purchased intangibles, net of accumulated amortization
of $159,505 in 2000 and $185,524 in 2001                 |                                                                                                   |                           | 223,603                                    |                                      |            |                 | 197,584     |                 
|Software development costs, net of accumulated amortization of
$1,375,569 in 2000 and $1,492,536 in 2001        |                                                                                                   |                           | 435,517                                    |                                      |            |                 | 783,913     |                 
|Deferred tax asset                                                                                              |                                                                                                   |                           | 8,348,179                                  |                                      |            |                 | 7,696,038   |                 
|Other assets                                                                                                    |                                                                                                   |                           | 755,388                                    |                                      |            |                 | 675,403     |                 
|                                                                                                                |                                                                                                   |                           |                                            |                                      |            |                 |             |                 
|                                                                                                                |                                                                                                   | Total assets              |                                            | $                                    | 28,287,539 |                 |             | $                | 25,998,248 |            
|                                                                                                                |                                                                                                   |                           |                                            |                                      |            |                 |             |                 
|                                                                                                                |                                                                                                   |                           |                                            | Liabilities And Shareholders Equity |            |                 |             |                  |            |             |  | 
|Current liabilities:                                                                                            |                                                                                                   |                           |                                            |                                      |            |                 |             |                 
|Short-term borrowings                                                                                           |                                                                                                   | $                         | 648,972                                    |                                      |            | $               | 361,908     |                 
|Current portion of long-term debt                                                                               |                                                                                                   |                           | 1,972,333                                  |                                      |            |                 | 1,973,514   |                 
|Accounts payable                                                                                                |                                                                                                   |                           | 2,676,398                                  |                                      |            |                 | 2,104,771   |                 
|Accrued expenses                                                                                                |                                                                                                   |                           | 2,683,274                                  |                                      |            |                 | 1,881,633   |                 
|Deferred income  service contracts and other                                                                   |                                                                                                   |                           | 727,158                                    |                                      |            |                 | 842,187     |                 
|                                                                                                                |                                                                                                   |                           |                                            |                                      |            |                 |             |                 
|                                                                                                                |                                                                                                   | Total current liabilities |                                            |                                      | 8,708,135  |                 |             |                  | 7,164,013  |            
|Long term debt                                                                                                  |                                                                                                   |                           | 5,527,667                                  |                                      |            |                 | 3,761,098   |                 
|Deferred income  service contracts and other                                                                   |                                                                                                   |                           | 432,459                                    |                                      |            |                 | 304,078     |                 
|                                                                                                                |                                                                                                   |                           |                                            |                                      |            |                 |             |                 
|                                                                                                                |                                                                                                   | Total liabilities         |                                            |                                      | 14,668,261 |                 |             |                  | 11,229,189 |            
|Commitments and contingencies                                                                                   |                                                                                                   |                           |                                            |                                      |            |                 |             |                 
|Shareholders equity:                                                                                           |                                                                                                   |                           |                                            |                                      |            |                 |             |                 
|Preferred stock, $.01 par value; Authorized: 3,000,000 shares;
Callable Series B shares issued and outstanding: |                                                                                                   |                           |                                            |                                      |            |                 |             |                 
|                                                                                                                | 2000 - 204,000 ($612,000 liquidation preference)
2001 - 204,000 ($612,000 liquidation preference) |                           |                                            | 2,040                                |            |                 |             | 2,040            |           
|Common stock, $.01 par value; Authorized: 50,000,000 shares                                                     |                                                                                                   |                           |                                            |                                      |            |                 |             |                 
|                                                                                                                | Shares issued and outstanding: 2000  9,868,855 and 2001  9,997,959                              |                           |                                            | 98,687                               |            |                 |             | 99,978           |           
|Additional paid-in capital                                                                                      |                                                                                                   |                           | 40,444,269                                 |                                      |            |                 | 40,993,797  |                 
|Unearned compensation                                                                                           |                                                                                                   |                           | (205,091                                   | )                                    |            |                 | (54,084     | )               
|Unrealized gains (losses) on investments                                                                        |                                                                                                   |                           | 289,028                                    |                                      |            |                 | (278,623    | )               
|Accumulated deficit                                                                                             |                                                                                                   |                           | (27,009,655                                | )                                    |            |                 | (25,994,049 | )               
|                                                                                                                |                                                                                                   |                           |                                            |                                      |            |                 |             |                 
|                                                                                                                |                                                                                                   |                           | Total shareholders equity                 |                                      |            | 13,619,278      |             |                  |            | 14,769,059  | 
|                                                                                                                |                                                                                                   |                           |                                            |                                      |            |                 |             |                 
|                                                                                                                |                                                                                                   |                           | Total liabilities and shareholders equity |                                      | $          | 28,287,539      |             |                  | $          | 25,998,248  | 
|                                                                                                                |                                                                                                   |                           |                                            |                                      |            |                 |             |                 



---

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

2



---



##### Table of Contents






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

|                                                     |           |                        |            |                                          |          |      |            |      |          |  
|---------------------------------------------------- | --------- | ---------------------- | ---------- | ---------------------------------------- | -------- | ---- | ---------- | ---- | -------- | -
|                                                     |           |                        |            | For the three months ended September 30,
|                                                     |           |                        |            |                                         
|                                                     |           |                        |            | 2000                                     |          | 2001
|                                                     |           |                        |            |                                          |          |     
|Sales of IVD systems                                 |           | $                      | 1,465,848  |                                          |          | $    | 1,313,877  |     
|Sales of IVD supplies and services                   |           |                        | 3,896,692  |                                          |          |      | 3,722,723  |     
|Sales of small lab devices and supplies              |           |                        | 1,665,565  |                                          |          |      | 1,747,799  |     
|Royalties and licensing revenues                     |           |                        | 14,670     |                                          |          |      | 127,336    |     
|                                                     |           |                        |            |                                          |          |      |            |     
|Net revenues                                         |           |                        | 7,142,775  |                                          |          |      | 6,911,735  |     
|                                                     |           |                        |            |                                          |          |      |            |     
|Cost of goods  IVD systems                          |           |                        | 1,025,602  |                                          |          |      | 980,057    |     
|Cost of goods  IVD supplies and services            |           |                        | 1,329,317  |                                          |          |      | 1,274,207  |     
|Cost of goods  lab devices and supplies             |           |                        | 853,812    |                                          |          |      | 807,044    |     
|                                                     |           |                        |            |                                          |          |      |            |     
|Cost of goods sold                                   |           |                        | 3,208,731  |                                          |          |      | 3,061,308  |     
|                                                     |           |                        |            |                                          |          |      |            |     
|Gross margin                                         |           |                        | 3,934,044  |                                          |          |      | 3,850,427  |     
|                                                     |           |                        |            |                                          |          |      |            |     
|Marketing and selling                                |           |                        | 835,279    |                                          |          |      | 931,148    |     
|General and administrative                           |           |                        | 1,065,658  |                                          |          |      | 1,135,077  |     
|Research and development, net                        |           |                        | 670,563    |                                          |          |      | 1,083,234  |     
|Amortization of intangibles                          |           |                        | 36,422     |                                          |          |      | 36,480     |     
|                                                     |           |                        |            |                                          |          |      |            |     
|Total operating expenses                             |           |                        | 2,607,922  |                                          |          |      | 3,185,939  |     
|                                                     |           |                        |            |                                          |          |      |            |     
|Operating income                                     |           |                        | 1,326,122  |                                          |          |      | 664,488    |     
|Other income (expense):                              |           |                        |            |                                          |          |      |            |     
|                                                     |           | Interest income        |            |                                          | 55,714   |      |            |      | 21,013   |  
|                                                     |           | Interest expense       |            |                                          | (242,779 | )    |            |      | (218,113 | )
|                                                     |           | Other income (expense) |            |                                          | 2,507    |      |            |      | (1,447   | )
|                                                     |           |                        |            |                                          |          |      |            |     
|Income before income taxes                           |           |                        | 1,141,564  |                                          |          |      | 465,941    |     
|Income taxes                                         |           |                        | 422,379    |                                          |          |      | 186,377    |     
|                                                     |           |                        |            |                                          |          |      |            |     
|Net income                                           |           | $                      | 719,185    |                                          |          | $    | 279,564    |     
|                                                     |           |                        |            |                                          |          |      |            |     
|Net income per common share                          |           |                        |            |                                          |          |      |            |     
|                                                     | - basic   |                        | $          | 0.07                                     |          |      | $          | 0.03 |         
|                                                     |           |                        |            |                                          |          |      |            |     
|                                                     | - diluted |                        | $          | 0.07                                     |          |      | $          | 0.02 |         
|                                                     |           |                        |            |                                          |          |      |            |     
|Weighted average number of common shares outstanding |           |                        |            |                                          |          |      |            |     
|- basic                                              |           |                        | 9,752,009  |                                          |          |      | 9,989,751  |     
|                                                     |           |                        |            |                                          |          |      |            |     
|- diluted                                            |           |                        | 10,696,246 |                                          |          |      | 11,220,087 |     
|                                                     |           |                        |            |                                          |          |      |            |     



---

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


3



---



##### Table of Contents






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

|                                                                    |                        |                                                                                                     |            |                                         |          |      |            |          |   | 
|------------------------------------------------------------------- | ---------------------- | --------------------------------------------------------------------------------------------------- | ---------- | --------------------------------------- | -------- | ---- | ---------- | -------- | - | 
|                                                                    |                        |                                                                                                     |            | For the nine months ended September 30,
|                                                                    |                        |                                                                                                     |            |                                        
|                                                                    |                        |                                                                                                     |            | 2000                                    |          | 2001
|                                                                    |                        |                                                                                                     |            |                                         |          |     
|Sales of IVD systems                                                |                        | $                                                                                                   | 4,985,001  |                                         |          | $    | 4,238,022  |         
|Sales of IVD supplies and services                                  |                        |                                                                                                     | 11,051,743 |                                         |          |      | 11,637,947 |         
|Sales of small lab devices and supplies                             |                        |                                                                                                     | 4,794,575  |                                         |          |      | 5,070,372  |         
|Royalties and licensing revenues                                    |                        |                                                                                                     | 541,075    |                                         |          |      | 249,302    |         
|                                                                    |                        |                                                                                                     |            |                                         |          |      |            |         
|Net revenues                                                        |                        |                                                                                                     | 21,372,394 |                                         |          |      | 21,195,643 |         
|                                                                    |                        |                                                                                                     |            |                                         |          |      |            |         
|Cost of goods  IVD systems                                         |                        |                                                                                                     | 3,350,703  |                                         |          |      | 3,089,556  |         
|Cost of goods  IVD supplies and services                           |                        |                                                                                                     | 4,238,884  |                                         |          |      | 4,003,022  |         
|Cost of goods  lab devices and supplies                            |                        |                                                                                                     | 2,473,161  |                                         |          |      | 2,410,126  |         
|                                                                    |                        |                                                                                                     |            |                                         |          |      |            |         
|Cost of goods sold                                                  |                        |                                                                                                     | 10,062,748 |                                         |          |      | 9,502,704  |         
|                                                                    |                        |                                                                                                     |            |                                         |          |      |            |         
|Gross margin                                                        |                        |                                                                                                     | 11,309,646 |                                         |          |      | 11,692,939 |         
|Marketing and selling                                               |                        |                                                                                                     | 2,678,025  |                                         |          |      | 2,892,726  |         
|General and administrative                                          |                        |                                                                                                     | 3,036,084  |                                         |          |      | 3,315,320  |         
|Research and development, net                                       |                        |                                                                                                     | 1,691,214  |                                         |          |      | 3,131,145  |         
|Amortization of intangibles                                         |                        |                                                                                                     | 107,095    |                                         |          |      | 108,504    |         
|                                                                    |                        |                                                                                                     |            |                                         |          |      |            |         
|Total operating expenses                                            |                        |                                                                                                     | 7,512,418  |                                         |          |      | 9,447,695  |         
|                                                                    |                        |                                                                                                     |            |                                         |          |      |            |         
|Operating income                                                    |                        |                                                                                                     | 3,797,228  |                                         |          |      | 2,245,244  |         
|Other income (expense):                                             |                        |                                                                                                     |            |                                         |          |      |            |         
|                                                                    | Interest income        |                                                                                                     |            | 139,032                                 |          |      |            | 102,837  |  
|                                                                    | Interest expense       |                                                                                                     |            | (727,406                                | )        |      |            | (654,942 | )
|                                                                    | Other income (expense) |                                                                                                     |            | 14,364                                  |          |      |            | (462     | )
|                                                                    |                        |                                                                                                     |            |                                         |          |      |            |         
|Income from continuing operations before provision
for income taxes |                        |                                                                                                     | 3,223,218  |                                         |          |      | 1,692,677  |         
|Provision for income taxes                                          |                        |                                                                                                     | 1,192,591  |                                         |          |      | 677,071    |         
|                                                                    |                        |                                                                                                     |            |                                         |          |      |            |         
|Income from continuing operations                                   |                        |                                                                                                     | 2,303,627  |                                         |          |      | 1,015,606  |         
|Loss from discontinued operations:                                  |                        |                                                                                                     |            |                                         |          |      |            |         
|                                                                    |                        | Loss from operations of discontinued segment
prior to March 31, 2000, net of tax benefit of
$61,015 |            |                                         | (286,385 | )    |            |          |  | 
|                                                                    |                        | Loss on disposal of discontinued segment,
including tax provision of $29,374                        |            |                                         | (199,159 | )    |            |          |  | 
|                                                                    |                        |                                                                                                     |            |                                         |          |      |            |         
|Loss from discontinued operations                                   |                        |                                                                                                     | (485,544   | )                                       |          |      |           |         
|                                                                    |                        |                                                                                                     |            |                                         |          |      |            |         
|Net income                                                          |                        | $                                                                                                   | 1,545,083  |                                         |          | $    | 1,015,606  |         
|                                                                    |                        |                                                                                                     |            |                                         |          |      |            |         

4



---



##### Table of Contents



|                                                     |  |                                   |      |                                         |            |      |      |   |            | 
|---------------------------------------------------- |  | --------------------------------- | ---- | --------------------------------------- | ---------- | ---- | ---- | - | ---------- | 
|                                                     |  |                                   |      | For the nine months ended September 30,
|                                                     |  |                                   |      |                                        
|                                                     |  |                                   |      | 2000                                    |            | 2001
|                                                     |  |                                   |      |                                         |            |     
|Income (loss) per share  basic:                     |  |                                   |      |                                         |            |      |      |  
|                                                     |  | Income from continuing operations |      | $                                       | 0.21       |      |      | $ | 0.10       | 
|                                                     |  | Loss from discontinued segment    |      |                                         | (0.05      | )    |      |   |           | 
|                                                     |  |                                   |      |                                         |            |      |      |  
|                                                     |  | $                                 | 0.16 |                                         |            | $    | 0.10 |  
|                                                     |  |                                   |      |                                         |            |      |      |  
|Income (loss) per share  diluted:                   |  |                                   |      |                                         |            |      |      |  
|                                                     |  | Income from continuing operations |      | $                                       | 0.20       |      |      | $ | 0.09       | 
|                                                     |  | Loss from discontinued segment    |      |                                         | (0.05      | )    |      |   |           | 
|                                                     |  |                                   |      |                                         |            |      |      |  
|                                                     |  | $                                 | 0.15 |                                         |            | $    | 0.09 |  
|                                                     |  |                                   |      |                                         |            |      |      |  
|Weighted average number of common shares outstanding |  |                                   |      |                                         |            |      |      |  
|                                                     |  | - basic                           |      |                                         | 9,593,806  |      |      |   | 9,957,016  | 
|                                                     |  |                                   |      |                                         |            |      |      |  
|                                                     |  | - diluted                         |      |                                         | 10,399,840 |      |      |   | 10,883,833 | 
|                                                     |  |                                   |      |                                         |            |      |      |  



---

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


5



---



##### Table of Contents






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

|                                                                      |                                                                         |                                                         |                               |             |                                         |        |            |             |          |   | 
|--------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------- | ----------- | --------------------------------------- | ------ | ---------- | ----------- | -------- | - | 
|                                                                      |                                                                         |                                                         |                               |             | For the nine months ended September 30,
|                                                                      |                                                                         |                                                         |                               |             |                                        
|                                                                      |                                                                         |                                                         |                               |             | 2000                                    |        | 2001      
|                                                                      |                                                                         |                                                         |                               |             |                                         |        |           
|Operating activities:                                                 |                                                                         |                                                         |                               |             |                                         |        |            |            
|                                                                      | Net income                                                              |                                                         | $                             | 1,545,083   |                                         |        | $          | 1,015,606   |         
|                                                                      | Adjustments to reconcile net income to net cash provided by
operations: |                                                         |                               |             |                                         |        |            |             |         
|                                                                      |                                                                         | Loss from discontinued operations                       |                               |             | 485,544                                 |        |            |             |         |  
|                                                                      |                                                                         | Deferred tax benefit                                    |                               |             | 1,106,842                               |        |            |             | 652,141  |  
|                                                                      |                                                                         | Depreciation and amortization                           |                               |             | 605,010                                 |        |            |             | 767,002  |  
|                                                                      |                                                                         | Common stock and stock option compensation amortization |                               |             | 170,591                                 |        |            |             | 161,007  |  
|                                                                      |                                                                         |                                                         | Gain on disposal of equipment |             |                                         | (1,677 | )          |             |          |  | 
|                                                                      | Changes in assets and liabilities:                                      |                                                         |                               |             |                                         |        |            |             |         
|                                                                      |                                                                         | Accounts receivable  trade and other                   |                               |             | 385,601                                 |        |            |             | 221,977  |  
|                                                                      |                                                                         | Service contracts, net                                  |                               |             | (386,242                                | )      |            |             | (210,882 | )
|                                                                      |                                                                         | Inventories                                             |                               |             | (1,341,502                              | )      |            |             | (765,503 | )
|                                                                      |                                                                         | Prepaid expenses and other current assets               |                               |             | 69,985                                  |        |            |             | (60,818  | )
|                                                                      |                                                                         | Other assets                                            |                               |             | (86,844                                 | )      |            |             | (20,763  | )
|                                                                      |                                                                         | Accounts payable                                        |                               |             | 317,455                                 |        |            |             | (571,627 | )
|                                                                      |                                                                         | Accrued expenses                                        |                               |             | 767,318                                 |        |            |             | (777,604 | )
|                                                                      |                                                                         |                                                         |                               |             |                                         |        |            |            
|Net cash provided by continuing operations                            |                                                                         |                                                         | 3,637,164                     |             |                                         |        | 410,536    |            
|Net cash used by discontinued operations                              |                                                                         |                                                         | (858,988                      | )           |                                         |        |           |            
|                                                                      |                                                                         |                                                         |                               |             |                                         |        |            |            
|Net cash provided by operating activities                             |                                                                         |                                                         | 2,778,176                     |             |                                         |        | 410,536    |            
|                                                                      |                                                                         |                                                         |                               |             |                                         |        |            |            
|Investing activities:                                                 |                                                                         |                                                         |                               |             |                                         |        |            |            
|                                                                      | Acquisition of property and equipment                                   |                                                         |                               | (253,019    | )                                       |        |            | (534,630    | )       
|                                                                      | Software development costs                                              |                                                         |                               | (186,086    | )                                       |        |            | (465,360    | )       
|                                                                      | Investing activities of discontinued operations                         |                                                         |                               | (136,694    | )                                       |        |            |            |         
|                                                                      |                                                                         |                                                         |                               |             |                                         |        |            |            
|Net cash used in investing activities                                 |                                                                         |                                                         | (575,799                      | )           |                                         |        | (999,990   | )          
|                                                                      |                                                                         |                                                         |                               |             |                                         |        |            |            
|Financing activities:                                                 |                                                                         |                                                         |                               |             |                                         |        |            |            
|                                                                      | Borrowings under line of credit                                         |                                                         |                               | 13,910,000  |                                         |        |            | 12,969,118  |         
|                                                                      | Repayments of line of credit                                            |                                                         |                               | (14,188,972 | )                                       |        |            | (13,256,183 | )       
|                                                                      | Borrowings under term loan                                              |                                                         |                               |            |                                         |        |            | 3,000,000   |         
|                                                                      | Repayments of term loan                                                 |                                                         |                               | (900,000    | )                                       |        |            | (833,332    | )       
|                                                                      | Repayment of notes payable                                              |                                                         |                               |            |                                         |        |            | (3,597,250  | )       
|                                                                      | Payments of capital lease obligations                                   |                                                         |                               | (12,960     | )                                       |        |            | (24,037     | )       
|                                                                      | Issuance of common stock and warrant for cash                           |                                                         |                               | 162,803     |                                         |        |            | 166,050     |         
|                                                                      |                                                                         |                                                         |                               |             |                                         |        |            |            
|Net cash used in financing activities                                 |                                                                         |                                                         | (1,029,129                    | )           |                                         |        | (1,575,634 | )          
|                                                                      |                                                                         |                                                         |                               |             |                                         |        |            |            
|Net increase (decrease) in cash and cash equivalents                  |                                                                         |                                                         | 1,173,248                     |             |                                         |        | (2,165,088 | )          
|Cash and cash equivalents at beginning of period                      |                                                                         |                                                         | 2,034,593                     |             |                                         |        | 3,661,310  |            
|                                                                      |                                                                         |                                                         |                               |             |                                         |        |            |            
|Cash and cash equivalents at end of period                            |                                                                         | $                                                       | 3,207,841                     |             |                                         | $      | 1,496,222  |            
|                                                                      |                                                                         |                                                         |                               |             |                                         |        |            |            
|Supplemental schedule of non-cash investing and financing activities: |                                                                         |                                                         |                               |             |                                         |        |            |            
|                                                                      | Issuance of common stock in exchange for services                       |                                                         | $                             | 87,000      |                                         |        | $          | 10,000      |         
|                                                                      | Addition to capital lease obligation                                    |                                                         |                               | 103,977     |                                         |        |            |            |         
|                                                                      | Issuance of warrants in connection with debt financing                  |                                                         |                               |            |                                         |        |            | 374,768     |         
|Supplemental disclosure of cash flow information:                     |                                                                         |                                                         |                               |             |                                         |        |            |            
|                                                                      | Cash paid for interest                                                  |                                                         |                               | 649,339     |                                         |        |            | 638,551     |         
|                                                                      | Cash paid for income taxes                                              |                                                         |                               | 21,726      |                                         |        |            | 39,602      |         



---

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


6



---



##### Table of Contents






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

|                                             |  |                                          |         |      |  |   |          |  
|-------------------------------------------- |  | ---------------------------------------- | ------- | ---- |  | - | -------- | -
|                                             |  | For the three months ended September 30,
|                                             |  |                                         
|                                             |  | 2000                                     |         | 2001
|                                             |  |                                          |         |     
|Net income                                   |  | $                                        | 719,185 |      |  | $ | 279,564  |  
|Unrealized loss on investments, net of taxes |  |                                          |        |      |  |   | (231,222 | )
|                                             |  |                                          |         |      |  |   |          |  
|Comprehensive income                         |  | $                                        | 719,185 |      |  | $ | 48,342   |  
|                                             |  |                                          |         |      |  |   |          |  

|                                             |  |                                         |           |      |  |   |           |  
|-------------------------------------------- |  | --------------------------------------- | --------- | ---- |  | - | --------- | -
|                                             |  | For the nine months ended September 30,
|                                             |  |                                        
|                                             |  | 2000                                    |           | 2001
|                                             |  |                                         |           |     
|Net income                                   |  | $                                       | 1,545,083 |      |  | $ | 1,015,606 |  
|Unrealized loss on investments, net of taxes |  |                                         |          |      |  |   | (567,651  | )
|                                             |  |                                         |           |      |  |   |           |  
|Comprehensive income                         |  | $                                       | 1,545,083 |      |  | $ | 447,955   |  
|                                             |  |                                         |           |      |  |   |           |  



---

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

7



---



##### Table of Contents






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

1. Formation and Business of the Company.

International Remote Imaging Systems, Inc. was incorporated in California
in 1979 and reincorporated during 1987 in Delaware. International Remote
Imaging Systems, Inc. and its subsidiaries (collectively IRIS or the
Company) designs, develops, manufactures and markets in vitrodiagnostic
(IVD) equipment, including IVD imaging systems based on patented and
proprietary automated intelligent microscopy (AIM) technology, and special
purpose centrifuges and other small instruments for USE in clinical
laboratories. The Company also provides ongoing service and supplies to support
the equipment sold.

2. Summary of Significant Accounting Policies.

Basis of Presentation of Unaudited Interim Financial Statements:

In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of the Company as of September 30, 2001
and 2000 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
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 July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 (SFAS 141), Business
Combinations. SFAS 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company does not believe that the adoption of
SFAS 141 will have a significant impact on its financial statements.

In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 (SFAS 142), Goodwill and Other Intangible Assets, which is
effective January 1, 2002. SFAS 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS 142 also requires companies to
complete a transitional goodwill impairment test six months from the date of
adoption. The Company is currently evaluating the impact that SFAS 142 will
have on its financial statements.
Reclassifications:

Certain reclassifications have been made to the 2000 financial statements
to conform to the 2001 presentation.

8



---



##### Table of Contents



3. Comprehensive Income.

The Companys components of comprehensive income are net income and
unrealized gains (losses) on investments. Income tax effect allocated to the
unrealized gains and losses on available for sale securities for the three and
nine months ended September 30, 2001 was a benefit of $154,148 and $378,434,
respectively.

The following is a reconciliation of accumulated other comprehensive
income balance for the three and nine months ended September 30, 2001:

|                      |  |              |          |             |  |   |          |  
|--------------------- |  | ------------ | -------- | ----------- |  | - | -------- | -
|                      |  | Three months |          | Nine months
|                      |  |              |          |            
|Beginning balance     |  | $            | (47,401  | )           |  | $ | 289,028  |  
|Current period change |  |              | (231,222 | )           |  |   | (567,651 | )
|                      |  |              |          |             |  |   |          |  
|Ending balance        |  | $            | (278,623 | )           |  | $ | (278,623 | )
|                      |  |              |          |             |  |   |          |  

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 December 31, 2000 |           | At September 30, 2001
|                                        |  |                      |           |                      
|Finished goods                          |  | $                    | 1,715,881 |                       |  | $ | 1,377,895 | 
|Work-in-process                         |  |                      | 216,050   |                       |  |   | 1,533,302 | 
|Raw materials, parts and sub-assemblies |  |                      | 3,252,341 |                       |  |   | 3,038,578 | 
|                                        |  |                      |           |                       |  |   |           | 
|                                        |  | $                    | 5,184,272 |                       |  | $ | 5,949,775 | 
|                                        |  |                      |           |                       |  |   |           | 

5.Short-Term Borrowings and Notes Payable.

In March 2001, the Company renewed its existing credit facility with
Foothill Capital that was due to mature in May 2001. At September 30, 2001,
the outstanding amounts under the revised credit facility consist of $2.7
million outstanding under a $3.0 million term loan and $362,000 outstanding
under a $4.0 million revolving line of credit. Borrowings under the line of
credit are limited to a percentage of eligible accounts receivable. The
Company had approximately $1.2 million available under the line of credit at
September 30, 2001. The term loan bears interest at the lenders prime rate
(6.0% on September 30, 2001) plus 3.0% and is payable in thirty-six monthly
installments of approximately $83,000. The revolving credit line bears interest
at the lenders prime rate plus 1.0%. The credit facility is subject to
minimum interest charges, prepayment penalties and customary fees, is
collateralized by a first priority lien on all assets of the Company and
matures in May 2004. It also contains financial covenants based primarily on
tangible net worth and cash flows and imposes restrictions on acquisitions,
capital expenditures and cash dividends.

The Company refinanced a $7.0 million Subordinated Note by paying down
$3.5 million in May 2001, with the remaining $3.5 million payable in 36 monthly
installments of approximately $97,000 commencing in September 2001. The note
bears interest on the unpaid principal at a fixed rate of 8.5% per annum until
July 31, 2001 and at a variable rate equal to the prime rate plus 2.0%
thereafter. Interest is payable monthly. In connection with the refinancing
of the $7.0 million note, the Company agreed to cancel and reissue warrants to
purchase 853,040 shares of common stock. As a result of the cancellation and
reissuance, the warrant life was extended from July 31, 2001 to July 31, 2004
and the exercise price was reduced from $3.56 per share to $1.90 per share
commencing July 31, 2001. The Company has accounted for the reissuance of the
warrants in accordance with Accounting Principles Board Opinion No. 14
Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants
and recorded as a discount to the note an amount of $374,768, representing the
relative fair value of the warrants based on the Black-Scholes option-pricing
model. The Company will record the discount as additional interest expense
over the remaining period of the note, using the interest method.

At September 30, 2001, the maturity of the Companys long term debt
obligations, excluding the discount, are $2,167,000 within one year and
$3,902,418 thereafter.

6. Capital Stock.

Stock Issuances:

During the nine months ended September 30, 2001, the Company (i) issued
10,870 shares of common stock in exchange for $10,000 in cash and services
under the Employee Stock Purchase Plan, (ii) issued options to purchase 423,005
shares of common stock under the Companys stock option plans and (iii)
cancelled options to purchase 26,916 shares of common stock. Options for
106,234 shares of common stock were exercised during

9



---



##### Table of Contents



the period. At September 30, 2001, options to purchase 2,292,739 shares of
common stock were issued and outstanding under the Companys stock options
plans. The outstanding options expire by the end of 2011. The exercise price
for these options ranges from $0.69 to $4.38 per share. At September 30, 2001,
there were 607,055 shares of common stock available for the granting of future
options under the Companys stock option plans.

Warrants:

As of September 30, 2001, the following warrants to purchase shares of
common stock were outstanding and exercisable:

| |  |                  |         |                 |  |                 |      |  |  |                  
| |  | ---------------- | ------- | --------------- |  | --------------- | ---- |  |  | -----------------
| |  | Number of Shares |         | Per Share Price |  | Expiration Date
| |  |                  |         |                 |  |                
| |  |                  | 84,270  |                 |  | $               | 3.56 |  |  | December 31, 2001
| |  |                  | 100,000 |                 |  |                 | 1.50 |  |  | February 10, 2002
| |  |                  | 10,000  |                 |  |                 | 4.31 |  |  | May 15, 2002     
| |  |                  | 301,500 |                 |  |                 | 2.00 |  |  | August 6, 2002   
| |  |                  | 289,500 |                 |  |                 | 1.00 |  |  | August 6, 2002   
| |  |                  | 853,040 |                 |  |                 | 1.90 |  |  | July 31, 2004    
| |  |                  | 50,000  |                 |  |                 | 2.13 |  |  | October 31, 2005 

7. Income Taxes.

The income tax provision from continuing operations for the nine-month
period ended September 30, 2001 was $677,071 as compared to $1,192,591 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 NOL and credit
carryforwards is dependent upon generating sufficient taxable income prior to
their expiration. Management believes that there is a risk that certain of
these NOL and credit carryforwards may expire unused and accordingly, has
established a valuation reserve against them. Although realization is not
assured for the remaining deferred tax assets, management believes it is more
likely than not that they will be realized through future taxable income or
alternative tax strategies. However, the net deferred tax assets could be
reduced in the near term if managements estimates of taxable income during the
carryforward period are significantly reduced or alternative tax strategies are
not available. The Company will continue to review its valuation allowances
and make adjustments, if necessary. Should the Company undergo an ownership
change as defined in Section 382 of the Internal Revenue Code, the Companys
tax NOL generated prior to the ownership change would be subject to an annual
limitation. If this occurred a further adjustment of the valuation allowance
would be necessary.

8. Earnings Per Share (EPS).

The computation of per share amounts for the three and nine months ended
September 30, 2001 and 2000 is based on the average number of common shares
outstanding for the period. Options and warrants to purchase 185,670 and
1,389,803 shares of common stock outstanding during the three months ended
September 30, 2001 and three months ended September 30, 2000, respectively,
were not considered in the computation of diluted EPS because their inclusion
would have been antidilutive. Options and warrants to purchase 239,270 and
1,722,103 shares of common stock outstanding during the nine months ended
September 30, 2001 and nine months ended September 30, 2000, 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,      |         | September 30,
|                                            |                 |  | 2000               |         | 2001         
|                                            |                 |  |                    |         |              
|Weighted average number of shares  basic   |                 |  | 9,752,009          |         |               |  | 9,989,751  |        
|Effects of Dilutive Securities              |                 |  |                    |         |               |  |            |        
|                                            | Options         |  |                    | 444,371 |               |  |            | 557,234 | 
|                                            | Warrants        |  |                    | 193,866 |               |  |            | 394,920 | 
|                                            | Preferred Stock |  |                    | 306,000 |               |  |            | 278,182 | 
|                                            |                 |  |                    |         |               |  |            |        
|Weighted average number of shares  diluted |                 |  | 10,696,246         |         |               |  | 11,220,087 |        
|                                            |                 |  |                    |         |               |  |            |        

10



---



##### Table of Contents



|                                            |                 |  |                   |         |               |  |            |         | 
|------------------------------------------- | --------------- |  | ----------------- | ------- | ------------- |  | ---------- | ------- | 
|                                            |                 |  | Nine Months Ended
|                                            |                 |  |                  
|                                            |                 |  | September 30,     |         | September 30,
|                                            |                 |  | 2000              |         | 2001         
|                                            |                 |  |                   |         |              
|Weighted average number of shares  basic   |                 |  | 9,593,806         |         |               |  | 9,957,016  |        
|Effects of Dilutive Securities
Options      |                 |  | 342,664           |         |               |  | 417,583    |        
|                                            | Warrants        |  |                   | 158,454 |               |  |            | 203,234 | 
|                                            | Preferred Stock |  |                   | 304,916 |               |  |            | 306,000 | 
|                                            |                 |  |                   |         |               |  |            |        
|Weighted average number of shares  diluted |                 |  | 10,399,840        |         |               |  | 10,883,833 |        
|                                            |                 |  |                   |         |               |  |            |        

9. Discontinued Operations.

In March 2000, the Board of Directors approved a plan of disposal for its
wholly-owned subsidiary, Perceptive Scientific Instruments, LLC, the Companys
genetic analysis business segment. The Company completed the sale of
substantially all of the U.S. operations of this business to Applied Imaging
Corporation (Nasdaq: AICX) on July 6, 2000. The purchase price consisted of
385,371 shares of Applied Imaging common stock, the assumption of certain
liabilities and potential cash payments based on future performance of Applied
Imagings business. To date, the Company has not received any contingent
purchase consideration. The Company was unable to sell the international
operations of this business and placed Perceptive Scientific International
Limited (a wholly-owned subsidiary of Perceptive Scientific Instruments, LLC)
into a voluntary liquidation under United Kingdom law on June 6, 2000.

The operating results of the discontinued operations for the nine months
ended September 30, 2000 are summarized as follows:

|                                              |  |   |           |  
|--------------------------------------------- |  | - | --------- | -
|Revenues                                      |  | $ | 1,227,400 |  
|Loss from discontinued operations, net of tax |  |   | (485,544  | )

10. Segment and Geographic Information.

The Companys continuing operations are organized on the basis of products
and related services and under FAS 131 the Company operates in two segments:
(1) urinalysis and (2) small laboratory devices.

The urinalysis segment designs, develops, manufactures and markets IVD
imaging systems based on patented and proprietary AIM technology for automating
microscopic procedures for urinalysis. In December 1997, this segment also
began distributing the UF-100 urine cell analyzer in the United States under an
existing agreement with its manufacturer. The Company ceased distribution of
the UF-100 in 2001 as a result of a dispute with its manufacturer. The segment
also provides ongoing sales of supplies and service necessary for the operation
of installed urinalysis workstations. In the United States, these products are
sold through our direct sales force; internationally, these products are sold
through distributors.

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

The accounting policies of the segments are the same as those described in
the Summary of Significant Accounting Policies included in the Companys
report on Form 10-K for the year ended December 31, 2000. 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, 2001 and 2000:

11



---



##### Table of Contents



Three Months Ended September 30, 2001:

|                                |  |            |            |         |  |            |           |             |  |   |           |   |  |   |            | 
|------------------------------- |  | ---------- | ---------- | ------- |  | ---------- | --------- | ----------- |  | - | --------- | - |  | - | ---------- | 
|                                |  |            |            |         |  | Small      |           | Unallocated |  |   |           |  
|                                |  |            |            |         |  | Laboratory |           | Corporate   |  |   |           |  
|                                |  | Urinalysis |            | Devices |  | 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    | 

Three Months Ended September 30, 2000:

|                                |  |            |            |         |  |            |           |             |  |   |            |   |  |   |            | 
|------------------------------- |  | ---------- | ---------- | ------- |  | ---------- | --------- | ----------- |  | - | ---------- | - |  | - | ---------- | 
|                                |  |            |            |         |  | Small      |           | Unallocated |  |   |            |  
|                                |  |            |            |         |  | Laboratory |           | Corporate   |  |   |            |  
|                                |  | Urinalysis |            | Devices |  | Expenses   |           | Total      
|                                |  |            |            |         |  |            |           |            
|Revenues                        |  | $          | 5,477,210  |         |  | $          | 1,665,565 |             |  |   |           |   |  | $ | 7,142,775  | 
|Interest income                 |  | $          | 55,714     |         |  |            |          |             |  |   |           |   |  | $ | 55,714     | 
|Interest expense                |  | $          | 1,111      |         |  |            |          |             |  | $ | 241,668    |   |  | $ | 242,779    | 
|Depreciation and amortization   |  | $          | 209,053    |         |  | $          | 30,603    |             |  | $ | 42,771     |   |  | $ | 282,427    | 
|Segment profit (loss)           |  | $          | 1,374,806  |         |  | $          | 467,295   |             |  | $ | (700,537   | ) |  | $ | 1,141,564  | 
|Segment assets                  |  | $          | 14,395,548 |         |  | $          | 2,114,008 |             |  | $ | 10,250,402 |   |  | $ | 26,759,958 | 
|Investment in long-lived assets |  | $          | 239,074    |         |  | $          | 16,552    |             |  |   |           |   |  | $ | 255,626    | 

Nine Months Ended September 30, 2001:

|                                |  |            |            |         |  |            |           |             |  |   |            |   |  |   |            | 
|------------------------------- |  | ---------- | ---------- | ------- |  | ---------- | --------- | ----------- |  | - | ---------- | - |  | - | ---------- | 
|                                |  |            |            |         |  | Small      |           | Unallocated |  |   |            |  
|                                |  |            |            |         |  | Laboratory |           | Corporate   |  |   |            |  
|                                |  | Urinalysis |            | Devices |  | 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    | 

12



---



##### Table of Contents



Nine Months Ended September 30, 2000:

|                                |  |            |            |         |  |            |           |             |  |   |            |   |  |   |            | 
|------------------------------- |  | ---------- | ---------- | ------- |  | ---------- | --------- | ----------- |  | - | ---------- | - |  | - | ---------- | 
|                                |  |            |            |         |  | Small      |           | Unallocated |  |   |            |  
|                                |  |            |            |         |  | Laboratory |           | Corporate   |  |   |            |  
|                                |  | Urinalysis |            | Devices |  | Expenses   |           | Total      
|                                |  |            |            |         |  |            |           |            
|Revenues                        |  | $          | 16,577,819 |         |  | $          | 4,794,575 |             |  |   |           |   |  | $ | 21,372,394 | 
|Interest income                 |  | $          | 139,032    |         |  |            |          |             |  |   |           |   |  | $ | 139,032    | 
|Interest expense                |  | $          | 2,191      |         |  |            |          |             |  | $ | 725,215    |   |  | $ | 727,406    | 
|Depreciation and amortization   |  | $          | 565,432    |         |  | $          | 89,230    |             |  | $ | 117,776    |   |  | $ | 772,438    | 
|Segment profit (loss)           |  | $          | 4,150,298  |         |  | $          | 1,308,479 |             |  | $ | (2,235,559 | ) |  | $ | 3,223,218  | 
|Investment in long-lived assets |  | $          | 397,416    |         |  | $          | 41,689    |             |  |   |           |   |  | $ | 439,105    | 

Long-lived assets were all located in the United States and totaled
$2,758,926 at December 31, 2000 and $3,052,641 at September 30, 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 laboratory 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 we also receive partial funding from time to time under grants
from the National Institute of Health and joint development projects with third
parties.

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

13



---



##### Table of Contents



|                                                                   |  |                    |           |                   |  |      |           |      |  |   |           |  |  |   |           | 
|------------------------------------------------------------------ |  | ------------------ | --------- | ----------------- |  | ---- | --------- | ---- |  | - | --------- |  |  | - | --------- | 
|                                                                   |  | Three Months Ended |           | Nine Months Ended
|                                                                   |  | September 30,      |           | September 30,    
|                                                                   |  |                    |           |                  
|                                                                   |  | 2000               |           | 2001              |  | 2000 |           | 2001
|                                                                   |  |                    |           |                   |  |      |           |     
|Research and development expense, net                              |  | $                  | 671,000   |                   |  | $    | 1,083,000 |      |  | $ | 1,691,000 |  |  | $ | 3,131,000 | 
|Capitalized software development costs                             |  |                    | 154,000   |                   |  |      | 164,000   |      |  |   | 186,000   |  |  |   | 465,000   | 
|Reimbursed costs for research and
development grants and contracts |  |                    | 207,000   |                   |  |      | 349,000   |      |  |   | 658,000   |  |  |   | 902,000   | 
|                                                                   |  |                    |           |                   |  |      |           |      |  |   |           |  |  |   |           | 
|Total product technology expenditures                              |  | $                  | 1,032,000 |                   |  | $    | 1,596,000 |      |  | $ | 2,535,000 |  |  | $ | 4,498,000 | 
|                                                                   |  |                    |           |                   |  |      |           |      |  |   |           |  |  |   |           | 

We sold Perceptive Scientific Instruments, our genetic analysis business,
on July 6, 2000 as part of a plan to refocus on our core business. We have
treated this business as a discontinued operation for accounting purposes, and
we have removed it from most of the discussion and financial information in
this Quarterly Report. For a further discussion of the sale of this business,
please see the discussion below in this section entitled Discontinued Business
Operations on page 19 of this Quarterly Report.

Results of Operations

Comparison of Quarter Ended September 30, 2001 to Quarter Ended September
30, 2000

Net revenues for the quarter ended September 30, 2001 decreased to $6.9
million from $7.1 million, a decrease of $231,000, or 3% over the same period
last year. Sales of IVD imaging systems decreased to $1.3 million from $1.5
million, a decrease of $152,000 or 10% from the same period last year. The
decrease is due primarily to lower sales to international distributors. Sales
of IVD imaging system supplies and services decreased to $3.7 million from $3.9
million, a decrease of $174,000 or 4% over the same period last year, primarily
due to lower service revenue. Sales of small instruments and supplies
increased $82,000 to $1.7 million, an increase of 5%. The increase is due
primarily to increased sales of supplies and service for the instruments.
Royalties and licensing revenues increased to $127,000 from $115,000 in the
comparable period from the prior year.

Revenues from the urinalysis segment totaled $5.2 million in the current
period as compared to $5.5 million in the comparable period last year, a
decrease of $313,000 or 6%. This reduction is due to decreased international
sales of our urinalysis workstations. Revenues from the small laboratory
devices segment increased $82,000 from the comparable period last year to $1.7
million. This increase is due primarily to increased sales of supplies and
service for the instruments.

Cost of goods for IVD systems as a percentage of sales of IVD imaging
systems totaled 75% in the current period as compared to 70% in the comparable
period from last year. The increase is primarily attributable to increased
manufacturing overhead associated with improved quality assurance and inventory
control processes. Cost of goods for IVD imaging system supplies and services
as a percentage of sales of such products was 34% for the current period which
was comparable to the same period last year. Cost of goods for small
instruments and supplies as a percentage of sales of small instruments and
supplies totaled 46% for the current period, as compared to 51% in the third
quarter of last year. This decrease is due to manufacturing efficiencies from
increased production volume as well as a change in product mix. The aggregate
gross margin totaled 56% for the quarter ended September 30, 2001 as compared
to 55% in the comparable period of the prior year.

Cost of goods sold as a percentage of revenues from the urinalysis segment
totaled 44%, as compared to 43% in the third quarter of last year. Cost of
goods for small laboratory devices as a percentage of revenues totaled 46% in
the current period, as compared to 51% in the third quarter of the prior year.
This decrease is due to manufacturing efficiencies from increased production
volume as well as a change in product mix.

Marketing and selling expenses totaled $931,000, compared to $835,000 for
the comparable period of last year, an increase of $96,000, or 11%, due
primarily to increased marketing efforts for our urinalysis business.
Marketing and selling expenses as a percentage of net revenues were 13% in the
quarter ended September 30, 2001, as compared to 12% in the same period last
year.

General and administrative expenses were $1.1 million, an increase of
$69,000, or 7% from the comparable period in the prior year. This increase is
due primarily to increased charges for legal fees and other professional
services, as well as the cost of upgrading the Companys internal information
systems. General and administrative expenses for the period as a percentage of
net revenue were 16% as compared to 15% in the same period in the prior year.

14



---



##### Table of Contents



Net research and development expenses increased to $1.1 million for the
quarter ended September 30, 2001, as compared to $671,000 in the third quarter
of last year, an increase of $413,000 or 62%. Net research and development
expenses as a percentage of revenues increased to 16% in the quarter ended
September 30, 2001 from 9% 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,
increased to $1.6 million from $1.0 million, an increase of $564,000 or 55% as
compared to the same period of the prior year. The increase in total product
technology expenditures is due primarily to increased spending under a major
project begun in 1999 to improve our urinalysis workstation product line. We
believe that this project is important to maintaining our competitive position
in the urinalysis market and that our failure to complete this project on
schedule could have a material and adverse effect on our business. We expect
our net research and development expenses will continue at current levels
during 2001.

Amortization of intangible assets reflects the amortization of acquired
intangible assets and patents. Amortization of intangible assets for the
quarter ended September 30, 2001 was $36,000 which was the same as in the
comparable period in the prior year.

Operating income for the quarter ended September 30, 2001 decreased to
$664,000 as compared to $1.3 million in the comparable quarter of the prior
year, principally as a result of increased research and development expenses.

Interest expense decreased to $218,000 in the quarter ended September 30,
2001 from $243,000 in the comparable quarter of the prior year due to decreased
interest rates on the credit facility and reduced indebtedness.

For the quarter ended September 30, 2001, urinalysis segment profits
decreased to $648,000 from $1.4 million in the comparable quarter of the prior
year. This decrease is attributable to higher operating costs, particularly
research and development. Segment profits for the small laboratory devices
segment totaled $578,000, as compared to $467,000 in the comparable quarter of
the prior year. The increase results from increased product sales and improved
profit margins in that segment. Unallocated corporate expenses totaled
$760,000 in the current period as compared to $701,000 in the same period last
year. The increase was primarily due to higher charges incurred for legal and
other professional services.

The income tax provision for the quarter ended September 30, 2001 totaled
$186,000, as compared to $422,000 in the quarter ended September 30, 2000. The
decrease reflects the decreased taxable income experienced by the Company in
2001.

Income from continuing operations decreased to $280,000, or $0.02 per
diluted share, for the quarter ended September 30, 2001, as compared to
$719,000, or $0.07 per diluted share, for the same period of the prior year.

Comparison of Nine Months Ended September 30, 2001 to Nine Months Ended
September 30, 2000

Net revenues for the nine months ended September 30, 2001 totaled $21.2
million, a slight decrease over the same period last year. Sales of IVD
imaging systems decreased to $4.2 million from $5.0 million, a decrease of
$747,000 or 15% from the comparable period last year. This decrease is due
primarily to a drop in sales to international distributors. Sales of IVD
system supplies and services increased to $11.6 million from $11.1 million, an
increase of $586,000 or 5% over the comparable last year, primarily due to the
larger installed base of urinalysis workstations. Sales of small instruments
and supplies increased to $5.1 million from $4.8 million, an increase of
$276,000 or 6% over the comparable period last year. Royalties and licensing
revenues decreased to $249,000 from $541,000 in the same period last year. The
decrease was due to the fact that the year ago period contained a nonrecurring
$300,000 license fee in connection with expanded licensing of several existing
patents.

Revenues from the urinalysis segment totaled $16.1 million in the current
nine-month period, down from $16.6 million in the comparable period last year.
Higher sales of IVD system supplies and services were more than offset by lower
sales of IVD imaging systems and royalties and licensing revenues. Revenues
from the small laboratory devices segment increased to $5.1 million in the
current nine-month period, as compared to $4.8 million in the same period last
year, an increase of $276,000. This growth is due primarily to increased sales
of supplies and service.

Cost of goods for IVD systems as a percentage of sales of IVD systems
totaled 73% in the current period as compared to 67% in the comparable period
last year. The increase is primarily attributable to increased manufacturing
overhead associated with improved quality assurance and inventory control
processes and the effect of the amortization of certain capitalized software
which began in June 2000. Cost of goods for IVD imaging system supplies and
services as a percentage of sales of such products decreased to 34% for the
current period

15



---



##### Table of Contents



as compared to 38% for the same period last year. This decrease is due
primarily to efficiencies derived from improved manufacturing processes. Cost
of goods for small instruments and supplies as a percentage of sales of small
instruments and supplies totaled 48% for the current period, as compared to 52%
in the first nine months of the prior year. This decrease is primarily due to
manufacturing efficiencies from increased production volume as well as a change
in product mix. The aggregate gross margin totaled 55% for the current period
as compared to 53% the same period last year.

Cost of goods sold as a percentage of revenues from the urinalysis segment
totaled 44% for the nine months ended September 30, 2001 as compared to 46% in
the same period last year. Lower cost of goods percentages in IVD system
supplies and services more than offset the higher cost of goods percentages in
the IVD systems area as well as the impact on revenues of the nonrecurring
license fee in the year ago period. Cost of goods for small laboratory devices
as a percentage of revenues totaled 48% in the current period as compared to
52% in the first nine months of 2000. This decrease is primarily due to
manufacturing efficiencies from increased production volume.

Marketing and selling expenses totaled $2.9 million for the nine months
ended September 30, 2001, compared to $2.7 million in the same period last
year, an increase of $215,000 or 8%. Marketing and selling expenses were 14%
of net revenues in the current period as compared to 13% last year.

General and administrative expenses increased to $3.3 million for the nine
months ended September 30, 2001 as compared to $3.0 million for the comparable
period last year, an increase of $279,000 or 9%. This increase is primarily
due to increased charges for legal fees and other professional services.
General and administrative expenses for the period as a percentage of net
revenues were 16% in the current year as compared to 14% in the same period in
the prior year.

Net research and development expenses increased to $3.1 million for the
nine months ended September 30, 2001 from $1.7 million, an increase of $1.4
million or 85% from the comparable period last year. Net research and
development expenses as a percentage of revenues increased to 15% from 8% in
the prior year. Total product technology expenditures, including capitalized
software development costs and reimbursed costs under research and development
grants and contracts, increased to $4.5 million from $2.5 million, an increase
of $2.0 million or 77% as compared to the prior period. The increase in total
product technology expenditures is due primarily to increased spending under a
major project begun in 1999 to improve our urinalysis workstation product line.
We believe that this project is critical to maintaining our competitive
position in the urinalysis market and that our failure to complete this project
on schedule could have a material and adverse effect on our business. We
expect our net research and development expenses will continue at current
levels during 2001.

Amortization of intangible assets reflects the amortization of acquired
intangible assets and patents. Amortization of intangible assets for the nine
months ended September 30, 2001 increased slightly to $109,000 from $107,000 in
the comparable period in the prior year.

Operating income for the first nine months of 2001 decreased to $2.2
million as compared to $3.8 million in the comparable period of the prior year,
principally as a result of the increased research and development costs.

Interest expense decreased to $655,000 for the nine months ended September
30, 2001 from $727,000 for the comparable period last year due to reduced
indebtedness and lower interest rates on the credit facility.

For the nine months ended September 30, 2001, urinalysis segment profits
decreased to $2.6 million as compared to $4.1 million in the same period last
year, a decrease of $1.5 million, or 37%. This decrease is largely due to
higher operating expenses, particularly research and development. Segment
profits for the small laboratory devices segment totaled $1.4 million in the
current nine-month period as compared to $1.3 million in the same period last
year. The improvement was the result of increased product sales and gross
margins. Unallocated corporate expenses totaled $2.4 million in the current
period as compared to $2.2 million in the comparable period last year, an
increase of $143,000, which was primarily due to higher charges for legal and
other professional services.

The income tax provision for the nine months ended September 30, 2001 was
$677,000, as compared to $1.2 million in the comparable year ago period. The
decrease reflects the decreased taxable income experienced by the Company in
2001.

Income from continuing operations decreased to $1.0 million or $0.09 per
diluted share for the first nine months of 2001 as compared to $2.3 million, or
$0.15 per diluted share for the first nine months of 2000.

Liquidity and Capital Resources

16



---



##### Table of Contents



Cash and cash equivalents decreased to $1.5 million at September 30, 2001
from $3.7 million at December 31, 2000. Cash flow provided by operations for
the nine months ended September 30, 2001 decreased to $411,000 from $2.8
million for the comparable period last year. This decrease is primarily due to
the payment of bonuses accrued in 2000 under the Companys bonus plan,
increased expenditures for research and development and increased inventory
levels.

Cash used by investing activities totaled $1.0 million for the nine months
ended September 30, 2001, as compared to $576,000 in the same period last year.
The increase is primarily due to the increase in expenditures for property and
equipment as part of the Companys efforts to upgrade its facilities, as well
as increased software development costs under the Companys research and
development program.

We have a credit facility with Foothill Capital Corporation, a Wells Fargo
company, that consists of a $3.0 million term loan and a $4.0 million revolving
line of credit. Borrowings under the revolving line of credit are limited to a
percentage of eligible accounts receivable. The term loan bears interest at
the lenders prime rate (6.0% on September 30, 2001) plus 3.0%, and is payable
in 36 equal monthly installments. The revolving line of credit bears interest
at the lenders prime rate plus 1.0%. The credit facility is subject to minimum
interest charges, prepayment penalties and customary fees and is collateralized
by a first priority lien on all the assets of the Company. It also contains
financial covenants based primarily on tangible net worth and cash flow and
imposes restrictions on acquisitions, capital expenditures and cash dividends.
The credit facility was recently renewed as discussed below.

We began a major project in 1999 to improve our urinalysis workstation
product line. As a result, we expect continuing high levels of research and
development expenditures in 2001. We plan to continue to fund this project
with cash generated from operations.

Net cash used by financing activities totaled $1.6 million and consisted
primarily of partial payment of a recently refinanced subordinated note,
principal payments made on the term loan and revolving line of credit described
above, partially offset by funds received from the new term loan under our
credit facility and exercise of stock options. As of September 30, 2001, we
owed $2.7 million on the term loan and $362,000 on the revolving line of credit
and were eligible to borrow an additional $1.2 million under the revolving
credit line.

In March 2001, we refinanced a $7.0 million subordinated note due July 31,
2001. We refinanced the subordinated note with the combination of (1) a new
$3.0 million term loan from Foothill Capital, (2) a new $3.5 million
subordinated note issued to the existing note holder and (3) $500,000 from our
cash reserves. The new term loan and new subordinated note will both amortize
over three years. In connection with the refinancing, we issued a new 3-year
warrant to the note holder to purchase 853,040 shares of common stock at $1.90
per share, the closing price of the common stock on the date of the
refinancing. The new warrant replaces an old warrant expiring July 2001 for
the same number of shares.

We reduced our outstanding debt by $1.7 million in the first nine months
of 2001 and, after considering the effect of the refinancing discussed above,
we have scheduled principal payments totaling $2.3 million during the next
twelve months. We anticipate needing additional funding next year and are
currently exploring various funding opportunities.

Discontinued Business Operations

We sold Perceptive Scientific Instruments, our genetic analysis business,
in July 2000. Its principal product was the PowerGene family of genetic
analyzers  IVD imaging systems for karyotyping, DNA probe analysis and
comparative genomic hybridization. We sold the assets of the U.S. operations
to Applied Imaging Corporation (Nasdaq: AICX) for 385,371 shares of Applied
Imaging common stock, the assumption of certain liabilities and contingent cash
payments tied to the future performance of Applied Imagings business. We
retained the Houston-based research group, including its federally funded
research grants, and changed the name of the group to Advanced Digital Imaging
Research. We were unable to sell the international operations and placed
Perceptive Scientific International Limited (a wholly-owned subsidiary of
Perceptive Scientific Instruments) into a voluntary liquidation under United
Kingdom law. We have classified Perceptive Scientific Instruments as a
discontinued operation for accounting purposes and have removed it from most of
the discussion and financial information in this Quarterly Report and our other
reports filed with the Securities and Exchange Commission after July 2000.

Shareholder Rights Plan

We have a shareholders 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

17



---



##### Table of Contents



party) will be entitled to purchase shares of common stock (or the economic
equivalent in preferred 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.

Recent Accounting Pronouncements

Recent accounting pronouncements are discussed in Note 2 to the interim
financial statements on page 9.

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 maybe 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.

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 on the safe harbor created by the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include our views on future financial results, financing sources, product
development, capital requirements, market growth and the like, and are
generally identified by phrases such as anticipates, believes, estimates,
expects, intends, plans and similar words. Forward-looking statements
are merely predictions and therefore inherently subject to uncertainties and
other factors which could cause the actual results to differ materially from
the forward-looking statement. These uncertainties and other factors include,
among other things,



| |  | unexpected technical and marketing difficulties inherent in major product development efforts such as our current project
to improve 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 2000
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.

18



---



##### Table of Contents



There was no material change in the Companys exposure to market risk on
September 30, 2001 as compared to its market risk exposure on December 31,
2000. 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, 2000.




PART II
OTHER INFORMATION




Item 1. Legal Proceedings.

We are not presently involved in any litigation.




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




(a)  Exhibits

|        |  |                                                                                 |  |           |    |  
|------- |  | ------------------------------------------------------------------------------- |  | --------- | -- | -
|Exhibit |  |                                                                                 |  | Reference
|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 | )

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 filed one Current Report on Form 8-K during the quarter ended
September 30, 2001. On September 20, 2001, the Company filed a Form 8-K
announcing that it had dismissed PricewaterhouseCoopers, LLP as its independent
accountants and had engaged BDO Seidman, LLP as its new independent
accountants.

19



---



##### Table of Contents






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 14, 2001

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

20



---



##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

EXHIBITS

TO

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2001

COMMISSION FILE NO. 1-9767

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.





---



##### Table of Contents






EXHIBIT INDEX

|        |  |                                                                                 |  |           |    |  
|------- |  | ------------------------------------------------------------------------------- |  | --------- | -- | -
|Exhibit |  |                                                                                 |  | Reference
|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 | )

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).





---



##### Table of Contents



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 14, 2001

| |  |                                            |  |                                                                         
| |  | ------------------------------------------ |  | ------------------------------------------------------------------------
| |  | INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
| |  |                                            |  |                                                                         
|
|
|
|
| |  | By:                                        |  | /s/ John Caloz                                                          
| |  |                                            |  |                                                                         
| |  |                                            |  | John Caloz
Corporate Vice President, Finance
and Chief Financial Officer

1