PART I - FINANCIAL INFORMATION                                           Page

    Item 1 - Consolidated Financial Statements
              Consolidated Balance Sheets                                   2
              Consolidated Statements of Operations                         3
              Consolidated Statements of Cash Flows                         5
              Consolidated Statements of Comprehensive Income               6
              Notes to Consolidated Financial Statements                    7 

    Item 2 - Management's Discussion and Analysis of
              Financial Condition and Results of Operations               14

    Item 3 - Quantitative and Qualitative Disclosure
              About Market Risk                                           24 

    Item 4 - Controls and Procedures                                      24 

PART II - OTHER INFORMATION

    Item 1 - Legal Proceedings                                            25

    Item 6 - Exhibits and Reports on Form 8-K
               (a) Exhibits                                               25
               (b) Reports on Form 8-K                                    25

SIGNATURE                                                                 26

PART I

FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

Assets

Liabilities And Shareholders' Equity

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

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

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

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

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

1.   Formation and Business of the Company.  

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

2.   Summary of Significant Accounting Policies. 

Basis of Presentation of Unaudited Interim Financial Statements: 

      In the opinion of management, the accompanying unaudited consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position of the Company as of September 30, 2003 and 2002 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 accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting periods. 

           The significant estimates in the preparation of the consolidated financial statements relate to the assessment of the carrying value of accounts receivables, inventories, purchased intangibles, estimated provisions for warranty costs and deferred tax assets. Actual results could materially differ from those estimates. 

Principles of Consolidation: 

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

Stock Based Compensation: 

      The Company has adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS 123 defines a fair value based method of accounting for an employee stock option. Fair value of the stock option is determined considering factors such as the exercise price, the expected life of the option, the current price of the underlying stock and its volatility, expected dividends on the stock, and the risk-free interest rate for the expected term of the option. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period. Pro forma disclosures for entities that elect to continue to measure compensation cost under the intrinsic method provided by Accounting Principles Board Opinion No. 25 must include the effects of all awards granted. The Company accounts for stock-based awards to non-employees in accordance with SFAS 123. A n expense is recognized for common stock, warrants or options issued or re-priced, and for services rendered by non-employees based on the estimated fair value of the security exchanged.  

      If compensation expense for the stock options had been determined using "fair value" at the grant date for awards in the third quarter and first nine months of 2003 and 2002, consistent with the provisions of SFAS 148, the Company's net income (loss) and income (loss) per share would have been reduced to the pro forma amounts indicated below: 

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

Accounts Receivable and Allowance for Doubtful Accounts 

Accounts receivable are customer obligations due under normal trade terms. We sell our products to distributors primarily in the healthcare industry. We perform continuing credit evaluations of our customers' financial condition and although we generally do not require collateral, letters of credit may be required from our customers in certain circumstances.

Senior management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. We include any accounts receivable balances that are determined to be uncollectible, along with a general reserve, in our overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available to us, we believe our allowance for doubtful accounts as of September 30, 2003 is adequate. However, actual write-offs might exceed the recorded allowance. 

Recent Accounting Pronouncements: 

      In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities."  SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The adoption of SFAS 149 did not have a material effect on the Company's financial position or results of operations. 

      In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The Company does not currently have any such financial instruments and so is not currently affected by SFAS 150. 

      In November 2002, the FASB Emerging Issues Task Force ("EITF" ) reached a consensus on Issue 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). In the absence of higher level accounting literature, EITF 00-21 governs how to separate and allocate revenue to goods or services or both that are to be delivered in a bundled sales arrangement. EITF 00-21 applies to revenue arrangements entered into after June 30, 2003 and allows for either prospective application or cumulative adjustment upon adoption. We have adopted the guidance of EITF 00-21 with no material impact on its results of operations and financial condition. 

Guarantees and Indemnifications 

Under its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director's serving in such capacity. The term of the indemnification period is for the officer's or director's lifetime. The Company has a separate indemnification agreement with one of its directors that requires it, subject to certain exceptions, to indemnify him to the fullest extent authorized or permitted by its bylaws and the California Corporation Code. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited.  However, the Company has a directors and officer liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of September 30, 2003. 

The Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, typically with business partners, contractors, and customers, landlords and (ii) its agreements with investors. Under these provisions the Company generally indemnifies and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company's activities or, in some cases, as a result of the indemnified party's activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by the Company with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. In addition, in some cases, the Company has agreed to reimburse employees for certain expenses and to provide salary continuation during short-term disability. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of September 30, 2003. 

Reclassifications: 

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

3.      Comprehensive Income.  

      The Company's components of comprehensive income are net income (loss) and unrealized losses on investments.  The income tax effect allocated to the unrealized losses on available for sale securities for the three and nine months ended September 30, 2003 was a benefit of $33,913 and $143,358, respectively.

      The following is a reconciliation of accumulated other comprehensive income (loss) balance for the three and nine months ended September 30, 2003:

4.      Inventories. 

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

5.   Related Party Transaction 

       In April 2002, the Company made a $125,000 loan to Dr. John A. O'Malley, then the Chairman, CEO and President of the Company (and currently, the Chairman of the Board of the Company), in accordance with his employment agreement.  The loan bore interest at the rate of five percent per annum and had a term of five years.  In June 2003, Dr. O'Malley repaid the loan in full, including interest. 

6.    Short-Term Borrowings and Notes Payable. 

       The Company has an $8.0 million credit facility with California Bank and Trust, which consists of a $500,000 term loan, a $1.0 million term loan and a $6.5 million revolving line of credit. The $500,000 term loan is payable in 60 equal monthly installments. The $1.0 million term loan carried interest only for the first 12 months, followed by 48 months of equal principal payments plus interest, commencing in March, 2003. The $6.5 million credit line matures in June 2004.  Borrowings under the line of credit are limited to a percentage of eligible receivables and inventory. Dependent on the Company's debt service coverage ratio, the entire credit facility bears interest at a rate range between the lender's prime rate (4.0% at September 30, 2003), or LIBOR rate plus 2.0% and the lender's prime rate plus 1.0% or LIBOR rate plus 3.0%. 

       At September 30, 2003, the Company was not in compliance with certain of its debt covenants; however California Bank and Trust has executed a forbearance agreement with the Company relieving it of compliance with these certain debt covenants for the third quarter of 2003. As part of that agreement, the Company has agreed to maintain a minimum excess borrowing availability of $400,000 under its line of credit. 

      At September 30, 2003, the outstanding amounts under the Company's credit facility consist of $333,000 under the first term loan, $833,000 under the second term loan and $2.5 million under the revolving line of credit. An additional $1.3 million was available under the line of credit at that date, after allowing for the $400,000 minimum excess borrowing availability requirement mentioned above. 

      At September 30, 2003, the outstanding principal balance on the unsecured Subordinated Note Payable was $1.1 million.  The note is payable in monthly installments of approximately $97,000 plus interest on the unpaid balance. The note bears interest at the prime rate (4.0% on September 30, 2003) plus 2.0% and matures on July 31, 2004. However, on September 30, 2003, California Bank and Trust invoked its rights under the Subordination Agreement to stop the Company from making future payments of the amounts owed on the Subordinated Note Payable until further notice. Since the timing of future payments is indeterminate, the remaining balance of the note is classified as non-current in the financial statements. 

7.   Capital Stock.  

Stock and Stock Option Issuances: 

      During the nine months ended September 30, 2003, the Company (i) issued 347,517 shares of common stock from the exercise of options, (ii) issued options to purchase 278,500 shares of common stock under the Company's stock option plans, (iii) issued options to purchase 290,000 shares of common stock under special inducement grants and (iv) cancelled options to purchase 62,984 shares of common stock.  At September 30, 2003, options to purchase 2,833,709 shares of common stock were issued and outstanding under the Company's stock options plans and special inducement grants. The outstanding options expire by the end of 2012.  The exercise price for these options ranges from $0.69 to $4.38 per share. At the Company's annual meeting in June 2003, shareholders approved a 1.0 million share increase in the number of shares available for future grants under the Company's 1998 Stock Option Plan. At September 30, 2003, there were 947,718 shares of common s tock available for the granting of future options under all of the Company's stock option plans. 

      On October 20, 2003, the Company completed a private placement of 500,000 shares of unregistered common stock at a price of $3.37 per share with a group of institutional investors, yielding proceeds to the Company of $1.685 million.  The investors were given certain registration rights as part of the transaction. 

Warrants: 

      During the nine months ended September 30, 2003, the Company issued warrants to purchase 34,722 shares of common stock. As of September 30, 2003, the following warrants to purchase common stock were outstanding and exercisable: 

8.   Income Taxes. 

      The income tax provision for the nine month period ended September 30, 2003 was a benefit of $407,090 as compared to an expense of $509,959 for the comparable period last year. The income tax provision differs from the federal statutory rate due primarily to state income taxes and permanent differences between income reported for financial statement and income tax purposes. 

      Realization of deferred tax assets associated with Net Operating Losses (NOL) and tax credit carry forwards 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 a s defined in Section 382 of the Internal Revenue Code, the Company's NOL generated prior to the ownership change would be subject to an annual limitation.  If this occurred, a further adjustment of the valuation allowance would be necessary.  

9.   Earnings Per Share (EPS). 

      The computation of per share amounts for the three and nine months ended September 30, 2003 and 2002 is based on the average number of common shares outstanding for the period.  Options and warrants to purchase 36,600 and 628,830 shares of common stock outstanding during the three months ended September 30, 2003 and 2002, respectively, were not considered in the computation of diluted EPS because their inclusion would have been antidilutive. Likewise, options and warrants to purchase 3,816,516 and 430,830 shares of common stock outstanding during the nine months ended September 30, 2003 and 2002, 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.