INTERNATIONAL REMOTE IMAGING SYSTEMS INC /DE/, S-1, 1996-09-30

INTERNATIONAL REMOTE IMAGING SYSTEMS INC /DE/
S-1, 1996-09-30
LABORATORY ANALYTICAL INSTRUMENTS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1996

REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 3826 94-2579751
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

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

9162 ETON AVENUE
CHATSWORTH, CA 91311
(818) 709-1244
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

FRED H. DEINDOERFER
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
9162 ETON AVENUE
CHATSWORTH, CA 91311
(818) 709-1244
(NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)

COPIES TO:

<TABLE>
<S> <C>
THEODORE E. GUTH, ESQ. ROD A. GUERRA, ESQ.
IRELL & MANELLA LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM
1800 AVENUE OF THE STARS, SUITE 900 300 S. GRAND AVENUE
LOS ANGELES, CALIFORNIA 90067 LOS ANGELES, CALIFORNIA 90071
TEL: (310) 277-1010 TEL: (213) 687-5000
FAX: (310) 203-7199 FAX: (213) 687-5600
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, check the following box: / / ____________

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ____________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------

CALCULATION OF REGISTRATION FEE
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<TABLE>
<S> <C> <C> <C> <C>

PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------
Common Stock, par value $0.01..... 3,450,000 $7.78 $26,841,000 $9,256
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</TABLE>

(1) Includes up to 450,000 shares which the Underwriters have the option to
purchase to cover over-allotments, if any.

(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(c) based upon the average of the high and low prices as reported
by the American Stock Exchange on September 25, 1996.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
------------------------

CROSS-REFERENCE SHEET

Pursuant to Item 501(b) of Regulation S-K
Showing Location in Prospectus of Information
Required by Items of Form S-1

<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING CAPTIONS OR LOCATION
IN FORM S-1 REGISTRATION STATEMENT IN PROSPECTUS
------------------------------------------ ------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Facing Page of the Registration Statement;
Cross Reference Sheet; Outside Front Cover
Page of the Prospectus
2. Inside Front and Outside Back Cover Page
of Prospectus............................. Inside Front Cover Page; Additional
Information; and Outside Back Cover Pages
3. Summary Information and Risk Factors and
Ratio of Earnings to Fixed Charges........ Prospectus Summary; Risk Factors
4. Use of Proceeds........................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price........... Not Applicable
6. Dilution.................................. Not Applicable
7. Selling Security Holders.................. Principal and Selling Stockholders
8. Plan of Distribution...................... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered................................ Description of Capital Stock
10. Interests of Named Experts and Counsel.... Legal Matters; Experts
11. Information with Respect to the
Registrant................................ Outside and Inside Front Cover Pages of
Prospectus; Prospectus Summary; Risk
Factors; Use of Proceeds; Dividend Policy;
Capitalization; Selected Consolidated
Financial Data; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business;
Management; Certain Relationships and
Related Transactions; Principal and
Selling Stockholders; Description of
Capital Stock; Glossary of Selected Terms;
Financial Statements
12. Disclosure of Commission Position for
Securities Act Liabilities................ Not Applicable
</TABLE>
<PAGE> 3

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1996

PROSPECTUS

3,000,000 SHARES

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

COMMON STOCK
------------------------

All of the 3,000,000 shares of common stock, $0.01 par value per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by International
Remote Imaging Systems, Inc., a Delaware corporation ("IRIS" or the "Company").
The Common Stock is listed on the American Stock Exchange ("AMEX") under the
symbol "IRI." On , 1996, the last reported sale price of the Common
Stock on the AMEX was $ per share. See "Price Range of Common Stock."
------------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 6 HEREIN FOR A DISCUSSION OF
CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PROCEEDS
PRICE TO UNDERWRITING TO
PUBLIC DISCOUNT(1) COMPANY(2)
----------- ------------ ----------
<S> <C> <C> <C>
Per Share.............................................. $ $ $
Total(3)............................................... $ $ $
</TABLE>

- ---------------
(1) Does not include amounts payable by the Company to M. Kane & Company, Inc.
("MKC") for financial advisory services provided to the Company. The Company
and a stockholder of the Company (the "Selling Stockholder") have agreed to
indemnify the several underwriters identified elsewhere herein (the
"Underwriters") against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."

(2) Before deducting expenses of the offering payable by the Company estimated
at $ .

(3) The Company and the Selling Stockholder have granted the Underwriters a
30-day option to purchase up to 450,000 additional shares of Common Stock on
the same terms and conditions as set forth above, solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the total Price to Public, Underwriting Discount, Proceeds to Company and
Proceeds to the Selling Stockholder will be $ , $ ,
$ and $ . See "Underwriting." The Company will not receive
any proceeds from the sale of shares by the Selling Stockholder. See
"Principal and Selling Stockholders."
------------------------

The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if issued and sold to and accepted by the Underwriters
and subject to approval of certain legal matters by counsel for the
Underwriters. It is expected that delivery of the Common Stock will be made
against payment therefor on or about , 1996, in New York, New York.
------------------------

JEFFERIES & COMPANY, INC.
RAUSCHER PIERCE REFSNES, INC.
M. KANE & COMPANY, INC.
, 1996
<PAGE> 4

IRIS(R), The Yellow IRIS(R), The White IRIS(R), Model 900UDx(TM),
PowerGene(TM), IRIStrip(TM), StatSpin(R), Cen-Slide(R) and Biovation(R) are
trademarks of the Company. This Prospectus also contains trademarks and
tradenames of other companies.

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE AMEX, IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all figures assume no
exercise of the Underwriters' over-allotment option.

THE COMPANY

The Company designs, develops, manufactures and markets in vitro diagnostic
("IVD") imaging systems based on its patented and proprietary "Automated
Intelligent Microscopy" ("AIM") technology for automating microscopic procedures
performed in clinical laboratories. AIM combines the Company's capabilities in
automating specimen presentation, including its patented slideless microscope,
as well as its proprietary high-speed digital processing hardware and software
to rapidly capture, classify and visually present images of microscopic
particles in easy-to-use displays. The Company's IVD imaging systems are
designed to provide customers with consistent, more precise and timely results
and labor cost-savings over manual methods of performing microscopy. The Company
markets its products primarily to hospitals and clinical reference laboratories
and has an installed base of over 500 customers.

The Company estimates that at least three-quarters of all IVD microscopic
procedures are performed manually and require trained medical specialists.
Manually performed diagnostic tests are costly, labor-intensive, cumbersome,
inefficient and often imprecise. Furthermore, there are pressures to reduce
costs while improving operating efficiencies in hospitals and clinical reference
laboratories. As a result, the Company believes there is a movement in such
laboratories to automate microscopic procedures including slide presentation,
testing and processing.

The Company pioneered its first IVD imaging application in 1983 with the
introduction of the first of The Yellow IRIS(R) workstations for urinalysis. The
Company believes that it is still the only supplier of laboratory systems which
fully automate a complete urinalysis, and it recently introduced its fourth
generation models which incorporate significant advancements in speed, utility
and ease of use. Earlier this year, the Company received clearance from the Food
and Drug Administration ("FDA") and began to market the Model 900UDx(TM) urine
pathology system designed especially for the high-volume testing requirements of
larger laboratories.

The Company is expanding into new applications of IVD imaging. The Company
recently developed The White IRIS(R) leukocyte differential analyzer for the
field of hematology. The FDA cleared The White IRIS(R) for marketing in May
1996, and the Company expects to initiate sales of this system in late 1996 or
early 1997.

The Company entered the field of genetics in July of this year with the
acquisition (the "PSI Acquisition") of the IVD imaging business of Perceptive
Scientific Instruments, Inc. ("PSI"), which included the PowerGene(TM) family of
analyzers. PowerGene(TM), an IVD imaging system for karyotyping, DNA probe
analysis and comparative genomic hybridization, has experienced average annual
worldwide revenue growth of 35% over the last two fiscal years. The Company also
acquired significant foreign operations from PSI which are expected to enable
the Company to expand in international markets with its other IVD imaging
systems and products.

The Company also provides significant ongoing sales of supplies and service
necessary for operation of The Yellow IRIS(R) workstations and the PowerGene(TM)
analyzers and also plans to sell comparable supplies and service for The White
IRIS(R).

3
<PAGE> 6

The Company's goal is to achieve global leadership in automated IVD imaging
by pursuing the following strategies:

- Continuing Market Penetration for Current Applications of IVD Imaging
Technology. The Company estimates that it has penetrated less than 20% of
the potential market in the United States for The Yellow IRIS(R)
urinalysis workstations and plans to continue expanding sales in this
segment with its recently introduced fourth generation models of The
Yellow IRIS(R) family, including the Model 900UDx(TM) urine pathology
system.

- Expanding in New Geographic Markets. The PSI Acquisition added
significant international operations which are expected to enable the
Company to expand the geographic market for its other IVD imaging systems
and products.

- Increasing Sales of Supplies and Service. The Company seeks to enhance
the revenue stream from sales of supplies and service by installing more
IVD imaging systems as well as increasing its product offering of supplies
for each system.

- Adding Complementary Product Lines. The Company has added several
complementary lines of small instruments and supplies which appeal to
smaller laboratories and respond to the desire of integrated healthcare
providers to purchase products for a variety of clinical settings from one
supplier.

- Maintaining Technological Edge. The Company has an active research and
development program to continually enhance its IVD imaging systems and
explore other potential IVD imaging applications for its AIM technology.

The Company's principal executive offices are located at 9162 Eton Avenue,
Chatsworth, California 91311 and its telephone number is (818) 709-1244.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.......... 3,000,000 shares
Common Stock to be outstanding after the
Offering................................... 8,908,392 shares(1)
Use of Proceeds.............................. To repay $11.9 million of outstanding
indebtedness incurred to finance the PSI
Acquisition, to repurchase shares of the
Company's Common Stock and warrants to
purchase Common Stock, and for working capital
and general corporate purposes.
American Stock Exchange symbol............... IRI
</TABLE>

- ---------------
(1) Excludes an aggregate of 2,542,810 shares of Common Stock reserved for
issuance upon exercise of outstanding options and warrants and an aggregate
of 199,554 additional shares reserved for issuance pursuant to the Company's
stock option plans and its stock purchase plan. Also excludes 469,413 shares
of Common Stock and warrants to purchase an additional 250,000 shares of
Common Stock to be purchased with the proceeds of the Offering. See "Use of
Proceeds."

4
<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- --------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
----------------------------- --------- ------------------- ---------
1993 1994 1995 1995(2) 1995 1996 1996(2)
------- ------- ------- --------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues
Sales of IVD imaging
systems.................. $ 5,029 $ 4,559 $ 4,870 $ 9,526 $ 2,150 $ 2,593 $ 5,830
Sales of supplies and
service.................. 3,995 5,024 6,738 7,466 3,167 4,166 4,495
Sales of small instruments
and supplies............. 3,369 2,886 3,414 3,424 1,566 2,370 2,456
------- ------- ------- ------- ------- ------ -------
Net sales........... 12,393 12,469 15,022 20,416 6,883 9,129 12,781
Gross margin................. 6,051.. 5,970 7,661 10,702 3,445 4,634 6,827
Operating income (loss)...... 1,313 1,495 (1,549)(5) (2,743)(5) (2,696)(5) 879 520
Income (loss) before income
taxes...................... 1,381 1,701 (1,171)(5) (2,717)(5) (2,491)(5) 1,042 472
Net income (loss)............ $ 1,323 $ 1,622 $ 2,357(6) $ 860(6) $(2,519) $ 867 $ 411
======= ======= ======= ======= ======= ====== =======
Net income (loss) per
share...................... $ 0.25 $ 0.28 $ 0.37 $ 0.09 $ (0.46) $ 0.13 $ 0.04
======= ======= ======= ======= ======= ====== =======
Weighted average shares and
share equivalents
outstanding................ 5,355 5,699 6,419 9,419 5,486 6,915 9,915
</TABLE>

<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
--------------------- --------- -----------
DECEMBER JUNE 30, JUNE 30, JUNE 30,
1995 1996 1996(3) 1996(3)(4)
-------- -------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash and cash equivalents............................. $ 1,511 $ 1,229 $ 1,229 $ 7,279
Working capital....................................... 11,465 11,431 8,164 17,914
Total assets.......................................... 22,470 23,676 38,064 43,841
Total debt............................................ 311 -- 16,117 4,267
Total shareholders' equity............................ 19,172 20,366 16,726(7) 34,353(7)
</TABLE>

- ---------------
(1) On February 1, 1996, the Company acquired StatSpin, Inc. (formerly known as
StatSpin Technologies) ("StatSpin"). This transaction was accounted for as a
pooling of interests and, accordingly, the consolidated financial statements
and summary financial data have been retroactively restated for all periods
presented to include the financial position, results of operations and cash
flows of StatSpin.

(2) Represents the unaudited pro forma results of operations for the year ended
December 31, 1995 and the six months ended June 30, 1996 giving effect to
the PSI Acquisition and related financing and the sale of 3,000,000 shares
of Common Stock offered hereby and the application of the net proceeds
therefrom as if each were consummated at the beginning of the periods
presented. See "Pro Forma Condensed Combined Financial Statements."

(3) Reflects the PSI Acquisition and related financing as if each had been
consummated on June 30, 1996. See "Pro Forma Condensed Combined Financial
Statements."

(4) Reflects the sale of 3,000,000 shares of Common Stock offered hereby and the
application of the net proceeds therefrom. See "Use of Proceeds."

(5) Includes a nonrecurring charge against operations of $2.9 million for 1995
and $3.2 million for the second quarter of 1995 (prior to final purchase
price allocation) for the acquisition of in-process research and development
for a product prototype not cleared by the FDA in connection with the
Company's acquisition of LDA Systems, Inc. ("LDA").

(6) In the fourth quarter of 1995, the Company recognized a deferred tax benefit
of $3.6 million resulting from a reduction in its deferred tax asset
valuation allowance. See Note 8 to the Consolidated Financial Statements.

(7) Includes a nonrecurring charge of $4.6 million for in-process research and
development in conjunction with the PSI Acquisition which will be reflected
in the Company's statement of operations for the quarter ended September 30,
1996. See "Pro Forma Condensed Combined Financial Statements."

5
<PAGE> 8

RISK FACTORS

Prospective investors should carefully consider the specific factors set
forth below, as well as all of the other information contained in this
Prospectus, before deciding to invest in the shares of Common Stock offered
hereby. This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from such forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below as well as those discussed elsewhere in this
Prospectus.

RELIANCE ON DOMINANT PRODUCTS; UNCERTAINTY OF MARKET ACCEPTANCE

The Company believes that currently it is the only supplier of laboratory
systems which fully automate a complete urinalysis, and a substantial portion of
the Company's historical revenues have been derived from sales of The Yellow
IRIS(R) family of urinalysis workstations and related supplies and service. In
addition, the Company's dominant position in this market has enabled it to
achieve a level of gross margins on sales of The Yellow IRIS(R) family. There
can be no assurance that the Company will continue to be the sole provider of
automated complete urinalysis systems or that the market for The Yellow IRIS(R)
will continue to expand.

The commercial success of the Company's systems depends upon their
acceptance by the medical community. Capital-intensive laboratory instruments
such as The Yellow IRIS(R) and the Company's other products can significantly
reduce labor costs, improve precision and offer other distinctive benefits.
However, often there is resistance to products which require significant capital
expenditures or which eliminate jobs through automation.

There can be no assurance that sales of the Company's systems will grow at
the rates expected by management or that the Company will introduce new products
that achieve significant market acceptance in the future. Furthermore, new
product introductions or product enhancements by the Company's competitors or
the use of other technologies could cause a decline in sales or gross margins on
sales or loss of market acceptance of the Company's systems. In the event that
the Company's existing products or any new products do not achieve market
acceptance, there could be a material adverse effect on the Company. See
"Business -- Products."

TECHNOLOGICAL CHANGE

The market for the Company's systems is characterized by rapid
technological advances, changes in customer requirements and frequent new
product introductions and enhancements. The Company's future success depends
upon its ability to enhance its current product lines, to introduce new products
that keep pace with technological developments and to respond to evolving
customer requirements. Any failure by the Company to anticipate or respond
adequately to technological developments by its competitors or to changes in
customer requirements, or significant delays in product introduction, could
result in a loss of competitiveness and revenues. There can be no assurance that
the Company will be successful in developing and marketing new products or
product enhancements on a timely or cost-effective basis, and such failure could
have a material adverse effect on the Company. See "Business -- Products."

INTELLECTUAL PROPERTY RIGHTS

The Company's commercial success depends in part on its ability to protect
and maintain its proprietary technology. The Company has received patents with
respect to certain of its technologies. See "Business -- Intellectual Property."
Receipt of such patents may not insulate the Company from damaging competition.
The validity and breadth of claims in clinical laboratory instrumentation
patents involve complex legal and factual questions and, therefore, are highly
uncertain. There can be no assurances that the claims allowed under patents held
by the Company or under patents based on pending or future patent applications
by the Company will be sufficiently broad to protect what the Company believes
to be its proprietary rights, that issued patents will not be disallowed or
circumvented by competitors, that the rights granted under such patents will
provide competitive advantages to the Company, that other parties will not take,
or threaten to take, legal action against the Company, alleging infringement of
patents by current and proposed products of

6
<PAGE> 9

the Company or that any of the Company's patents, or patents in which it has
licensed rights, will be held valid if subsequently challenged.

Other companies have filed applications for, or have been issued, patents
relating to products or processes that may be competitive with certain of the
Company's products or processes. The Company is unable to predict how the courts
would resolve issues relating to the validity and scope of such patents. If any
relevant claims of third-party patents are held as infringed and not invalid in
any litigation or administrative proceeding, the Company could be prevented from
practicing the subject matter claimed in such patents, or would be required to
obtain licenses from the patent owners of each such patent or to redesign its
products or processes to avoid infringement. In addition, in the event of any
possible infringement, there can be no assurance that the Company would be
successful in any attempt to redesign its products or processes to avoid such
infringement. The Company may be required to obtain licenses to patents or
proprietary rights of others. There can be no assurance that any such license
would be made available or, if available, would be available on commercially
acceptable terms.

Furthermore, no assurance can be given that others have not developed or
will not develop similar products, duplicate any of the Company's products or
design around any patents issued to or licensed by the Company or that may be
issued in the future to the Company. The Company has not conducted an extensive
search of patents issued to other companies, research or academic institutions,
or others, and no assurances can be given that such patents do not exist, have
not been filed, or could not be filed or issued, which contain claims relating
to the Company's technology, products or processes.

The Company has received a letter from Coulter Corporation ("Coulter")
informing the Company that the specimen sampling device used on The White
IRIS(R) might fall within the claims of a United States patent and its foreign
equivalents owned by Coulter (the "Coulter patent"). The Company has been
offered the right to license the Coulter patent. The Company does not believe it
is necessary to obtain such license and does not believe it is infringing this,
or to the Company's knowledge, any other patent. However, there can be no
assurance that the Company will not ultimately be required to seek a license
from Coulter, or any other third party, or that such license would be available
or, if available, would be available on terms commercially acceptable to the
Company.

The Company also has trade secrets and unpatented technology and
proprietary knowledge related to the sale, promotion, operation, development and
manufacturing of its products. While the Company generally enters into
confidentiality agreements with its employees and consultants, there can be no
assurance that the Company's trade secrets or proprietary technology will not
become known or be independently developed by competitors in such a manner that
the Company has no practical recourse. Nor can there be any assurance that
others will not develop or acquire equivalent expertise or develop products
which render the Company's current or future products noncompetitive or
obsolete.

The Company also claims copyrights in its software and the ways in which it
assembles and displays images. There can be no assurance that copyright
protection can be obtained, or if obtained, can or will be enforced or will
provide significant commercial advantage to the Company.

The Company has certain trademark rights in the United States and other
foreign countries. It is possible that third parties may allege superior rights
to one or more of the Company's trademarks, or close variations of such
trademarks, for those countries in which the Company is presently conducting
business or may do so in the future. The Company's rights to use and register
its marks in a given jurisdiction may depend on its rights relative to a third
party's rights as governed by the laws of the pertinent country. It is possible
that the Company could be prevented from using or registering its trademarks in
certain countries due to a superior third party right.

Litigation regarding patent and other intellectual property rights, whether
with or without merit, could be time-consuming and expensive and could divert
the Company's technical and management personnel. Currently, the Company is
defending two of its patents in a declaratory relief action brought by
Intelligent Medical Imaging, Inc. ("IMI"). There can be no assurance that the
Company's litigation expenses will not

7
<PAGE> 10

increase in the future. Any change in the Company's ability to protect and
maintain its proprietary rights could have a material adverse effect on the
Company. See "Business -- Litigation."

GOVERNMENT REGULATION

Most of the Company's products are subject to stringent government
regulation in the United States and other countries. The regulatory process can
be lengthy, expensive and uncertain, and securing clearances or approvals may
require the submission of extensive clinical data and other supporting
information. Failure to comply with applicable requirements can result in fines,
recall or seizure of products, total or partial suspension of production,
withdrawal of existing product approvals or clearances, refusal to approve or
clear new applications or notices and criminal prosecution, any of which could
have a material adverse effect on the Company.

In the United States, the FDA regulates medical devices under the Food,
Drug, and Cosmetic Act, as amended (the "FDC Act"). Before a new medical device
can be commercially introduced in the United States, the manufacturer must
obtain FDA clearance by filing a pre-market notification under Section 510(k) of
the FDC Act (a "510(k) Notification") or obtain FDA approval by filing a
pre-market approval application (a "PMA Application"). The 510(k) Notification
process can be lengthy, expensive and uncertain, but the PMA Application process
is significantly more complex, expensive, time-consuming and uncertain. To date,
the Company has cleared all of its regulated products with the FDA through the
510(k) Notification process including, most recently, The White IRIS(R) and the
Model 900UDx(TM). The Company's business strategy includes the development of
additional products for which FDA clearance or approval may be required, and no
assurance can be given that the Company can secure any necessary FDA clearance
to market such additional products or that the FDA will not require the filing
of a PMA Application for such additional products. Furthermore, FDA clearance of
a 510(k) Notification or approval of a PMA Application is subject to continual
review, and the subsequent discovery of previously unknown facts may result in
restrictions on a product's marketing or withdrawal of the product from the
market. There can be no assurance that the FDA's failure to clear one or more of
the Company's future products, or the FDA's placement of restrictions on the
marketing of any such products, will not have a material adverse effect on the
Company.

The FDA also regulates computer software of the type used in the Company's
IVD imaging systems and is currently reevaluating the regulation of such
software. The Company cannot predict the extent to which the FDA will regulate
such software in the future, and there can be no assurance that regulatory
changes in this area will not have a material adverse effect on the Company.

The Company distributes the PowerGene(TM) analyzer in the United States and
internationally in more than thirty-five countries but has not yet applied for
regulatory clearances or approvals to market The Yellow IRIS(R) or The White
IRIS(R) in most of these countries. The Company's business strategy includes
expanding the geographic distribution of these and other products, and there can
be no assurance that the Company can secure the necessary clearances and
approvals in the relevant foreign jurisdictions. Furthermore, the regulations in
certain foreign jurisdictions continue to develop and there can be no assurance
that new laws or regulations will not have a material adverse effect on the
Company's existing business or future plans. Among other things, CE Mark
certifications are, or may soon be, required for the sale of many products in
certain international markets such as the European Community. The Company is
actively pursuing CE Mark certification for many of its products, but there can
be no assurance that the Company will be successful in securing such
certification or that the failure to secure such certification will not have a
material adverse effect on the Company.

Any medical device cleared by the FDA through a 510(k) Notification or a
PMA Application and its manufacturer are subject to continuing regulatory
review. Among the applicable regulatory requirements, the Company is required to
register as a medical device manufacturer with the FDA and comply with FDA
regulations concerning good manufacturing practices ("GMP") for medical devices.
The FDA inspects manufacturing facilities on a periodic basis to monitor
compliance with GMP standards. Violation of GMP standards, or other FDA
requirements applicable to medical devices, could have a material adverse effect
on the Company.

8
<PAGE> 11

Many states have also enacted statutory provisions regulating medical
devices. The State of California's requirements in this area, in particular, are
extensive, and require registration with the state and compliance with
regulations similar to the GMP regulations of the FDA. While the impact of such
laws and regulations has not been significant to date, there can be no
assurances that future developments in this area will not have a material
adverse effect on the Company.

Any change in existing federal, state or foreign laws or regulations, or in
the interpretation or enforcement thereof, or the discussion or promulgation of
any additional laws or regulations could have a material adverse effect on the
Company. See "Business -- Government Regulation."

ACQUISITIONS AND EXPANSION

As part of the Company's strategy to enhance and maintain its competitive
position, the Company may from time to time consider potential acquisitions of
complementary products, technologies and other businesses. The Company has
completed a number of acquisitions in the past two years. The evaluation,
negotiation and integration of acquisitions may consume significant time and
resources of the Company. There can be no assurance that acquisitions will not
have a material adverse effect upon the Company due to, among other things,
operational disruptions, integration issues, unexpected expenses and accounting
charges associated with such acquisitions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- PSI and Other
Recent Acquisitions."

COMPETITION

There are numerous companies engaged in active research and development
programs within and outside of the clinical laboratory imaging systems field
that have considerable experience in areas of interest to the Company. The
Company cannot determine if any such firms are currently engaged in potentially
competitive research. However, any one or more of these firms could develop and
introduce products comparable or superior to The Yellow IRIS(R), The White
IRIS(R), the PowerGene(TM) or any other product ultimately developed or acquired
by the Company.

The Company is not aware of any competitor marketing a complete urinalysis
system. However, TOA Medical Electronics Co., Ltd., a Japanese company ("TOA"),
is marketing a urine sediment analyzer in Japan and recently began displaying a
new urine sediment analyzer, the UF-100. The Company subsequently asserted its
rights under a 1988 agreement between the two companies to distribute the UF-100
in North America. TOA disputes the Company's right to distribute the product and
has initiated arbitration of the issue in accordance with the terms of the 1988
agreement. See "Business -- Litigation." The Company does not have sufficient
information to evaluate the UF-100's potential competitive impact. In addition,
since the 1980's, the Company has been subject to competition from companies
claiming to reduce the need for microscopic examinations through the use of
disposable test strips, and this claim has hampered the Company's sales efforts
in some hospitals.

The Company is aware of one other company, IMI, that is presently
manufacturing an IVD imaging system for performing a portion of the white blood
cell differential and certain other analyses. In 1995, IMI entered into an
exclusive sales, marketing and service arrangement with Coulter, a large
manufacturer and distributor of hematology analyzers. In 1994, the Company
notified IMI that the Company believes the IMI system infringes at least two of
the Company's patents. The companies are now litigating the issue. See
"Business -- Litigation."

The Company's primary competitor in the genetics market is Applied Imaging
Corp. ("Applied Imaging") which markets IVD imaging systems for prenatal and
other genetic testing. Vysis Inc. ("Vysis"), a subsidiary of AMOCO Technology
Company, is the only other company selling IVD imaging systems for this market.
Vysis has not been as significant a competitor as Applied Imaging in the sale of
genetic analyzers. Vysis' strategy has been to offer systems at a discount as a
vehicle for selling its DNA probes, mostly into the genetics research market in
the United States. While this strategy has not significantly impacted the sale
of the PowerGene(TM) analyzer to date, there can be no assurance that it will
not have a significant impact on such sales in the future.

9
<PAGE> 12

The Company's ability to compete successfully in the sale of its systems
depends in large part upon its ability to implement successfully its strategy
and its ability to attract new customers, sell new products, deliver and support
product enhancements to its existing customers, and respond effectively to
continuing technological change by developing new products. There can be no
assurance that the Company will be able to compete successfully in the future,
or that future competition for product sales will not have a material adverse
effect on the Company. See "Business -- Competition" and "Business -- The
Company's Strategy."

DEPENDENCE ON KEY PERSONNEL

The Company's success depends in significant part upon the continued
service of certain key scientific, technical and management personnel, and its
continuing ability to attract and retain such personnel. Competition for such
personnel is intense and there can be no assurance that the Company can retain
its key scientific, technical and managerial personnel or that it can attract,
assimilate or retain other high-qualified personnel in the future. The loss of
key personnel, especially without advanced notice, or the inability to hire or
retain qualified personnel could have a material adverse effect on the Company.

RELIANCE ON SINGLE SOURCE SUPPLIERS

Certain key components of the Company's products are only available from
single manufacturers, some of which have notified the Company that they have
discontinued, or will soon discontinue, production of key components. In the
past, the Company has successfully transitioned to new components to replace
discontinued components. However, there can be no assurance that the Company can
successfully transition to satisfactory replacement components or that the
Company will have access to adequate supplies of discontinued components on
satisfactory terms during the transition period. The Company's inability to
transition successfully to replacement components or to secure adequate supplies
of discontinued components on satisfactory terms could have a material adverse
effect on the Company.

OPTION TO ACQUIRE POLY U/A SYSTEMS, INC.

In September 1995, the Company entered into a research and development
contract with Poly U/A Systems, Inc. ("Poly"), a Company-sponsored research and
development entity, for development of several new products to enhance automated
urinalysis (the "Poly Products"). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The Company has an option to acquire all of the common stock of Poly
for an aggregate price increasing on August 1, 1997 from $4.4 million to $5.1
million payable in cash or shares of Common Stock at the Company's discretion.

If the Company elects to exercise its option, the portion of the net cost
of the acquisition allocated to completed products would be capitalized and its
subsequent amortization would impact future earnings. For the portion of the net
cost of the acquisition allocated to in-process research and development, the
Company would record a nonrecurring, noncash (if purchased with Common Stock)
charge against then current earnings. In June 1995, the Company exercised a
similar option to acquire LDA, another Company-sponsored research and
development entity, in exchange for Common Stock and incurred a non-cash charge
of $2.9 million against earnings in 1995 for the acquisition of in-process
research and development related to The White IRIS(R) leukocyte differential
analyzer. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."

The Company has not reached a decision to exercise its option to acquire
Poly and is under no obligation to do so. However, the Company will periodically
review the merits of acquiring Poly and may elect to exercise the option in the
future based on factors which are subject to change, including (i) the progress
of research and development of the Poly Products, (ii) the Company's assessment
of the commercial feasibility of the Poly Products, (iii) the cost to acquire
Poly and (iv) the market price of the Company's Common Stock at the time the
Company considers exercising the option.

10
<PAGE> 13

THIRD-PARTY REIMBURSEMENT AND HEALTHCARE REFORM POLICIES

In the United States, hospitals and clinical reference laboratories and
other purchasers of clinical laboratory equipment generally rely for payment on
third-party payors, principally Medicare, Medicaid, private health insurance
plans and health maintenance organizations (collectively, "Third-Party Payors").
Any changes in the payment policies of Third-Party Payors could have a material
adverse effect on the Company.

The Company believes that, in the future, healthcare payments from
Third-Party Payors will be subject to increased restrictions both in the United
States and in international markets. The Company believes that the overall
escalating cost of medical care has led, and will continue to lead, to increased
pressures on the healthcare industry, both foreign and domestic, to reduce the
cost of products and services, including the Company's current or future
products. There can be no assurance in either the United States or international
markets that third-party healthcare payments will be available or adequate, that
current payment amounts will not be decreased in the future or that future
legislation, regulation or payment policies of Third-Party Payors will not
otherwise adversely affect the demand for the Company's current or future
products or its ability to sell its products on a profitable basis. The
unavailability or inadequacy of third-party healthcare payments could have a
material adverse effect on the Company. In addition, fundamental reforms in the
healthcare industry in the United States and other countries continue to be
considered, although the Company cannot predict if or when any healthcare reform
proposals will be adopted and there can be no assurance that such reform will
not materially adversely affect the Company.

FUTURE CAPITAL NEEDS AND UNCERTAINTY OF FINANCING

The Company believes that the anticipated net proceeds of the Offering,
together with its existing cash, cash equivalents and short-term investments and
projected cash flow from operations, will be sufficient to meet the Company's
liquidity and capital requirements for at least the next twelve months. However,
implementation of the Company's business strategy may require significant
expenditures of capital and the Company may require additional financing in the
future. Additional funds may be sought through equity or debt financings. There
can be no assurance that commitments for such financings would be obtained on
favorable terms, if at all. Equity financing could result in dilution to holders
of Common Stock, and debt financing could result in the imposition of
significant financial and operational restrictions on the Company. Lack of
access to adequate capital on acceptable terms could have a material adverse
effect on the Company.

CERTAIN ANTI-TAKEOVER CONSIDERATIONS

Certain provisions of the Company's Certificate of Incorporation, Bylaws
and the Delaware General Corporation Law (the "DGCL") could, together or
separately, discourage potential acquisition proposals, delay or prevent a
change in control of the Company and limit the price that certain investors
might be willing to pay in the future for shares of the Common Stock. These
provisions provide, among other things, for a classified Board of Directors, for
the issuance, without further stockholder approval, of preferred stock with
rights and privileges which could be senior to the Common Stock, and for
limitations on the right of stockholders to call a special meeting of
stockholders and to take action without a meeting. The Company also is subject
to Section 203 of the DGCL which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder. See
"Description of Capital Stock."

PRODUCT LIABILITY

The Company's products are used to gather information for medical decisions
and diagnosis. Accordingly, the manufacture and sale of the Company's products
entails an inherent risk of product liability arising from an inaccurate, or
allegedly inaccurate, test result. The Company has product liability insurance
coverage of $1.0 million per incident and $2.0 million in the aggregate per
year, and an umbrella policy of $5.0 million. There can be no assurance that the
Company's product liability insurance will be sufficient to protect the

11
<PAGE> 14

Company in the event of a product liability claim. There has not been any
indication that the Company's insurance carrier will not renew the Company's
product liability insurance at or near current premiums; however, there can be
no assurance that the Company will be able to renew product liability insurance
in the future at acceptable premiums. In addition, any failure to comply with
the FDA's GMP regulations could have a material adverse effect on the ability of
the Company to defend against product liability lawsuits.

CURRENCY FLUCTUATIONS

The Company acquired a foreign subsidiary from PSI which conducts business
in various foreign currencies. Consequently, fluctuations in exchange rates will
affect the Company's future consolidated operating results and such fluctuations
could have an adverse effect on the Company. The impact of future fluctuations
in exchange rates cannot be predicted with any measure of accuracy. The Company
is not currently seeking to hedge the risks associated with fluctuations in
exchange rates and therefore continues to be subject to such risks. In the
future, the Company may undertake such transactions. If any hedging techniques
are implemented by the Company, there can be no assurance that such techniques
can be successful in eliminating or reducing the effects of currency
fluctuations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- PSI and Other Recent Acquisitions."

12
<PAGE> 15

USE OF PROCEEDS

The net proceeds to the Company from the sale of shares of Common Stock in
the Offering are estimated to be approximately $20 million ($22.9 million if the
Underwriters' over-allotment option is exercised in full), after deducting the
underwriting discount and estimated offering expenses. The Company intends to
use the net proceeds of the Offering as follows: (i) to repay $11.9 million of
the principal amount of outstanding indebtedness incurred to finance the PSI
Acquisition, (ii) to repurchase, for $2.1 million, 469,413 shares of Common
Stock and warrants to purchase 250,000 shares of Common Stock held by an
affiliate of Boehringer Mannheim Corporation ("BMC") and (iii) for working
capital and general corporate purposes. See "Certain Relationships and Related
Transactions." The Company will not receive any proceeds from the sale of
shares, if any, by the Selling Stockholder. See "Principal and Selling
Stockholders" and "Underwriting."

The PSI Acquisition indebtedness to be repaid consists of a $7.8 million
bank term loan, $1.3 million borrowed under the Company's revolving bank credit
facility and $2.8 million of principal on a $7.0 million aggregate principal
amount subordinated note. The term loan bears interest monthly at the bank's
prime rate (8.25% as of August 31, 1996) plus 0.25% through December 1, 1996 and
1.0% thereafter. The Company is required to make certain principal repayments
and to pay the balance on or before January 15, 1998. Under the terms of the
credit facility, the Company can borrow and reborrow up to a maximum principal
amount of $1.5 million at a variable interest rate equal to the bank's prime
rate (8.25% as of August 31, 1996). The credit facility matures June 1, 1997.
The subordinated note bears interest at a fixed rate of 8.5% per annum payable
in quarterly installments. The entire principal amount is due on or before July
31, 2001. Under the terms of the subordinated note, upon the issuance by the
Company of equity securities generating net proceeds in excess of $14.5 million,
the Company is required to apply fifty percent of the excess over $14.5 million
to the prepayment of the subordinated note. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

Pending application of the net proceeds to the Company from the Offering,
the Company intends to invest in conventional United States government
securities or other investment grade securities.

13
<PAGE> 16

PRICE RANGE OF COMMON STOCK

The Common Stock trades on the AMEX under the symbol "IRI." The following
table sets forth the high and low sales prices of the Common Stock for the
quarters indicated as reported on the AMEX.

<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
FISCAL 1994
First Quarter...................................... $ 6 1/8 $ 3 7/8
Second Quarter..................................... 5 1/2 41/16
Third Quarter...................................... 5 7/8 43/16
Fourth Quarter..................................... 7 1/8 4 5/8
FISCAL 1995
First Quarter...................................... 8 7/8 5 1/4
Second Quarter..................................... 8 5/8 6
Third Quarter...................................... 8 6 1/4
Fourth Quarter..................................... 8 6 3/8
FISCAL 1996
First Quarter...................................... 7 7/8 6 1/4
Second Quarter..................................... 12 3/4 6 5/8
Third Quarter (through , 1996)...........
</TABLE>

On , 1996, the last reported sale price of the Common Stock on
the AMEX was per share. As of August 31, 1996, there were approximately
4,650 holders of record of Common Stock.

DIVIDEND POLICY

The Company intends to retain future earnings for use in its business and
therefore does not anticipate declaring or paying any cash dividends in the
foreseeable future. The declaration and payment of any cash dividends in the
future depends upon the Company's earnings, financial condition, capital needs
and other factors deemed relevant by the Company's Board of Directors.

14
<PAGE> 17

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company at June 30, 1996, (i) on a historical basis, (ii) on a pro forma basis
to give effect to the PSI Acquisition as though such transaction and the related
financing had been consummated as of June 30, 1996 and (iii) on a pro forma, as
adjusted basis, to give further effect to the issuance and sale of the 3,000,000
shares of Common Stock offered by the Company hereby at an offering price of
$ per share, after deducting underwriting discount and the estimated
expenses of the Offering payable by the Company, and the application of the net
proceeds therefrom as set forth in "Use of Proceeds". The information set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and PSI and the related Notes thereto and the Pro
Forma Condensed Combined Financial Statements and Notes thereto included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------------
PRO FORMA
HISTORICAL(1) PRO FORMA AS ADJUSTED
------------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................ $ 1,229 $ 1,229 $ 7,279
======== ======== ========
Long term debt........................................... $ -- $ 12,411 $ 4,261
Shareholders' equity:
Preferred Stock, par value $.01 per share, 3,000,000
shares authorized, none issued or outstanding....... -- -- --
Common Stock, par value $.01 per share, 15,600,000
shares authorized, 6,377,805 shares issued and
outstanding; 8,908,392 shares issued and outstanding
as adjusted(2)...................................... 64 64 89
Additional paid-in capital............................. 34,469 35,396 52,998
Treasury stock......................................... (378) (378) (378)
Unearned compensation.................................. (160) (160) (160)
Accumulated deficit.................................... (13,629) (18,196)(3) (18,196)(3)
-------- -------- --------
Total shareholders' equity.......................... 20,366 16,726 34,353
-------- -------- --------
Total capitalization........................... $ 20,366 $ 29,137 $ 38,614
======== ======== =======
</TABLE>

(2) Excludes (i) 1,637,810 shares of Common Stock issuable upon exercise of
currently outstanding options and warrants, (ii) 875,000 shares of Common
Stock reserved for issuance upon exercise of the warrant included in the
purchase price of the PSI Acquisition, (iii) approximately 199,554 shares of
Common Stock reserved for issuance under the Company's stock option and its
stock purchase plan, (iv) up to 30,000 shares of Common Stock issuable upon
exercise of MKC's warrant, and (v) 469,413 shares of Common Stock and a
warrant to purchase 250,000 shares of Common Stock to be repurchased from an
affiliate of BMC with the proceeds of the Offering.

(3) Includes a nonrecurring charge of $4.6 million for in-process research and
development in conjunction with the PSI Acquisition which will be reflected
in the Company's statement of operations for the quarter ended September 30,
1996. See "Pro Forma Condensed Combined Financial Statements."

15
<PAGE> 18

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth below as of December 31,
1995 and 1994 and for each of the years in the three year period ended December
31, 1995 have been derived from the Company's Consolidated Financial Statements
and the related Notes thereto that have been audited by Coopers & Lybrand
L.L.P., independent accountants, which consolidated financial statements and
report thereon are included elsewhere in this Prospectus. The selected
consolidated financial data set forth below for the six month periods ended June
30, 1996 and 1995, are derived from unaudited consolidated financial statements
included elsewhere herein and, in the opinion of the Company include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein. The unaudited pro forma
operating data for the year ended December 31, 1995 and for the six months ended
June 30, 1996 give effect to the PSI Acquisition and related financing and the
sale of the shares of Common Stock offered hereby and the application of the net
proceeds therefrom as if each were consummated at the beginning of the periods
presented. The pro forma statements of operating data are presented for
information purposes only and do not purport to be indicative of the results of
operations that actually would have resulted nor which may result from future
operations. The pro forma balance sheet data gives effect to the PSI Acquisition
and related financing as if they had been consummated on June 30, 1996. The pro
forma as adjusted balance sheet data gives further effect to the sale of Common
Stock offered hereby and the application of the net proceeds therefrom as set
forth in "Use of Proceeds." The following data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements of the Company
and the Notes thereto and the Pro Forma Condensed Combined Financial Statements
and Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------- ---------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
------------------------------------------------------- --------- --------------------- ---------
1991 1992 1993 1994 1995 1995(2) 1995 1996 1996(2)
------- ------- ------- ------- ------- --------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1):
Net sales............ $ 7,606 $10,823 $12,393 $12,469 $15,022 $20,416 $ 6,883 $ 9,129 $12,781
Cost of sales........ 4,236 5,563 6,342 6,499 7,361 9,714 3,438 4,495 5,954
-- --
------ ------- ------- ------- ------- ------- ------
Gross margin....... 3,370 5,260 6,051 5,970 7,661 10,702 3,445 4,634 6,827
Operating expenses:
Selling, general
and
administrative... 2,920 3,440 3,859 3,812 5,090 9,017 2,301 3,164 5,156
Research and
development,
net.............. 710 951 879 663 1,220 1,528 664 591 1,151
Acquisition of
in-process
research and
development...... -- -- -- -- 2,900(5) 2,900(5) 3,176(5) -- --
-- --
------ ------- ------- ------- ------- ------- ------
Total operating
expenses......... 3,630 4,391 4,738 4,475 9,210 13,445 6,141 3,755 6,307
-- --
------ ------- ------- ------- ------- ------- ------
Operating income
(loss)......... (260) 869 1,313 1,495 (1,549) (2,743) (2,696) 879 520
Interest income
(expense), net..... 64 17 28 95 267 (94) 138 131 (50)
Other income......... 93 112 40 111 111 120 67 32 2
-- --
------ ------- ------- ------- ------- ------- ------
Income (loss)
before income
taxes.......... (103) 998 1,381 1,701 (1,171) (2,717) (2,491) 1,042 472
Provision (benefit)
for income taxes... 29 69 58 79 (3,528)(6) (3,577)(6) 28 175 61
-- --
------ ------- ------- ------- ------- ------- ------
Net income
(loss)......... $ (132) $ 929 $ 1,323 $ 1,622 $ 2,357 $ 860 $(2,519) $ 867 $ 411
====== ======= ======= ======= ======= == ======= ====== ==
Net income (loss)
per share...... $ (0.03) $ 0.18 $ 0.25 $ 0.28 $ 0.37 $ 0.09 $ (0.46) $ 0.13 $ 0.04
====== ======= ======= ======= ======= == ======= ====== ==
Weighted average
shares and share
equivalents
outstanding........ 4,557 5,304 5,355 5,699 6,419 9,419 5,486 6,915 9,915
</TABLE>

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA AS ADJUSTED
----------------------------------- ---------------- ---------------------
DECEMBER 31, 1995 JUNE 30, 1996 JUNE 30, 1996(3) JUNE 30, 1996(3)(4)
----------------- ------------- ---------------- ---------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash and cash equivalents.................... $ 1,511 $ 1,229 $ 1,229 $ 7,279
Working capital.............................. 11,465 11,431 8,164 17,914
Total assets................................. 22,470 23,676 38,064 43,841
Total debt................................... 311 -- 16,117 4,267
Total shareholders' equity................... 19,172 20,366 16,726(7) 34,353(7)
</TABLE>

- ---------------
(1) On February 1, 1996, the Company acquired StatSpin. This transaction was
accounted for as a pooling of interests and, accordingly, the consolidated
financial statements and selected financial data have been retroactively
restated for all periods presented to include the financial position,
results of operations and cash flows of StatSpin.
(2) Represents the unaudited pro forma results of operations for the year ended
December 31, 1995 and the six months ended June 30, 1996 giving effect to
the PSI Acquisition and related financing and the sale of 3,000,000 shares
of Common Stock offered hereby and the application of the net proceeds
therefrom as if each were consummated at the beginning of the periods
presented. See "Pro Forma Condensed Combined Financial Statements."
(3) Reflects the PSI Acquisition and related financing as if they had been
consummated on June 30, 1996. See "Pro Forma Condensed Combined Financial
Statements."
(4) Reflects the sale of 3,000,000 shares of Common Stock offered hereby and the
application of the net proceeds therefrom. See "Use of Proceeds."
(5) Reflects a non-recurring charge against operations of $2.9 million for 1995
and $3.2 million for the second quarter of 1995 (prior to the final purchase
price allocation) for the acquisition of in-process research and development
for a product prototype not cleared by the FDA in connection with the
Company's acquisition of LDA.
(6) In the fourth quarter of 1995, the Company recognized a deferred tax benefit
of $3.6 million resulting from a reduction in its deferred tax asset
valuation allowance. See Note 8 to the Consolidated Financial Statements.
(7) Includes a nonrecurring charge of $4.6 million for in-process research and
development in conjunction with the PSI Acquisition which will be reflected
in the Company's statement of operations for the quarter ended September 30,
1996. See "Pro Forma Condensed Combined Financial Statements."

16
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company generates revenues from the initial sales of IVD imaging
systems based on its patented and proprietary AIM technology, which in turn
generate follow-on sales of supplies and service necessary for their operation.
The Company also generates revenues from sales of ancillary lines of small
laboratory instruments and supplies.

Until recently, the Company generated most of its revenues from sales of
two models of The Yellow IRIS(R) urinalysis workstation and related supplies and
services. These two models differ mainly by their speed and price. In 1996, the
Company introduced a third model of The Yellow IRIS(R) and two new lines of
other IVD imaging systems. The Model 900UDx(TM) urine pathology system, the
latest in The Yellow IRIS(R) family, is a higher capacity automated urinalysis
workstation designed especially for the high-volume testing requirements of
large hospitals and reference laboratories. The Company received FDA clearance
to market the Model 900UDx(TM) in March 1996 and began sales in May. The Company
also received FDA clearance to market The White IRIS(R) leukocyte differential
analyzer in May 1996 and expects to start sales of this system in late 1996 or
early 1997. Finally, the Company began selling the PowerGene(TM) family of
genetic analyzers in August 1996 after completing the PSI Acquisition. See "Risk
Factors -- Reliance on Dominant Products; Uncertainty of Market Acceptance."

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

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Research and development expense,
net................................. $ 879 $ 663 $1,220 $ 664 $ 591
Capitalized software development
costs............................... 81 25 299 78 288
Reimbursed costs under research and
development contracts............... 539 1,111 843 638 944
------ ------ ------ ------ ------
Total product technology
expenditures.............. $1,499 $1,799 $2,362 $1,380 $1,823
====== ====== ====== ====== ======
</TABLE>

The Company has in the past partially funded its research and development
programs through (i) grants from the National Institutes of Health ("NIH")
obtained through the federal government's Small Business Innovative Research
program, (ii) joint development programs with strategic partners and (iii)
Company-sponsored research and development entities.

In recent years, the Company has, in addition to its internally-funded
projects, entered into four significant externally-funded projects, two joint
development projects with strategic partners and two projects with
Company-sponsored research and development entities. From 1994 to 1996, the
Company collaborated with BMC, an Indianapolis-based manufacturer of diagnostic
products, and Boehringer Mannheim GmbH ("BMG"), BMC's German affiliate and a
world leader in clinical chemistry, in the development of (i) the
CHEMSTRIP(R)/IRIStrip(TM) urine test strips and a related urine test strip
reader for The Yellow IRIS(R) and (ii) the Model 900UDx(TM), the latest model in
The Yellow IRIS(R) family. The Company entered into a project in October 1992
with LDA, a Company-sponsored research and development entity, for development
of The White IRIS(R) leukocyte differential analyzer. Corange International
Limited ("Corange"), an affiliate of BMC and BMG, provided substantial funding
to LDA. In June 1995, the Company acquired LDA for approximately 498,000 shares
of Common Stock. As a result of the LDA acquisition, the Company incurred a
non-recurring, non-cash charge of $2.9 million against earnings in 1995 for the
acquisition of in-process research and development since The White IRIS(R) had
not yet received FDA clearance. The White IRIS(R) received FDA clearance in May
1996, and the Company expects to begin marketing The White IRIS(R) in late 1996
or early 1997. The Company entered into a similar project in September 1995 with
Poly, another

17
<PAGE> 20

Company-sponsored research and development entity, for development of the Poly
Products. The program with Poly is currently ongoing. The Company believes that
it will be unnecessary to enter into any new development programs with
Company-sponsored research and development entities in the future. See "--
Liquidity and Capital Resources," "Certain Relationships and Related
Transactions" and "Risk Factors -- Option to Acquire Poly U/A Systems, Inc."

RESULTS OF OPERATIONS

The consolidated financial statements of the Company contained in this
Prospectus have been retroactively restated for all periods presented to include
the financial position, results of operations and cash flows of StatSpin in
accordance with the pooling-of-interests method of accounting. See "-- PSI and
Other Recent Acquisitions." The following table sets forth selected consolidated
operating data of the Company expressed as a percentage of net sales (except for
the cost of goods for individual product lines which are expressed as a
percentage of net sales of the respective product lines) for the periods
indicated:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER ENDED JUNE
31, 30,
---------------------- -------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales of IVD imaging systems...................... 41 % 37 % 32 % 31 % 28 %
Sales of IVD imaging system supplies and
service......................................... 32 40 45 46 46
Sales of small instruments and supplies........... 27 23 23 23 26
--- --- --- --- ---
Net sales......................................... 100 100 100 100 100
--- --- --- --- ---
Cost of goods -- IVD imaging systems.............. 47 48 46 45 46
Cost of goods -- IVD imaging system supplies and
service......................................... 49 50 47 49 50
Cost of goods -- small instruments and supplies... 61 63 57 58 51
Total cost of goods sold.......................... 51 52 49 50 49
--- --- --- --- ---
Gross margin...................................... 49 48 51 50 51
--- --- --- --- ---
Marketing and selling expenses.................... 17 17 20 20 18
General and administrative expenses............... 14 14 14 14 16
Research and development expenses, net............ 7 5 8 9 7
Acquisition of in-process research and
development..................................... -- -- 19 46 --
--- --- --- --- ---
Total operating expense........................... 38 36 61 89 41
--- --- --- --- ---
Operating income (loss)........................... 11 12 (10 ) (39 ) 10
Interest and other income......................... -- 2 2 3 1
--- --- --- --- ---
Income before provision for income taxes.......... 11 14 (8 ) (36 ) 11
Provision for (benefit from) income taxes......... -- 1 (24 ) 1 2
--- --- --- --- ---
Net income (loss)....................... 11 % 13 % 16 % (37 )% 9 %
=== === === === ===
</TABLE>

Comparison of Six Months Ended June 30, 1996 to Six Months Ended June 30, 1995

Net sales for the six months ended June 30, 1996 increased to $9.1 million
from $6.9 million, an increase of $2.2 million or 33% over the comparable period
of the prior year. Sales of IVD imaging systems increased to $2.6 million from
$2.2 million, an increase of $443,000 or 21% over the comparable period, mostly
as a result of the launch of the Model 900UDx(TM). Sales of IVD imaging system
supplies and service increased to $4.2 million from $3.2 million, an increase of
$1.0 million or 32% over the comparable period, due to the larger installed base
of IVD imaging systems and the ongoing conversion of the installed base to the
new CHEMSTRIP(R)/IRIStrip(TM) urine test strips. As of June 30, 1996, the
Company had converted approximately 80% of the installed base of The Yellow
IRIS(R) systems from test strips marketed by various distributors to the new
test strips marketed exclusively by the Company. Sales of small instruments and
supplies increased to

18
<PAGE> 21

$2.4 million from $1.6 million, an increase of $804,000 or 51%, over the
comparable period. The increase reflects generally higher sales levels of the
products of StatSpin acquired in February 1996, as well as the addition of the
Cen-Slide(R) urine sediment analysis system device in March 1996 and the product
line acquired from Biovation, Inc. ("Biovation") in March 1995. See "-- PSI and
Other Recent Acquisitions."

Cost of goods for IVD imaging systems increased as a percentage of sales of
IVD imaging systems to 46% for the six months ended June 30, 1996 from 45% for
the comparable period due to the introduction of the Model 900UDx(TM) in May
1996. Cost of goods for IVD imaging system supplies and service increased as a
percentage of sales of such products to 50% for the six months ended June 30,
1996 from 49% for the comparable period primarily due to lower gross margins on
a higher proportion of sales of CHEMSTRIP(R)/IRIStrip(TM) urine test strips as
compared to other IVD imaging system supplies. Cost of goods for small
instruments and supplies decreased as a percentage of sales of small instruments
and supplies to 51% for the six months ended June 30, 1996 from 58% for the
comparable period due to higher gross margins on the recently added Cen-Slide(R)
urine sediment analysis system and Biovation product line as compared to the
Company's other small instruments and supplies, as well as improved gross
margins on the StatSpin product lines due to the higher sales volume and cost
reductions. The net result of these changes and the overall change in product
mix was an increase in gross margin to 51% for the six months ended June 30,
1996 from 50% for the comparable period.

Marketing and selling expenses consist primarily of salaries, commissions
and related travel expenses of the Company's direct sales force, as well as
salaries for the marketing and distributor relations departments. Marketing and
selling expenses increased to $1.7 million for the six months ended June 30,
1996 from $1.4 million, an increase of $320,000 or 24% over the comparable
period, due to increased spending on direct sales and after-sales support, but
decreased as a percentage of net sales to 18% from 20%.

General and administrative expenses consist primarily of payroll costs
associated with the Company's management and support personnel, corporate travel
expenses, and legal and accounting fees. General and administrative expenses
increased to $1.5 million for the six months ended June 30, 1996 from $947,000,
an increase of $542,000 or 57% over the comparable period, and increased as a
percentage of net sales to 16% from 14%, primarily as a result of one-time costs
associated with the acquisition of StatSpin in February 1996 which were required
to be expensed by the pooling-of-interests method of accounting, as well as the
addition of two additional persons to the administrative staff.

Net research and development expenses consist of losses incurred for the
development of new products and improvements to existing products less
third-party reimbursements under joint development programs, grants and research
and development contracts. Net research and development expenses decreased to
$591,000 for the six months ended June 30, 1996 from $664,000, a decrease of
$73,000 or 11% over the comparable period, and also decreased as a percentage of
net sales to 7% from 9%, due principally to an increase in reimbursements under
joint development programs to $944,000 from $638,000 offset to a large extent by
increased spending on research and development. Total product technology
expenditures increased to $1.8 million from $1.4 million, an increase of
$443,000 or 32% over the comparable period, due primarily to the acceleration of
work on the Model 900UDx(TM) prior to its launch and commercial refinements to
The White IRIS(R) following FDA clearance in preparation of its launch. See
"Risk Factors -- Technological Change."

Interest income consists of income from investments and decreased to
$137,000 for the six months ended June 30, 1996 from $175,000 for the comparable
period, primarily the result of decreased amounts of invested cash during the
1996 period. See "-- Liquidity and Capital Resources."

Interest expense consists of interest on notes assumed in the StatSpin
acquisition and decreased to $5,000 for the six months ended June 30, 1996 from
$37,000 for the comparable period due to repayment of the notes in full in March
1996.

Other income consists principally of royalties for sales of licensed
products and decreased to $32,000 for the six months ended June 30, 1996 from
$67,000 for the comparable period due to lower reported sales of licensed
products.

19
<PAGE> 22

Acquisition of in-process research and development for the six months ended
June 30, 1995 reflects the acquisition of LDA which resulted in a non-recurring,
non-cash charge of $3.2 million against earnings in the second quarter of 1995
for the acquisition of in-process research and development (i.e.,
work-in-process not yet cleared by the FDA). The FDA cleared The White IRIS(R)
in May 1996.

The income tax provision for the six months ended June 30, 1996 was
$175,000 as compared to $28,000 for the comparable period in 1995. The effective
tax rate increased to 17% for the six months ended June 30, 1996 from 4% for the
1995 period (before the non-recurring charge) due to expected utilization in
1996 of net operating loss carryforwards for which a portion of the related
income tax benefit had previously been recognized for financial statement
purposes. For the six months ended June 30, 1995, the income tax benefit from
the utilization of net operating loss carryforwards was recognized in the period
of utilization.

The above factors contributed to net income of $867,000, or $0.13 per
share, for the six months ended June 30, 1996 as compared to a net loss of $2.5
million, or $0.46 per share, for the six months ended June 30, 1995. The net
loss for the 1995 period included the acquisition of LDA which resulted in a
non-recurring, non-cash charge of $3.2 million against earnings in the second
quarter of 1995 for the acquisition of in-process research and development.
Excluding the effect of the acquisition, the Company would have had net income
of approximately $657,000, or $0.11 per share, for the six months ended June 30,
1995.

Comparison of Fiscal 1995 to Fiscal 1994

Net sales increased to $15.0 million for 1995 from $12.5 million for 1994,
an increase of $2.5 million or 20%. Sales of IVD imaging systems increased to
$4.9 million in 1995 from $4.6 million in 1994, an increase of $311,000 or 7%
over the prior year due to the sale of more systems in 1995. Sales of IVD
imaging system supplies and service increased to $6.7 million from $5.0 million,
an increase of $1.7 million or 34% over the prior year, due to the larger
installed base of IVD imaging systems and the introduction of the new
CHEMSTRIP(R)/IRIStrip(TM) urine test strips in late 1994. Sales of small
instruments and supplies increased to $3.4 million from $2.9 million, an
increase of $528,000 or 18%. The increase reflects generally higher sales of the
StatSpin product line and the addition of the Biovation product line in March
1995. See "-- PSI and Other Recent Acquisitions."

Cost of goods for IVD imaging systems decreased as a percentage of sales of
IVD imaging systems to 46% for 1995 from 48% for 1994 due generally to a decline
in material costs. Cost of goods for IVD imaging system supplies and service
decreased as a percentage of sales of IVD imaging system supplies and service to
47% for 1995 from 50% for 1994 due to a decrease in service costs, offset to
some extent, by lower gross margins on the CHEMSTRIP(R)/IRIStrip(TM) urine test
strips. Cost of goods for small instruments and supplies decreased as a
percentage of sales of small instruments and supplies to 57% for 1995 from 63%
for 1994 due to higher gross margins on the recently added Biovation product
line as well as improved gross margins on the StatSpin product lines due to
increased sales volume. The net result of these changes and the overall change
in product mix was an increase in gross margin to 51% for 1995 from 48% for
1994.

Marketing and selling expenses increased to $2.9 million for 1995 from $2.1
million for 1994, an increase of $836,000 or 40%, due to increased spending on
direct sales and after-sales support, and increased as a percentage of net sales
to 20% from 17%.

General and administrative expenses increased to $2.2 million for 1995 from
$1.7 million for 1994, an increase of $442,000 or 26%, and remained constant as
a percentage of net sales at 14%.

Net research and development expenses increased to $1.2 million for 1995
from $663,000 for 1994, an increase of $557,000 or 84%, and also increased as a
percentage of net sales to 8% from 5%. The increase in net research and
development expenses was due principally to a decrease in reimbursements under
research and development contracts and increased spending by the Company on the
continued development of The White IRIS(R). Reimbursements under research and
development contracts and joint development programs decreased to $843,000 from
$1.1 million, a decrease of $268,000 or 24%, due to the acquisition of LDA.
Total product technology expenditures increased to $2.4 million from $1.8
million, an increase of $563,000 or 31%, reflecting the addition of two new
research projects, a modest increase in general research and development

20
<PAGE> 23

activity and continuing expenditures by the Company on The White IRIS(R) to
complete its development and pursue FDA clearance.

Interest income increased to $310,000 for 1995 from $168,000 for the prior
year, primarily the result of increased amounts of invested cash during 1995 as
a result of the exercise of outstanding warrants issued in connection with the
formation of LDA and stock sales to employees under the Company's stock option
and purchase plans.

Interest expense consisted of interest incurred on notes issued by StatSpin
and decreased to $43,000 for 1995 from $73,000 for the prior year due to a
reduction in the outstanding principal balances.

Other income consisted principally of royalties for sales of licensed
products and remained constant at $111,000 for 1995 and 1994.

Acquisition of in-process research and development in 1995 reflects the
acquisition of LDA which resulted in a non-recurring, non-cash charge of $2.9
million against earnings in 1995 for the acquisition of in-process research and
development.

The income tax benefit for 1995 was $3.5 million as compared to a $79,000
provision in 1994. The Company recognized a deferred tax benefit of $3.6 million
in 1995 due to a significant reduction in the Company's deferred tax asset
valuation allowance. This reduction in the valuation allowance resulted
principally from the Company's assessment of the realizability of its net
operating loss carryforwards based on recent operating history as well as an
assessment that operations will continue to generate taxable income. However,
the amount of the deferred tax assets considered realizable could be reduced if
the future taxable income during the carryforward periods is reduced.

Net income increased to $2.4 million, or $0.37 per share, for 1995 as
compared to net income of $1.6 million, or $0.28 per share, for 1994. Excluding
the effects of the non-recurring charge against earnings for the acquisition of
in-process research and development and the recognition of the tax benefit due
to the reduction in the deferred tax asset valuation allowance, the Company
would have had net income of approximately $1.7 million, or $0.26 per share, for
1995.

Comparison of Fiscal 1994 to Fiscal 1993

Net sales increased to $12.5 million for 1994 from $12.4 million for 1993,
an increase of $77,000 or 1%. Sales of IVD imaging systems decreased to $4.6
million from $5.0 million, a decrease of $470,000 or 9% from 1993. Improved
sales of IVD imaging systems in the last three quarters of 1994 were more than
offset by unusually slow sales during the first quarter of 1994 caused by the
combined effect of the introduction of a major healthcare reform initiative at
the federal level and the Northridge earthquake which affected operations at the
Company's Chatsworth facility. Sales of IVD imaging system supplies and service
increased to $5.0 million from $4.0 million, an increase of $1.0 million or 26%
over the prior year, due to the larger installed base of IVD imaging systems.
Sales of small instruments and supplies decreased to $2.9 million from $3.4
million, a decrease of $483,000 or 14%. The decrease reflects lower sales levels
of the StatSpin product lines due to a decline in sales to one customer.

Cost of goods for IVD imaging systems increased slightly as a percentage of
sales of IVD imaging systems to 48% for 1994 from 47% for 1993. Cost of goods
for IVD imaging system supplies and service also increased slightly to 50% for
1994 from 49% for 1993. Cost of goods for small instruments and supplies
increased as a percentage of sales of small instruments and supplies to 63% for
1994 from 61% for the prior year. The net result of these changes and the
overall change in product mix was a slight decrease in gross margin to 48% for
1994 from 49% for 1993.

Marketing and selling expenses remained constant at $2.1 million in 1994
and 1993 and also remained constant as a percentage of net sales at 17%.

General and administrative expenses remained constant at $1.7 million in
1994 and 1993, and remained constant as a percentage of net sales at 14%.

21
<PAGE> 24

Net research and development expenses decreased to $663,000 for 1994 from
$879,000 for 1993, a decrease of $216,000 or 25%, and also decreased as a
percentage of net sales to 5% from 7% due principally to a reduction in research
and development spending at StatSpin. Reimbursements under research and
development contracts increased to $1.1 million from $539,000, an increase of
$572,000 or 106%, due to increased funding from LDA for The White IRIS(R)
project. Total product technology expenditures increased to $1.8 million from
$1.5 million, an increase of $300,000 or 20%, primarily as a result of increased
expenditures for development of The White IRIS(R).

Interest income increased to $167,000 for 1994 from $110,000 for the prior
year. This was the result of increased amounts of invested cash, generally
higher interest rates and a greater emphasis on long-term investments.

Interest expense consisted of interest incurred on notes issued by StatSpin
and decreased to $73,000 for 1994 from $82,000 for the prior year due to paydown
of outstanding principal balances on the notes.

Other income consisted principally of royalties for sales of licensed
products and increased to $111,000 for 1994 from $39,000 for the prior year due
to higher reported sales of licensed products.

The income tax provision for 1994 was $79,000 as compared to $58,000 for
1993. The effective tax rate remained relatively constant at 5% in 1994 as
compared to 4% in 1993 due to a full valuation allowance being provided for the
deferred tax assets in both years as a result of the uncertainty about the
recoverability of the related tax benefits. The tax provisions consisted
primarily of federal alternative minimum tax due to the utilization of net
operating loss carryforwards.

The above factors contributed to net income of $1.6 million, or $0.28 per
share, for 1994 as compared to net income of $1.3 million, or $0.25 per share,
for 1993.

22
<PAGE> 25

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth unaudited consolidated quarterly financial
data for the ten consecutive quarters ended June 30, 1996 as restated to reflect
the acquisition of StatSpin under the pooling-of-interests method of accounting.
The Company believes that this information includes all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of
such quarterly information when read in conjunction with the consolidated
financial statements and notes thereto included elsewhere herein. The operating
results for any quarter are not necessarily indicative of the results for any
future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------------
1994 1995 1996
--------------------------------------- --------------------------------------- ------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $ 2,485 $ 3,135 $ 3,339 $ 3,510 $ 3,167 $ 3,716 $ 3,744 $ 4,395 $ 4,344 $ 4,785
Cost of goods sold.......... 1,395 1,711 1,769 1,624 1,631 1,807 1,812 2,111 2,161 2,334
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross margin................ 1,090 1,424 1,570 1,886 1,536 1,909 1,932 2,284 2,183 2,451
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Marketing and selling
expenses................ 518 554 545 468 640 714 731 837 794 880
General and administrative
expenses................ 337 396 431 563 428 519 481 740 719 770
Research and development,
net..................... 217 127 145 174 177 487 218 338 270 321
Acquisition of in-process
research and
development............. -- -- -- -- -- 3,176 -- (276 ) -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses.......... 1,072 1,077 1,121 1,205 1,245 4,896 1,430 1,639 1,783 1,971
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss)..... 18 347 449 681 291 (2,987 ) 502 645 400 480
Interest and other income,
net....................... 73 34 54 45 118 87 65 107 82 80
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
provision for income
taxes..................... 91 381 503 726 409 (2,900 ) 567 752 482 560
Provision (benefit) for
income
taxes..................... 5 5 11 58 12 16 3 (3,560 ) 40 135
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)... $ 86 $ 376 $ 492 $ 668 $ 397 $(2,916 ) $ 564 $ 4,312 $ 442 $ 425
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Net income (loss)
per share......... $ 0.02 $ 0.07 $ 0.09 $ 0.12 $ 0.07 $ (0.53 ) $ 0.09 $ 0.64 $ 0.07 $ 0.06
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments decreased to $3.9 million
at June 30, 1996 from $6.2 million at December 31, 1995. The decrease is
primarily attributable to increased levels of inventory and accounts receivable,
the acquisition of the Cen-Slide(R)urine sediment analysis system near the end
of the first quarter of 1996 and the purchase of additional manufacturing and
office equipment. Inventory levels during the first six months of 1996 increased
to $4.0 million from $2.9 million. This increase was primarily due to the
addition of the Model 900UDx(TM) to the product line, as well as the additional
inventory of supplies and spare parts required to support the growing size of
the installed base of IVD imaging systems. Total accounts receivable increased
to $5.6 million at June 30, 1996 from $4.3 million at December 31, 1995. This
increase was the combined effect of generally higher sales levels and extended
payment terms on the sale of several IVD imaging systems to one customer which
were collected in August 1996.

In the six months ended June 30, 1996, the Company expended $424,000 for
capital equipment, primarily for manufacturing and office equipment, and
$288,000 in capitalized software development, primarily for the Model
900UDx(TM). The Company expended $821,000, $266,000 and $439,000 for capital
equipment and $299,000, $25,000 and $81,000 in capitalized software development
in 1995, 1994 and 1993, respectively.

During the first six months of 1996, the Company generated cash of $278,000
from stock sales to employees under the Company's stock option and purchase
plans and from exercises of stock options assumed in connection with the
StatSpin acquisition. The Company generated cash of $1.7 million, $356,000 and
$206,000 in 1995, 1994 and 1993, respectively, from exercises of outstanding
warrants issued in connection

23
<PAGE> 26

with the formation of LDA and stock sales to employees under the Company's stock
option and purchase plans.

On July 31, 1996, the Company completed the PSI Acquisition for
approximately $16.1 million in cash plus a five-year warrant to purchase 875,000
shares of the Company's Common Stock at $8.00 per share. The Company financed
the cash portion of the purchase price with (i) a $7.0 million principal amount
subordinated note issued to PSI's parent company (the "Subordinated Note"), (ii)
a $7.8 million term loan from City National Bank (the "Bank") (the "Term Loan")
and (iii) $1.3 million loan drawn under a new revolving line of credit with the
Bank (the "Credit Facility").

The Subordinated Note bears interest at a fixed rate of 8.5% per annum
payable in quarterly installments. The entire principal amount is due on or
before July 31, 2001. The Company may prepay the Subordinated Note at any time
without premium or penalty. Under the terms of the Subordinated Note, upon the
issuance by the Company of equity securities generating net proceeds in excess
of $14.5 million, the Company shall apply fifty percent of the excess to the
prepayment of the Subordinated Note. In accordance with these provisions, the
Company will repay $2.8 million of principal of the Subordinated Note with the
proceeds of the Offering, leaving an outstanding principal balance of $4.2
million. The payment of principal and interest on the Subordinated Note is
subordinated in right of payment, to the extent and in the manner provided
therein, to the prior payment in full of all indebtedness to the Bank.

The Term Loan is collateralized by a first priority lien on all the assets
of the Company and bears interest monthly at the Bank's prime rate (8.25% as of
August 31, 1996) plus 0.25% through December 1, 1996 and 1.0% thereafter. The
Company is required to repay $1.8 million of principal on or before December 1,
1996, $100,000 of principal each month thereafter commencing January 1, 1997 and
the balance of $4.7 million on or before January 15, 1998. The Company may repay
the Term Loan at any time without premium or penalty. As required by the
provisions of the Term Loan, the Company will repay the entire outstanding
balance of the Term Loan with the net proceeds of the Offering. The Term Loan
imposes substantially the same operating and financial covenants on the Company
as the Credit Facility (discussed below).

The Company established the Credit Facility in July 1996. Under the terms
of the Credit Facility, the Company can borrow and reborrow up to a maximum
principal amount of $1.5 million at a variable interest rate equal to the Bank's
prime rate (8.25% as of August 31, 1996). The Credit Facility matures June 1,
1997 and is collateralized by a first priority lien on all of the assets of the
Company. The Credit Facility imposes certain operating and financial covenants
on the Company, including, among other things, (i) financial covenants regarding
minimum tangible net worth, a minimum fixed charge coverage ratio, a maximum
ratio of senior liabilities to tangible net worth and a minimum ratio of current
assets to current liabilities, (ii) restrictions on the disposition of assets
other than in the ordinary course of business, (iii) covenants to maintain the
Company's assets and appropriate insurance coverage and (iv) covenants to
deliver from time to time certain financial and other information. As of August
31, 1996, there was approximately $200,000 of unused credit available under the
Credit Facility. The Company will repay the entire outstanding balance of $1.3
million under the Credit Facility with the net proceeds of the Offering.

In September 1995, the Company and Poly entered into a research and
development agreement to develop the Poly Products using the Company's
technology. These products are intended to have dual potential as both
stand-alone products and enhancements to The Yellow IRIS(R) family of urinalysis
workstations. Under the terms of this agreement, Poly will have the right to use
Company technology and any newly-developed technology for developing,
manufacturing and marketing the Poly Products as stand-alone devices, and the
Company will have the right to use the newly-developed technology for any other
purpose and to incorporate the Poly Products into The Yellow IRIS(R) family of
products. Poly has retained the Company to conduct research, development,
clinical evaluation and premarket testing of the Poly Products. The Company is
funding the first $15,000 per month (up to a maximum of $500,000) of the cost of
the project, and Poly is reimbursing the Company for the excess. Poly was
organized by the Company in June 1995 and subsequently raised net proceeds of
approximately $2.0 million in a private offering. The Company has an option
until 121 days after termination of the agreement with Poly to acquire all of
the common stock of Poly for an aggregate price increasing on August 1, 1997
from $4.4 million to $5.1 million payable in cash or shares of

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Common Stock of the Company. If the Company elects to exercise its option, the
portion of the net cost of the acquisition allocated to completed products would
be capitalized and its subsequent amortization would impact future earnings. For
the portion of the net cost of the acquisition allocated to in-process research
and development, the Company would record a nonrecurring, noncash (if purchased
with Common Stock), charge against then current earnings. See "Risk
Factors -- Option to Acquire Poly U/A Systems, Inc."

The Company believes that its current cash on hand plus short-term
investments, together with cash generated by operations and the net proceeds of
the Offering, will be sufficient to meet its needs for at least the next year.

PSI AND OTHER RECENT ACQUISITIONS

In 1995, the Company began implementing a strategy to achieve global IVD
imaging leadership by expanding its product line of IVD imaging systems and
adding complementary lines of small instruments and supplies.

In July 1996, IRIS consummated the PSI Acquisition for approximately $16.1
million plus a five-year warrant to purchase 875,000 shares of Common Stock at
$8.00 per share. See "-- Liquidity and Capital Resources." For the six months
ended June 30, 1996, PSI's total revenues from this business increased to $3.6
million from $2.4 million, an increase of $1.2 million or 53% over the
comparable period of the prior year. PSI generated total revenues from this
business of $5.4 million, $4.3 million and $3.0 million in 1995, 1994 and 1993,
respectively, reflecting annual increases of 25% and 46%, respectively.

PSI has a significant international presence and generated 55% and 56% of
its total revenues from international sales of the PowerGene(TM) product line
for the six months ended June 30, 1996 and the twelve months ended December 31,
1995, respectively. With the PSI Acquisition, the Company acquired an overseas
operation headquartered in Chester, England that supports agents and
distributors in more than thirty-five countries. Prior to the acquisition, the
Company's international sales were not significant. The Company intends to
market all of its products globally through the international operations
acquired from PSI and to enhance domestic sales of the PowerGene(TM) product
line through the Company's existing operations. See "Risk Factors -- Government
Regulation."

The Company also acquired a significant research and development staff from
PSI. PSI expended $797,000, $410,000 and $152,000 for research and development
in 1995, 1994 and 1993, respectively. These expenditures were offset by research
and development grants from the National Aeronautics and Space Administration
("NASA") and NIH totalling $489,000, $317,000 and $66,000 in 1995, 1994 and
1993, respectively.

As a result of the PSI Acquisition, the Company expects to recognize a
charge against earnings of approximately $7.2 million ($4.6 million net of
deferred tax benefits) in the third quarter of 1996 for the acquisition of
in-process research and development. In addition, interest expense is expected
to increase substantially due to debt incurred in connection with the PSI
Acquisition until the Company repays the majority of such debt with the net
proceeds of the Offering. See "-- Liquidity and Capital Resources" and "Use of
Proceeds." The Company also acquired a foreign subsidiary from PSI which
conducts business in various foreign currencies. See "Risk Factors -- Currency
Fluctuations."

In March 1996, the Company purchased the Cen-Slide(R) 1500 System for
centrifugal urine sedimentation and manual microscopic examination and certain
other products for $788,000. The Company generated revenues from these products
of approximately $153,000 for the three months ended June 30, 1996.

In February 1996, the Company merged with StatSpin for approximately
340,000 shares of Common Stock and the assumption of options and warrants to
purchase an additional 126,000 shares of Common Stock in a pooling-of-interests
transaction for accounting purposes. Accordingly, the financial statements of
the Company have been retroactively restated for all periods presented to
include the financial position, results of operations and cash flows of
StatSpin. StatSpin manufactures special-purpose centrifuges,
application-specific consumable items and other small laboratory instruments.
Through this acquisition, the Company acquired sample preparation technologies
useful for future IVD imaging applications, as well as access to key

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distributors for its small laboratory instruments and supplies. StatSpin had net
sales of $2.0 million for the six months ended June 30, 1996 and $3.1 million
for the twelve months ended December 31, 1995.

In June 1995, the Company purchased LDA for approximately 498,000 shares of
Common Stock. LDA was a Company-sponsored research and development entity which
provided funding for The White IRIS(R) leukocyte differential analyzer under a
research and development agreement with the Company. See "-- Overview" and
"Certain Relationships and Related Transactions."

In March 1995, the Company purchased its digital refractometer product line
from Biovation for $850,000 and warrants to purchase 75,000 shares of Common
Stock at $8.125 per share. The Company generated revenues from this product line
of approximately $226,000 for the six months ended June 30, 1996.

The Company may pursue additional acquisitions in the future. See "Risk
Factors -- Acquisitions and Expansion."

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 Third-Party Payors
could adversely affect the demand for the Company's current or future products
and its ability to sell its products on a profitable basis. Moreover, healthcare
legislation is an area of extensive and dynamic change, and the Company cannot
predict future legislative changes in the healthcare field or their impact on
its business. See "Risk Factors -- Third-Party Reimbursement and Healthcare
Reform Policies."

INFLATION

The Company does not foresee any material impact on its operations from
inflation.

RECENTLY-ISSUED ACCOUNTING STANDARDS

In December 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123 ("SFAS No. 123"), "Accounting for Stock
Based Compensation." The Company will adopt the disclosure method as provided
for in SFAS No. 123.

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of ("Statement 121").
Statement 121 addresses the accounting for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used. Statement 121 also addresses the accounting for long-lived assets and
certain identifiable intangibles to be disposed of, establishes guidance for
recognizing and measuring impairment losses and requires that the carrying
amount of impaired assets be reduced to fair value. Statement 121 was effective
for fiscal years beginning after December 15, 1995. The impact of the adoption
of Statement 121 was not material to the Company's June 30, 1996 financial
statements.

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BUSINESS

OVERVIEW

The Company designs, develops, manufactures and markets IVD imaging systems
based on its patented and proprietary AIM technology for automating microscopic
procedures performed in clinical laboratories. AIM combines the Company's
capabilities in automating specimen presentation, including its patented
slideless microscope, as well as its proprietary high-speed digital processing
hardware and software to classify and visually present images of microscopic
particles in easy-to-use displays. The Company's IVD imaging systems are
designed to provide customers with consistent, more precise and timely results
and labor cost-savings over manual methods of performing microscopy. The Company
markets its products primarily to hospitals and clinical reference laboratories.

The Company's goal is to achieve global leadership in automated IVD
imaging. The Company is pursuing this goal by enlarging its line of IVD imaging
systems with new applications, developing newer models for existing
applications, expanding into new geographic markets, enhancing revenues from IVD
imaging systems through more installations and increased product offerings of
supplies, and adding complementary lines of small instruments and supplies which
appeal to smaller laboratories.

The Company pioneered its first IVD imaging application in 1983 with the
introduction of the first of The Yellow IRIS(R) workstations for urinalysis. The
Company believes that it is still the only supplier of laboratory systems which
fully automate a complete urinalysis, and it recently introduced its fourth
generation models which incorporate significant advancements in speed, utility
and ease of use. Earlier this year, the Company received FDA clearance and began
to market the Model 900UDx(TM) urine pathology system designed especially for
the high-volume testing requirements of larger laboratories. The Company also
provides ongoing sales of supplies and service necessary for operation of The
Yellow IRIS(R) workstations. Most supplies are purchased by customers under
standing orders and, following the initial one-year warranty period, the
majority of customers purchase annual service contracts.

In addition to urinalysis, the Company has also added new applications for
its IVD imaging systems. It recently developed The White IRIS(R) leukocyte
differential analyzer for the field of hematology. The FDA cleared The White
IRIS(R) for marketing in May 1996, and the Company expects to initiate sales of
this system in late 1996 or early 1997. The Company also plans to sell supplies
and service for The White IRIS(R) comparable to those sold for The Yellow
IRIS(R).

As part of its goal to achieve global leadership in automated IVD imaging,
the Company entered the field of genetics in July of this year with the PSI
Acquisition, which included the PowerGene(TM) family of analyzers. The
PowerGene(TM), an IVD imaging system for karyotyping, DNA probe analysis and
comparative genomic hybridization, has experienced average annual worldwide
sales growth of 35% over the last two fiscal years. The Company also acquired
PSI's significant foreign operations which will enable the Company to expand in
international markets with its other IVD imaging systems and products.

THE INDUSTRY

As a result of cost containment pressures from Third-Party Payors,
healthcare providers are focusing on the more efficient use of their resources,
thereby driving providers to reduce costs while simultaneously improving patient
care. Meeting this goal depends, in part, on reducing the cost and improving the
clinical utility of medical tests for diagnosing and monitoring diseases, as
well as reporting the results of these tests in timely and useful ways. See
"Risk Factors -- Third-Party Reimbursement and Healthcare Reform Policies."

Medical tests are performed either on the patient or on a specimen removed
from the patient. IVD testing refers to analysis of a specimen -- urine
("urinalysis"), a sample of blood ("hematology"), chromosomes ("genetics") or
other tissue or material removed from the patient -- usually in the clinical
laboratory. Many IVD tests rely on chemical or simple physical measures of
specific characteristics of the specimen. Over the past five decades, the
chemical and particle-counting aspects of these tests have been largely
converted from manual methods to automated instruments, such as clinical
chemistry analyzers and blood cell counters.

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<PAGE> 30

However, many other IVD tests require visual examination of the specimen
through a microscope ("microscopy"). Manual microscopy requires numerous steps
from specimen preparation to visual examination, making the method
labor-intensive, cumbersome, biohazardous, inefficient and imprecise. More labor
time is spent in performing manual microscopy, collectively, than in any other
IVD testing procedure in the clinical laboratory. Despite these factors, a vast
majority of microscopic procedures are still performed manually.

The pressure to reduce the cost and improve the clinical utility of IVD
tests, together with recent technological developments, have created an
opportunity for automating microscopic procedures. Advances in image processing
software, computer hardware and solid-state cameras have made it possible to
capture digital images of microscopic specimens in a uniform manner and perform
sophisticated analysis and classification of these images. The test results can
then be electronically transmitted to the central computer system of the
hospital or reference laboratory for clinical use and billing. The digital
images of the specimen can also be stored in electronic format for future review
and transmitted to remote locations for review by other technologists or
specialists.

THE COMPANY'S STRATEGY

The Company's objective is to be the global leader in automated IVD imaging
by responding to the demands of healthcare providers to reduce the cost of IVD
tests while simultaneously improving patient care. The Company's IVD imaging
systems are designed to reduce the labor cost of microscopic examinations while
improving the clinical utility and timeliness of their results. The Company is
pursuing its objective through the following strategies:

- Introducing New IVD Imaging Applications. The Company believes AIM
technology has a number of potential applications in the clinical
laboratory and is expanding beyond the field of urinalysis. The Company
recently completed development of The White IRIS(R) leukocyte
differential analyzer for hematology and expects to start sales of this
system in late 1996 or early 1997. In July of this year, the Company
strategically expanded into the field of genetics through the PSI
Acquisition, which included the PowerGene(TM) family of IVD imaging
systems.

- Continuing Market Penetration for Current Applications of IVD Imaging
Technology. Although more than 75% of all United States medical schools
use The Yellow IRIS(R) urinalysis workstation, the Company estimates that
it has penetrated less than 20% of the potential market in the United
States for this family of systems. It plans to continue penetrating this
segment of the IVD testing market with additional sales of its recently
introduced fourth generation models of The Yellow IRIS(R) family,
including the Model 900UDx(TM) urine pathology system which was designed
especially for the high-volume testing requirements of larger
laboratories. The Company also plans to intensify its rental program for
these systems which generates revenues based on the number of tests
performed by the customer which allows the Company to place its systems
with customers who would not otherwise purchase the systems.

- Expanding in New Geographic Markets. Until recently, the Company has
marketed its IVD imaging systems almost exclusively in the United States.
The PSI Acquisition in July of this year added significant foreign
operations which the Company expects will enable it to expand the
geographic market for its other IVD imaging systems and products.

- Increasing Sales of Supplies and Service. Once an IVD imaging system is
installed, the Company generates significant recurring revenue from sales
of supplies and service for its operation. The Company seeks to enhance
this revenue stream by installing more systems as well as increasing its
product offering of supplies for each system. For example, the Company
began selling the CHEMSTRIP(R)/IRIStrip(TM) urine test strips for The
Yellow IRIS(R) systems at the end of 1994 and, when The White IRIS(R)
system is introduced, will sell a patented cytoprobe for this system as
well.

- Adding Complementary Product Lines. Over the past year and a half, the
Company has also added several complementary lines of small instruments
and supplies which appeal to smaller laboratories and

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<PAGE> 31

respond to the desire of integrated healthcare providers to purchase
systems and supplies for a variety of clinical settings from one
supplier.

See "Risk Factors -- Future Capital Needs and Uncertainty of Financing."

AIM TECHNOLOGY

An effective system for automated microscopy in most applications requires
technology for fast, consistent and easily discernible presentation of the
specimen to the microscope ("front end processing") and for rapidly capturing,
analyzing, classifying, enhancing, arranging and displaying images of the
specimen ("back end imaging"). The Company has over the past seventeen years
created and developed its patented and proprietary AIM technology to address
both of these requirements, as well as developing significant patented and
proprietary technology for certain applications.

The Company's AIM technology automates all or most of the front end
processing in its IVD imaging systems. For example, traditional urine sediment
analysis requires manual preparation of a slide from the specimen requiring
several steps, including centrifugation followed by carefully positioning,
staining and coverslipping a sample extracted from the specimen. The slide is
then placed under the microscope and manually manipulated and scanned by a
technologist. This procedure is time-consuming, imprecise and carries the
potential for human exposure to biohazards. In contrast, the Company's patented
slideless microscope, used in The Yellow IRIS(R) and The White IRIS(R), allows
microscopic examination of a moving specimen precisely positioned in a stream of
fluid and eliminates the need for manual slide preparation, manipulation and
scanning. The slideless microscope precisely positions the specimen to within
microns in a thin layer for proper focusing as it flows past the microscope at
high-speed ensheathed in a larger stream of fluid. The method of ensuring proper
alignment, particle orientation, focus and measurement, called "imaging flow
cytometry," is patented, and the Company is unaware of any other company which
has developed similar technology. For those IVD tests where imaging flow
cytometry is not optimal or possible, AIM technology automates the slide
manipulation and scanning process. The Company's PowerGene(TM) genetic analyzers
use this technology to automatically locate and focus microscopic particles on a
slide as it is precisely manipulated and scanned by the system.

Once the specimen is located and presented to the microscope, AIM's back
end imaging automatically captures, digitizes, classifies, organizes and
presents the microscopic images on a video monitor for review by the medical
specialist. These digital images of the specimen can then be stored on magnetic
or optical media for later retrieval, even years later. The Company is testing a
system for digitally transmitting these images for remote review of the images
and consultation on the diagnosis through network technology. See "Risk
Factors -- Technological Change."

PRODUCTS

AIM Systems

The Company has three families of AIM systems -- The Yellow IRIS(R), The
White IRIS(R) and the PowerGene(TM). These systems incorporate sophisticated
front end processing and back end imaging and are designed for sale to clinical
laboratories performing a relatively high-volume of IVD tests.

The Yellow IRIS(R) family of urinalysis workstations is used in over 250
hospitals nationwide, including over 75% of all United States medical schools.
However, the Company believes it has penetrated less than 20% of the potential
market in the United States for The Yellow IRIS(R) workstations. This family of
IVD imaging systems currently consists of three models. Two models can also
perform IVD imaging tests on a number of body fluids other than urine, including
cerebrospinal, peritoneal, pleural, pericardial, synovial and seminal fluids as
well as peritoneal dialyzates and lavages. The third model, the Model
900UDx(TM), is designed

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for laboratories testing high numbers of urine specimens. The Yellow IRIS(R)
family of IVD imaging systems currently has list prices ranging from $85,000 to
$195,000.

The White IRIS(R) leukocyte differential analyzer is an automated
high-speed workstation used to classify normal, as well as immature and other
abnormal white blood cells. It was cleared by the FDA in May 1996 and, when
introduced in late 1996 or early 1997, is expected to be the only commercially
available system cleared for automated classification of abnormal white blood
cells. The White IRIS(R) performs differential analysis which includes
identifying the five types of normally occurring white blood cells plus a number
of abnormally occurring immature white blood cells, variant lymphocytes and
other cells. The Company also holds an exclusive, worldwide license to several
patents which cover the unique cytoprobe used by The White IRIS(R), as well as
the multi-colored expression of the cytoprobe in white blood cells. The Company
expects to start sales of this system with an introductory list price of
approximately $195,000.

The PowerGene(TM) family of genetic analyzers performs certain chromosome
tests such as karyotyping, DNA probe analysis in FISH procedures and comparative
genomic hybridization. These tests are typically used for analyzing genetic
abnormalities for both clinical uses (e.g. prenatal screening) and research
applications (e.g. cancer studies). The genetics market is one of the fastest
growing segments of the global IVD market. IRIS acquired this family of
analyzers in July 1996 in the PSI Acquisition. The PowerGene(TM) analyzers
currently have list prices ranging from $35,000 to $200,000 depending upon the
selected options and configuration.

IRIS believes its AIM technology may be suitable for a number of other
potential IVD imaging applications such as cytology, microbiology and histology.
See "Risk Factors -- Third-Party Reimbursement and Healthcare Reform Policies,"
"-- Government Regulation," "-- Technological Change" and "-- Competition."

IVD Imaging System Supplies and Service

In addition to sales of its IVD imaging systems, the Company obtains
significant recurring revenue from sales of supplies used in the operation of
these systems and from their service and repair. Supplies for The Yellow IRIS(R)
family and The White IRIS(R) include the sheath fluid used to position the
particles and cleanse the system in slideless microscopy; proprietary reagents
such as the patented cytoprobe used by The White IRIS(R); and "controls" used in
calibrating and monitoring the performance quality of the systems. The Company
also sells the CHEMSTRIP(R)/IRIStrips(TM) for testing urine chemistry on The
Yellow IRIS(R). The Company introduced the CHEMSTRIP(R)/IRIStrip(TM) urine test
strips in late 1994 and has already converted over 80% of the installed base of
systems to these new test strips.

Small Instruments and Supplies

The Company also manufacturers and markets a variety of small instruments
and supplies for the clinical laboratory market. These products complement the
Company's line of IVD imaging systems because they appeal to smaller
laboratories and physician offices performing an insufficient number of tests to
justify the capital cost of an IVD imaging system. These products also take
advantage of the Company's reputation and expertise in urinalysis and respond to
the desire of integrated healthcare providers to purchase systems and supplies
for a variety of clinical settings (both large and small) from one supplier.
This category of products includes special-purpose centrifuges, digital
refractometers for measuring the specific gravity of urine, the Cen-Slide(R)
1500 System for centrifugal urine sedimentation and manual microscopic
examination and other supplies intended primarily for the urinalysis market.

RESEARCH AND DEVELOPMENT

The Company maintains an active research and development program to
continually enhance its existing IVD imaging systems and explore other IVD
imaging applications for its AIM technology. In 1995 and 1996,

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<PAGE> 33

the Company focused its research and development efforts on the following major
projects, as well as numerous other smaller projects:

- Developing the Model 900UDx(TM). The Company completed development of
its newest model in The Yellow IRIS(R) family, the Model 900UDx(TM). The
Company received FDA clearance to market the Model 900UDx(TM) in March
1996 and began selling systems in May. The Model 900UDx(TM) is the
industry's first and only fully-automated walkaway system for performing
complete macroscopic, chemical and microscopic urinalysis profiles.

- Upgrading The Yellow IRIS(R). The Company conducts an ongoing process of
refining its AIM technology and the cost-effectiveness of its systems.
Late in the third quarter of 1995, the Company completed development work
on its fourth generation models of The Yellow IRIS(R) family which offer
increased speed and other performance advantages over the previous
generation of systems.

- Completing The White IRIS(R). The Company has had a major program over a
number of years, under sponsorship of NIH and later in conjunction with
LDA, to develop The White IRIS(R). In May 1996, the Company received FDA
clearance to market The White IRIS(R), and it is now refining engineering
and manufacturing processes prior to commercial availability of The White
IRIS(R) later this year or early 1997.

As of August 15, 1996, the Company employed 34 people on its research and
development teams. The Company's current research and development efforts
include, among other things:

- Developing the Next Generation Platform for Its IVD Systems. The Company
is pursuing improvements designed to significantly increase speed and
image resolution while simultaneously reducing the amount of technologist
time required to operate the system.

- Upgrading the PowerGene(TM) Karyotyping Software. Research and
development efforts for this system are focused upon developing improved
image classification algorithms.

- Developing the Poly Products. The Company is developing the Poly
Products, which are designed, among other things, to enhance future
generations of The Yellow IRIS(R) family by improving the automated
classification of the urine sediment and reducing the amount of specimen
handling.

- Testing a Telemedicine System. The Company is testing a telemedicine
system for digitally storing and transmitting images of specimens
captured by its IVD imaging systems.

- Identifying Future Applications. The Company is performing experiments
and customer research to identify future applications of its technology.

The Company has in the past partially funded its research and development
programs through (i) grants from NASA and NIH, (ii) joint development programs
with strategic partners and (iii) Company-sponsored research and development
entities. In recent years, the Company has entered into four significant
projects, two joint development projects with strategic partners (BMC and BMG)
and two projects with Company-sponsored research and development entities (LDA
and Poly). The Company collaborated with BMC and BMG in the development of (i)
the CHEMSTRIP(R)/IRIStrip(TM) urine test strips and a related urine test strip
reader for The Yellow IRIS(R) and (ii) the Model 900UDx(TM), the latest model in
The Yellow IRIS(R) family. The Company entered into a project with LDA for
development of The White IRIS(R) leukocyte differential analyzer and later
acquired LDA. The Company entered into a similar project with Poly which is
ongoing for development of several new products to enhance automated urinalysis.
The Company believes that it will be unnecessary to enter into any new
development programs with Company-sponsored research and development entities in
the future. See "Risk Factors -- Option to Acquire Poly U/A Systems, Inc.,"
"-- Government Regulation," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Certain Relationships and Related
Transactions."

The Company also acquired a significant research and development staff from
PSI. PSI expended approximately $797,000, $410,000 and $152,000 for research and
development in 1995, 1994 and 1993,

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<PAGE> 34

respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- PSI and Other Recent Acquisitions."

MARKETING AND SALES

In the United States, the Company's IVD imaging systems are sold and
serviced through the Company's own sales and service forces. Sales activities
consist of direct sales by field sales representatives, telemarketing to
initiate and aid in pursuing sales opportunities, logistics support of the field
sales representatives and after-sales support to customers in the operation of
their systems. Currently, 53 employees are engaged in sales and service
activities. In addition to its sales activities, the Company promotes the
advantages of its products through, among other things, advertising in trade
journals, attendance at trade shows and direct mail. All sales of IVD imaging
systems include installation, customer training and a one-year warranty. The
Company's small instruments, targeted at primarily smaller customers, are sold
through Fisher CMS, VWR Canlabs and other distributors. Through the PSI
Acquisition, the Company acquired an overseas sales office and staff of 13
people based in Chester, England that supports agents and distributors in more
than thirty-five countries. The Company intends to use the international sales
channel acquired from PSI to market its other IVD systems and products.

The Company also maintains a rental program under which it has several
systems currently in place. Under the terms of the rental agreements, payments
generally are based on the number of tests performed with a guaranteed monthly
minimum payment to the Company. The Company is responsible for supply and
service of the systems. Some hospitals lease systems through medical equipment
leasing companies.

In addition, the Company markets most of the supplies used in the operation
of its IVD systems and maintains these systems through its own national service
organization, including 19 field service engineers. Service, after a one-year
warranty period, is generally sold under an annual service contract or, less
frequently, on a per-call basis.

COMPETITION

There are numerous large and well-financed companies engaged in active
research and development programs within and outside of the medical
instrumentation field that have considerable experience in areas of interest to
the Company. The Company cannot determine if any such firms are currently
engaged in potentially competitive research. However, one or more of these firms
may be able to develop and introduce IVD systems comparable or superior to the
Company's current products or any other product ultimately developed or acquired
by the Company. See "Risk Factors -- Competition."

Urinalysis

The Company's primary products for the urinalysis market are The Yellow
IRIS(R) family of urinalysis workstations. The principal competitive factors in
this market are cost-per-test, ease of use, and quality of result. The Company
believes The Yellow IRIS(R) competes favorably with regard to these factors in
its target markets.

The Company is unaware of any other competitor marketing an automated
complete urinalysis system. The Company granted TOA a perpetual license to
market an instrument performing only the urine sediment analyzer portion of a
urinalysis using pre-1989 Company technology. Royalty reports from TOA indicate
that, as of June 30, 1996, TOA has sold fewer than fifty systems, primarily in
Japan. More recently, the Company learned that TOA is attempting to introduce
its new UF-100 urine sediment analyzer in the United States. The Company
subsequently asserted its rights under the agreement between the two companies
to distribute the UF-100 in North America. TOA disputes the right of the Company
to distribute this product and has initiated arbitration of the issue in
accordance with the terms of the agreement. TOA has not sought damages but is
seeking reimbursement of its legal fees. The Company has asked the arbitration
panel to also rule on whether the Company is entitled to royalties on the UF-100
based on such agreement. See "-- Litigation."

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A number of hospitals conduct urine sediment examinations using the Kova
system made by Hycor Biomedical, Inc., as well as several other similar
products, all of which are composed largely of disposable plastic parts. These
products provide a more standardized method of preparing urine sediment for
microscopical examination as opposed to traditional means. While these
disposable products help somewhat to overcome manipulative imprecision, they do
so at the added expense of an increased number of disposable parts and offer
little in time savings. BMC, Behring Diagnostics, Inc., a subsidiary of Hoechst
AG, and the Bayer Diagnostics division of Bayer AG sell lines of urine test
strips which are useful in determining the concentration of various chemical
substances often found in urine. Some claims have been made that the absence of
certain results determined with these test strips can preclude the need for
microscopic examinations of some specimens.

Hematology

The Company's product for the hematology market will be The White IRIS(R)
leukocyte differential analyzer. The principal competitive factors in this
market are accuracy, precision, labor savings and ease of use. The Company
believes The White IRIS(R) will compete favorably with regard to these factors.

IMI is presently manufacturing an IVD imaging system called the Micro
21(TM) for performing a portion of the white blood cell differential and certain
other analyses. In 1995, IMI entered into an exclusive sales, marketing and
service arrangement with Coulter, a large manufacturer and distributor of blood
cell counters. Unlike The White IRIS(R) which uses imaging flow cytometry, the
Micro 21(TM) is a slide-based system. The Company expects to begin selling The
White IRIS(R) in late 1996 or early 1997. The Company believes The White IRIS(R)
has certain performance advantages over the Micro 21(TM). For example, The White
IRIS(R) (1) uses a closed-tube sampling procedure which is safer and more
convenient because it does not require slide preparation, (2) is more sensitive
and precise because it counts significantly more white blood cells, (3) allows
an easier-to-obtain and more complete answer because it automatically classifies
variant, immature and other abnormal cells, as compared only to automated
classification of normal cells by the Micro 21(TM), and (4) is more cost
effective because it requires less attended time. However, there can be no
assurance of the actual competitiveness of The White IRIS(R) until the Company
begins marketing the system. See "Risk Factors -- Competition." In 1994, the
Company notified IMI that the Company believes the Micro 21(TM) system infringes
at least two of the Company's patents. The companies are now litigating the
issue. See "-- Litigation."

While other automated blood smear reading instruments capable of varying
degrees of white blood cell differential analysis exist, they are relatively
expensive. There is at least one such instrument that is in production (made by
Omron, a Japanese company), but, to the Company's knowledge, it is not marketed
outside of Japan. The Company is not aware of any current plans by Omron to
market its white blood cell slide readers in the United States. TOA, Abbott
Laboratories and Coulter, all manufacturers of blood cell counters, have begun
displaying devices which automate the blood smear preparation process and are
attachable to their respective analyzers but do not provide for automation of
white blood cell differentials.

Genetics

The Company's products for the genetics market are the PowerGene(TM)
analyzers. The principal competitive factors in this market are product
features, software upgrades, clarity of output and customer service. The Company
believes the PowerGene(TM) analyzers compete favorably with regard to these
factors.

The Company's primary competitor in this market is Applied Imaging which
markets IVD imaging systems for prenatal and other genetic testing. Vysis is the
only other present competitor the Company is aware of selling IVD imaging
systems for this market. Its strategy has been to offer systems at a discount as
a vehicle for selling its DNA probes, mostly into the genetics research market
in the United States. However, it has not been as significant a competitor as
Applied Imaging in the sale of genetic analyzers.

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<PAGE> 36

Other Potential Competitors

IRIS is aware of at least four other companies that sell IVD imaging
systems, all for cytology and/or histology applications. They include Roche
Image Analysis Systems, a subsidiary of F. Hoffman-La Roche, Inc., and Becton
Dickinson Cellular Imaging Systems, a division of Becton Dickinson and Company.
More recently, two newer ventures, Neuromedical Systems and Neopath, Inc., have
begun marketing IVD imaging systems they have developed for PAP smear screening.

INTELLECTUAL PROPERTY

The Company pursues broad protection of its proprietary technology through
the filing of various patent applications. The Company has received eighteen
United States patents related to its AIM technology and applications of such
technology. Nine of these patents relate to core AIM technology, five are
related to color image analytical qualities, two relate to specific applications
of imaging analysis and two are for a method to fractionate blood cells. Six
other United States applications have been filed and a number of foreign patents
and applications corresponding to United States patents and applications have
been filed or granted dealing with various areas of the Company's technology.
Numerous additional disclosures of potentially patentable inventions have been
made, some of which may result in additional patent applications. In connection
with its recent acquisitions, the Company acquired another seventeen United
States patents. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- PSI and Other Recent Acquisitions." These include
one from Biovation for the digital refractometer, seven from StatSpin relating
to centrifuges, eight from UroHealth Systems, Inc. for disposable urinalysis
products and one from PSI for an aspect of its slide-handling technology.

The Company also has an exclusive license from Cytocolor, Inc. for the
patented 2-methylpolymethine ("2-MPM") cytoprobe to be used in The White
IRIS(R). Cytocolor has pursued patent protection of this unique reagent through
the filing of patent applications in the United States and abroad. Cytocolor has
received United States patents relating to differential staining of immature
leukocytes, subtypes in blood and bone marrow specimens and differential
staining of lymphocyte subpopulations using this cytoprobe. Corresponding
patents have been granted and issued in the United Kingdom, France, Italy,
Canada, Germany and Japan. Under the terms of the license, the Company must pay
Cytocolor royalties of $1,000 per system for the first 1,000 sales of The White
IRIS(R) plus 8% of the net sales price of all consumable products containing the
2-MPM cytoprobe.

The Company has received a letter from Coulter informing the Company that
the specimen sampling device used on the The White IRIS(R) might fall within the
claims of the Coulter patent. The Company has been offered the right to license
the Coulter patent. The Company does not believe it is necessary to obtain such
license and does not believe it is infringing this or, to the Company's
knowledge, any other patent. However, there can be no assurance that the Company
will not ultimately be required to seek a license from Coulter, or any other
third party, or that such license would be available or, if available, would be
available on terms commercially acceptable to the Company.

In 1994, the Company notified IMI, a company demonstrating a slide-based
imaging system used for white blood cell classification, that it believed IMI's
system infringes at least two of the Company's patents. The companies are now
litigating the issue. See "-- Litigation."

The Company claims copyright in its software and the ways in which it
assembles and displays images, but it has not filed copyright registrations with
the United States Copyright Office or any comparable state or foreign agency.
The Company also owns various trademarks for its products, including "IRIS",
"The Yellow IRIS" and "The White IRIS", which have been federally registered.
The Company owns numerous other federally registered trademarks and a number of
unregistered trademarks. The Company intends to aggressively protect its
copyrights and trademarks.

Litigation regarding patents, trademarks, copyrights and other intellectual
property rights, whether with or without merit, could be time-consuming and
expensive and could divert the Company's technical and management personnel.
There can be no assurance that the Company's litigation expenses will not
increase in

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<PAGE> 37

the future. Any change in the Company's ability to protect and maintain its
proprietary rights could have a material adverse effect on the Company. See
"Risk Factors -- Intellectual Property."

GOVERNMENT REGULATION

Most of the Company's products are subject to stringent government
regulation in the United States and other countries which govern the testing,
manufacture, labeling, storage, record-keeping, distribution, sale, marketing,
advertising and promotion of such products. Failure to comply with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production, withdrawal of existing product approvals or
clearances, refusal to approve or clear new applications or notices and criminal
prosecution. See "Risk Factors -- Government Regulations."

In general, medical devices must be cleared or approved by regulatory
authorities prior to their commercial sale. The regulatory process can be
lengthy, expensive and uncertain, and securing clearances or approvals may
require the submission of extensive clinical data and other supporting
information. The regulatory process for medical devices in the United States is
governed by the FDC Act and FDA implementing regulations, and product clearance
depends to a large degree on the classification of a particular device. The FDA
classifies medical devices as Class I, II, or III on the basis of the degree of
controls deemed by the FDA to be necessary to reasonably ensure their safety and
effectiveness. Class I devices are subject to general controls (provisions
governing establishment registration; product listing; adulteration;
misbranding; premarket notification; notification of unreasonable risk; repair;
replacement or refund; recalls; device records and reports; and adherence to GMP
regulations), and Class II devices are subject to general controls and special
controls (e.g., performance standards, postmarket surveillance, patient
registries and FDA guidelines). Class III devices are those that must receive
premarket approval by the FDA to ensure their safety and effectiveness (e.g.,
life sustaining, life supporting and implantable devices), and devices that were
not on the market before May 28, 1976 ("new medical devices") for which the FDA
has not made a finding of "substantial equivalence" based on a 510(k)
Notification (discussed below). Class III devices usually require much more
extensive clinical testing and FDA review prior to marketing and distribution.

Before a new medical device can be commercially introduced in the United
States, the manufacturer must obtain FDA clearance by filing a 510(k)
Notification or FDA approval by filing a PMA Application. The FDA will clear a
new medical device submitted using a 510(k) Notification if the submitted
information establishes that the device is "substantially equivalent" to a
legally marketed Class I or II medical device or to a legally marketed Class III
device that does not itself require a PMA Application prior to marketing
("predicate device"). A 510(k) Notification must contain information to support
a claim of substantial equivalence, which may include laboratory test results or
the results of clinical studies. A 510(k) Notification for a device claiming
substantial equivalence to a predicate Class III device is typically given an
extensive review, comparable in certain respects to the review given to a PMA
Application in thoroughness and time. Based on the Company's prior experience,
it generally takes from three to six months from the date of submission of a
510(k) Notification to obtain clearance from the FDA, but it may take longer and
such clearance may never be obtained. The Yellow IRIS(R) (including the Model
900UDx(TM)), The White IRIS(R) and the PowerGene(TM) analyzer were all cleared
by the FDA through the 510(k) Notification process, and The White IRIS(R)
received an extensive review because the FDA deemed it to be claiming
substantial equivalence to a predicate Class III device (automated differential
cell counter).

If the FDA determines that a new medical device is not substantially
equivalent to a predicate device, the manufacturer must file a PMA Application.
The PMA Application process is significantly more complex, expensive and time
consuming than the 510(k) Notification process, and a number of devices for
which PMA approval has been sought by other companies have never been approved
for marketing. A PMA Application requires much more extensive scientific data
than a 510(k) Notification. Although The White IRIS(R) received a tier III level
of review (which, as noted, is comparable to PMA Application review in
thoroughness and time), the FDA has not previously required the filing of a PMA
Application for any of the Company's products. However, there can be no
assurance that the FDA will not require a PMA Application for any future
products of the Company. Furthermore, FDA clearance of a 510(k) Notification or
approval of a PMA

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<PAGE> 38

Application is subject to continual review, and later discovery of previously
unknown problems may result in restrictions on a product's marketing or
withdrawal of the product from the market.

The FDA also regulates computer software, such as used in the Company's IVD
imaging systems, that performs the function of a regulated device or that is
intimately associated with a given device. The FDA is in the process of
reevaluating its regulation of such software, and the Company cannot predict the
extent to which the FDA will regulate such software in the future. Should the
FDA increase regulation of such software, the Company's software platform may
become subject to more extensive regulatory processes and clearance
requirements. See "Risk Factors -- Government Regulation."

The Company is also required to register as a medical device manufacturer
with the FDA and comply with GMP regulations. The GMP regulations require, among
other things, that (i) the manufacturing process for each medical device must be
controlled by the use of written procedures, (ii) each step of the manufacturing
must be validated by extensive and detailed testing; and (iii) the manufacturer
must demonstrate its ability to produce medical devices which meet the
manufacturer's specifications. The GMP regulations also require investigation of
any deficiencies in the manufacturing process or in the products produced and
detailed record keeping. The FDA inspects manufacturing facilities on a periodic
basis to monitor compliance with GMP requirements. The FDA has inspected the
Company most recently in March of 1996. During this last inspection, the FDA
cited the Company for a few minor deficiencies for which certain remedial steps
have been taken and the remainder are already underway.

Labelling, advertising and promotional activities for medical devices are
subject to scrutiny by the FDA and, in certain instances, by the Federal Trade
Commission. The FDA also enforces statutory and policy prohibitions against
promoting or marketing medical devices for unapproved uses.

The FDA has statutory authority to institute civil administrative
proceedings or court enforcement actions against medical device manufacturers
and distributors for violations of applicable requirements of the FDC Act and
FDA implementing regulations. A finding of liability in an administrative
proceeding can result in the imposition of civil monetary penalties. Court
enforcement actions, involving seizure of products, injunction against continued
distribution of products or criminal prosecution, can result, respectively, in
destruction of products, orders against further distribution of products, or
criminal fines if the FDA prevails. The FDA can also require the recall of an
already-marketed medical device when the agency believes that the product would
cause serious adverse health consequences or deaths if marketing were allowed to
continue.

In the United States, many states have also enacted statutory provisions
regulating medical devices. The State of California's requirements in this area,
in particular, are extensive, and require registration with the state and
compliance with regulations similar to the GMP regulations of the FDA. The
impact of such regulations have been minimal on the Company. The Company has
been inspected from time to time by the California Department of Health
Services, and the results of these inspections have generally been favorable.

Exports of medical devices manufactured in the United States are allowed if
the devices have satisfied applicable premarket approval or notification
requirements and are not adulterated or misbranded. The Company has satisfied
the necessary notification requirements for export with respect to The Yellow
IRIS(R), The White IRIS(R) and the PowerGene(TM) system. An unapproved medical
device manufactured in the United States can also be exported to 23 so-called
"Tier 1" countries without prior FDA export approval, if the device has valid
marketing authorization in a "Tier 1" country and the device complies with the
laws of the importing country, subject to notification to the FDA at the time of
export. Exports of medical devices not approved in the United States to
non-"Tier 1" countries need prior FDA approval. In addition, exports of
unapproved medical devices manufactured in the United States for export for
clinical investigations in "Tier 1" countries, or where marketing authorization
is imminent in a "Tier 1" country, may be made without prior FDA approval,
provided that a notice is submitted to the FDA at the time of export.

In addition to domestic regulation of medical devices, many of the
Company's products are subject to regulations in the foreign jurisdictions in
which it operates or sells products. The requirements for the sale of medical
devices in foreign markets vary widely from country to country, ranging from
simple product registrations to detailed submissions similar to those required
by the FDA. The Company currently markets

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<PAGE> 39

the PowerGene(TM) analyzer internationally in more than thirty-five countries
but has not yet applied for regulatory clearances or approvals to market The
Yellow IRIS(R) or The White IRIS(R) in most of these countries. The regulation
of medical devices in a number of these foreign jurisdictions continues to
develop and there can be no assurance that new laws or regulations will not have
a material adverse effect on the Company's business. CE Mark certifications are
required for the sale of many products in certain international markets such as
the European Community. CE Mark certifications require the preparation and
implementation of stringent written procedures for manufacturing and testing a
product as well as careful documentation of the entire manufacturing process.
The Company is actively pursuing CE Mark certification for many of its products,
but there can be no assurance that the Company will be successful in securing
such certification.

PSI AND OTHER RECENT ACQUISITIONS

In 1995, the Company began implementing a strategy to achieve global IVD
imaging leadership by expanding its product lines of large IVD imaging systems
and adding complementary lines of small instruments and supplies. See
"Management's Discussion and Analysis of Financial Condition and Results and
Operations -- PSI and Other Recent Acquisitions" and "Risk
Factors -- Acquisitions and Expansion."

FACILITIES

The Company leases all of its facilities. The leases expire at various
times over the next four years. The Company's headquarters are located at 9162
Eton Avenue, Chatsworth, California 91311. The table below sets forth certain
information regarding the Company's leaseholds as of August 15, 1996:

<TABLE>
<CAPTION>
APPROX.
SIZE MONTHLY
LOCATION (SQ. FT.) RENT USE
--------------------------- ---------- -------- --------------------------------------
<S> <C> <C> <C>
Chatsworth, CA............. 26,000 $ 13,600 Sales, Research and Development, and
Manufacturing
League City, TX............ 7,000 $ 8,400 Sales, Research and Development, and
Manufacturing
Norwood, MA................ 11,000 $ 7,100 Sales, Research and Development, and
Manufacturing
Chester, England........... 5,000 L 3,100 Sales and Manufacturing
</TABLE>

Although the Company believes that its facilities are adequate to meet its
current needs, the Company anticipates that additional space will be required in
the near future at its headquarters facility in Chatsworth to facilitate the
integration of recent acquisitions and accommodate future growth. The Company
may elect to lease additional space or a larger headquarters facility. While the
Company believes both are available for lease in suitable locations, there can
be no assurances that the Company will be able to lease such space on
satisfactory terms.

EMPLOYEES

At August 15, 1996, the Company had 157 full-time employees, as compared to
105 at the end of 1995, and 86 at the end of 1994. No employees are covered by
collective bargaining agreements, and the Company believes that its employee
relations are good. The Company's success depends in large part on its ability
to attract and retain experienced personnel. Such experienced personnel are in
great demand, and the Company must compete for their services with other firms
which, because of their maturity and resources, might be able to offer more
favorable salaries and/or benefits.

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<PAGE> 40

LITIGATION

In 1994, the Company became aware that IMI was demonstrating a new
slide-based microscopic imaging system at various trade shows. After further
examination of the IMI system, the Company notified IMI that its system
infringed upon at least two of the Company's patents. The parties then entered
into negotiations regarding the licensing to IMI of these and possibly other
Company patents. The parties were unable to reach an agreement and, on September
27, 1995, IMI filed a complaint in the United States District Court for the
Southern District of Florida (Case No. 95-8594CIV). In its complaint, IMI seeks,
among other things, declaratory judgments that: (i) IMI's system does not
infringe upon either of the two Company patents in question; (ii) both of such
Company patents are invalid or unenforceable; and (iii) the Company is in
violation of certain United States antitrust laws. The Company is defending the
validity and enforceability of both patents and the antitrust claims and
pursuing infringement counterclaims against IMI.

In 1995, TOA began displaying the UF-100 urine sediment analyzer. The
Company subsequently asserted its rights under a 1988 agreement between the two
companies to distribute the UF-100 in North America. TOA disputed the right of
the Company to distribute the product and commenced an arbitration proceeding in
March 1996 before the International Chamber of Commerce to determine whether it
was obligated to allow the Company to distribute the UF-100. TOA seeks a ruling
that the UF-100 is not covered by the distribution provisions of the 1988
agreement. TOA has not sought damages but is seeking reimbursement of its legal
fees. The Company has asked the arbitration panel to also rule on whether the
Company is entitled to royalties on the UF-100 based on such agreement. See
"Risk Factors -- Competition."

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<PAGE> 41

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth information regarding the directors and
executive officers of the Company as of September 1, 1996:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
-------------------------------- --- -------------------------------------------------
<S> <C> <C>
Fred H. Deindoerfer............. 66 Chairman of the Board of Directors, President and
Chief Executive Officer
John A. O'Malley................ 63 Director
Steven M. Besbeck............... 48 Director
Thomas F. Kelley................ 64 Director, Vice President, Science and Technology
and General Manager of StatSpin
Edward Randall, III............. 69 Director
Jeffrey S. Williams............. 30 Executive Vice President and Chief Operating
Officer
Martin S. McDermut.............. 45 Vice President, Finance and Administration and
Chief Financial Officer
Frank C. Becker................. 47 Vice President, Marketing
Achille M. Bigliardi............ 53 Vice President, Sales and Service
Kenneth R. Castleman............ 54 Vice President, Research
Paul Douglas.................... 45 Vice President, International Sales
Harvey L. Kasdan................ 55 Vice President, Engineering and Product
Development
Alan E. Koontz.................. 43 Vice President, Business Development
Jimmie R. Kyle.................. 45 Vice President, Manufacturing Operations
Anthony G. Landells............. 43 Vice President, International Operations and
Managing Director of U.K. subsidiary
Joseph E. Whittier.............. 46 Vice President, Sales and Distributor Relations
E. Eduardo Benmaor.............. 47 Secretary, Controller and Principal Accounting
Officer
</TABLE>

The Board of Directors is divided into three classes with the directors in
each class holding office for staggered terms of three years each or until their
successors have been duly elected and qualified. Officers serve at the
discretion of the Board of Directors. There are no familial relationships among
the directors and executive officers of the Company.

Fred H. Deindoerfer, a Company founder, was elected a director of the
Company in 1980, became Chairman of the Board of Directors, President and Chief
Executive Officer later that year and has served continuously in these
capacities since then. In addition, he served as Chief Financial Officer from
1991 until August 1996. Prior to his employment with the Company, Dr.
Deindoerfer served as Executive Vice President of International Diagnostic
Technology, an IVD company which was acquired by Boehringer Ingelheim, and
earlier as an international group Vice President of American Hospital Supply
Corporation after serving as Vice President of such corporation's McGaw
Laboratories Division. He holds a B.S. from the University of Illinois, an M.S.
from Columbia University and a Ph.D. from the University of Pennsylvania, all in
Chemical Engineering. Dr. Deindoerfer also is President of Poly.

John A. O'Malley has served as a director of the Company since 1988. He is
President of Second Opinion, a consulting firm serving the healthcare diagnostic
and biotechnology industry and a member of the Office of the President of Litmus
Concepts, Inc., a developer of point-of-care diagnostic tests for the women's
healthcare market. Previously, he was worldwide director of chemical
manufacturing operations for the Milligen/Biosearch Division which Millipore
Corporation acquired from New Brunswick Scientific where Dr. O'Malley had been
its Vice President and General Manager. Previously, he was President of Primary
Diagnostic Systems and President of Smith Kline Instruments, both IVD companies.
Dr. O'Malley received

39
<PAGE> 42

his B.S. degree in Chemistry from Rutgers, the State University of New Jersey,
and his Ph.D. degree in Physical Chemistry from the University of Pennsylvania.
He also serves as Chairman of the Board of Directors, Executive Vice President
and General Manager of Poly.

Steven M. Besbeck has served as a director of the Company since 1990. He is
President, Chief Executive Officer and Chief Financial Officer of Creative
Computer Applications, Inc. ("CCA"), a position he has held since 1983, as well
as one of its directors since 1980. CCA designs, develops, services and markets
laboratory, pharmacy and radiology information systems for clinical
laboratories. Prior to his involvement with CCA, Mr. Besbeck was a director,
President and Chief Executive Officer of American Cytogenetics, Inc., a
specialty clinical laboratory, at various times over an eight-year period. Mr.
Besbeck holds a B.S. in Finance from California State University, Long Beach.

Thomas F. Kelley was appointed a director of the Company in March 1996 and
elected to his first three-year term in June. In July 1996, he was named Vice
President of Science and Technology. From 1982 to the time of its acquisition by
the Company, he was President and Chairman of the Board of StatSpin. Prior to
founding StatSpin, Dr. Kelley was employed by Instrumentation Laboratory, Inc.,
in roles of Director of Market Development and Director of Applied Research
among others. He is a noted speaker at national and international conferences on
biotechnology and clinical laboratory instrumentation. Dr. Kelley received his
A.B. and M.A. degrees in Biology from Boston University in 1954 and 1955,
respectively, and his Ph.D. in Biochemistry from Brown University in 1959. He
also serves as a director of BioNostics, Inc., an Acton, Massachusetts-based
original equipment manufacturer and private-label manufacturer of reagents,
controls and calibrators.

Edward Randall, III was appointed as a director of the Company in August
1996 following the Company's acquisition of PSI. He was the principal owner of
PSI since 1992, and for the past twelve years, he has been a private investor
and has served as a director of numerous companies. Prior to this, Mr. Randall
was Chief Executive Officer of the investment banking firm of Rotan Mosle Inc.
until its merger with PaineWebber Inc. in 1984. He earned a B.A. in Economics at
the University of Texas at Austin and currently serves as a director of Enron
Oil & Gas Company, KN Energy, Inc. and PaineWebber Group Inc.

Jeffrey S. Williams joined the Company as Executive Vice President and
Chief Operating Officer in January 1996. He was Vice President and Global
Business Manager, Urinalysis, for Boehringer Mannheim, the parent company of BMC
and BMG and the world's second-largest diagnostics company. Prior to his global
role at Boehringer Mannheim's world headquarters in Mannheim, Germany, he was
Director of North American Urinalysis at its Indianapolis-based United States
affiliate since 1991. He also held earlier marketing and sales roles with the
University of Michigan and Organon Pharmaceuticals, a division of Akzo Nobel.
Mr. Williams holds an M.B.A. from the University of Michigan in Marketing and
Corporate Strategy, and received his B.S. in Biology from Alma College.

Martin S. McDermut joined the Company as Vice President of Finance and
Administration and Chief Financial Officer in September 1996. Immediately prior
to this appointment, he was Chief Financial Officer of Edudata Corporation which
acquired Dental/Medical Diagnostic Systems in March of 1996. Dental Medical
Diagnostic Systems develops, manufactures and markets intraoral dental cameras.
From June 1995 to April 1996, Mr. McDermut was Vice President and Chief
Financial Officer of All-Comm Media Corporation, and, prior to that, he held the
same roles at Pet Metro, Inc., an early stage retail chain which filed a
voluntary petition under Chapter 11 of the United States Bankruptcy Code on
April 13, 1995. From 1975 to 1993, he was with the accounting and consulting
firm of Coopers & Lybrand L.L.P., beginning as a partner in 1988. From 1990 to
1993, Mr. McDermut practiced in the firm's Los Angeles Entrepreneurial Advisory
Services Group and was named its head in 1992. He is a Certified Public
Accountant and holds an M.B.A. in Finance and Accounting from the University of
Chicago and a B.A. in Economics from the University of Southern California.

Frank C. Becker joined the Company in August 1996 as Vice President of
Marketing. From 1991 until August 1996, he held a number of marketing and new
product development roles with BMC, lastly as Global Product Line Manager for
Urinalysis based in Mannheim, Germany. Previously, Mr. Becker held marketing
management roles with Miles, Inc. (now part of Bayer AG), Kendall-Futuro and
Angenics, all companies in

40
<PAGE> 43

the medical industry. He holds a B.S. in Biology from Briar Cliff College, a
Certificate in Medical Technology from Bergan Mercy School of Medical Technology
and did graduate studies at the University of Nebraska Medical Center and the
Keller Graduate School of Business.

Achille M. Bigliardi joined the Company in 1991 as Western Regional Sales
Manager and was promoted to Director of Sales in 1993 and to Vice President of
Sales and Service in 1994. From 1982 until joining the Company, Mr. Bigliardi
served as Executive Vice President, General Manager of Sclavo Inc. ("Sclavo"), a
European-based multinational medical diagnostics company, and President and
co-founder of Aktis Corporation prior to its acquisition by Sclavo. Previously,
Mr. Bigliardi served as Vice President and Director of Marketing of SSI, Inc.
and before then as Director of Sales of International Diagnostic Technology,
both IVD companies. Mr. Bigliardi earned his B.S. and M.S. degrees in Electrical
Engineering from the University of Michigan.

Kenneth R. Castleman joined the Company as Vice President of Research in
July 1996 upon the Company's acquisition of PSI. He was Vice President of
Research and Development of PSI since 1992 and cofounded its predecessor
company, Perceptive Systems, in 1984. A world-renowned imaging scientist, Dr.
Castleman was formerly a Senior Scientist at the NASA Jet Propulsion Laboratory
and a lecturer in biomedical imaging and digital imaging processing at
California Institute of Technology and the University of Texas, subjects on
which he has authored two textbooks and numerous articles. He holds B.S., M.S.
and Ph.D degrees in Electrical Engineering from the University of Texas at
Austin.

Paul Douglas joined the Company as Vice President of International Sales in
July 1996 upon the Company's acquisition of PSI. He previously held the role of
Vice President of Sales at PSI since joining that corporation in 1992. He has
prior experience in digital imaging technology sales and marketing as Director
of Sales at Applied Imaging's UK-based international operations, as well as
senior sales management positions with UK-based Imaging Recognition Systems and
Joyce Loebl, both acquired by Applied Imaging. Mr. Douglas holds a Full
Technological Certificate in Electronic Engineering.

Harvey L. Kasdan joined the Company in 1982 as Manager of Systems
Engineering and was promoted to Vice President of Research in 1987 and named
Vice President of Engineering and Product Development in 1996. He has also
served as Director of Product Development, Director of the Company's DNA Systems
Project and Director of Research and Development. Prior to joining the Company,
Dr. Kasdan was a Vice President at Recognition Systems, Inc. and a Senior
Engineering Specialist with Litton Industries. He earned his B.S. and M.S. in
Electrical Engineering from Massachusetts Institute of Technology and his Ph.D
in Engineering from the University of California at Los Angeles.

Alan E. Koontz joined the Company in 1994 as Vice President, Marketing and
Business Development and was named Vice President, Business Development in 1996.
For the previous six years he was Vice President of Marketing and Sales of
Axxiom Chromatography, Inc., a manufacturer of analytical laboratory software
products. Dr. Koontz also directed urinalysis and clinical chemistry marketing
at Behring Diagnostics. He holds a B.S. in Chemistry from Stanford University
and a Ph.D. in Biochemistry from the University of California.

Jimmie R. Kyle joined the Company in 1983 as a field service engineer and
later served in the positions of National Service Manager, Director of Quality
and Director of Manufacturing. Mr. Kyle was promoted to Vice President of
Manufacturing and Product Reliability in 1994 and Vice President, Manufacturing
Operations in July 1996. After graduating from the University of Arkansas in
1974, Mr. Kyle served as a Biomedical Engineer with the Veterans Administration
until joining the Company.

Anthony G. Landells joined the Company as Vice President of International
Operations and Managing Director of its United Kingdom subsidiary in July 1996,
upon the Company's acquisition of PSI. Previously, he was President of PSI and
also Managing Director and Chief Executive of PSI's United Kingdom subsidiary,
roles he held since joining PSI in 1992. A veteran in the field of digital
imaging technology, he was formerly Managing Director of Applied Imaging's
UK-based international operations, and earlier held senior management positions
with Image Recognition Systems and Joyce Loebl, both acquired by Applied
Imaging.

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<PAGE> 44

Mr. Landells earned a B.S. in Electronic Engineering and an M.S. in Computer
Systems and Applications from the University of Sunderland in the United
Kingdom.

Joseph S. Whittier joined the Company as Vice President of Sales and
Distributor Relations in May 1996. Since 1995, he was the Vice President of
Sales and Marketing of StatSpin prior to its acquisition by the Company. From
1991 to 1995, he served as a Marketing Manager for Kollsman Manufacturing
Company, a private label designer and manufacturer of instruments for companies
selling to the clinical laboratory market. Earlier, he held marketing roles at
Instrumentation Laboratory and held a number of sales positions with Fisher
Scientific. Mr. Whittier has a B.A. in Medical Technology from Northeastern
University and an M.A. from the University of Northern Colorado.

E. Eduardo Benmaor joined the Company in 1988 as Director of Accounting and
became Secretary, Controller and Principal Accounting Officer in 1991. Prior to
joining the Company, Mr. Benmaor served in various accounting and management
positions, including Assistant Regional Controller for the In-Flite Division of
the Marriott Corporation. He is a graduate of California State University at
Northridge, holding a B.S. degree in Accounting. Mr. Benmaor is also Vice
President, Secretary and Treasurer of Poly.

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth the annual and long-term compensation of the
Chief Executive Officer of the Company and the four other most highly
compensated individuals serving as executive officers for the fiscal year ended
December 31, 1995 whose total annual salary and bonus exceeded $100,000 during
1995 (the "Named Officers").(1)

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
----------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION(2) YEAR(3) SALARY($) BONUS($) ($)(4) SARS(#)(6) ($)(5)
- ------------------------------------ ------- --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Fred H. Deindoerfer................. 1995 $ 157,000 $ 86,350 $ 22,473 50,000 $ 1,500
President, Chief Executive 1994 150,000 78,700 21,600 40,000 1,500
Officer, Chief Financial Officer 1993 144,000 53,818 21,600 24,000 625
and Chairman of the Board of
Directors
Achille M. Bigliardi................ 1995 96,000 35,575 23,190 12,000 --
Vice President, Sales and Service 1994 90,000 19,006 5,900 21,400 --
Harvey L. Kasdan.................... 1995 92,000 28,085 16,111 -- --
Vice President, Research and 1994 88,000 15,424 13,198 20,000 --
Development 1993 85,000 19,534 12,750 8,000 --
Alan E. Koontz...................... 1995 90,000 19,752 -- 20,000 --
Vice President, Marketing and New 1994 85,000 13,226 -- 20,000 --
Business Development
</TABLE>

- ---------------
(1) For the year ended December 31, 1995, the Company had, in addition to its
Chief Executive Officer, only three executive officers whose total annual
salary and bonus exceed $100,000.

(2) The principal position indicated is such officer's position as of December
31, 1995. During 1996, the Company hired Jeffrey S. Williams as its Chief
Operating Officer and Martin S. McDermut as its Chief Financial Officer.

(3) Information is provided only for those years in which the individual served
as an executive officer.

(4) Represents the dollar value of the difference between the price paid for
Common Stock purchased under the Company's Key Employee Stock Purchase Plan
and the fair market value of such shares on the date of purchase. Excludes
perquisites and other personal benefits, securities or property, which did
not in any year exceed the lesser of $50,000 or 10% of the total annual
salary and bonus reported for the Named Officer for such year.

42
<PAGE> 45

(5) Represents premiums paid by the Company for term life insurance for the
benefit of the Named Officers
in excess of amounts available under the Company's group plan.

(6) No stock appreciation rights were granted to the Named Officers during the
year ended December 31, 1995.

Option Grants in Last Fiscal Year

The following table sets forth grants of stock options during the year
ended December 31, 1995 to the Named Officers.(1) No stock appreciation rights
were granted during such year.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
---------------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL PERCENTAGE RATES OF
SECURITIES OPTIONS/SARS EXERCISE STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO OR BASE PER OPTION TERM(4)
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ---------------------------
NAME GRANTED(#)(2) FISCAL YEAR ($/SH)(3) DATE 0% 5% 10%
- --------------------------- ------------- ------------ ----------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Fred H. Deindoerfer........ 50,000 23.8% $6.06 12/16/05 $53,500 $277,700 $621,600
Achille M. Bigliardi....... 2,000 0.9 4.25 01/29/05 1,500 7,800 17,400
10,000 4.8 6.22 10/15/05 10,900 56,900 127,600
Alan E. Koontz............. 20,000 9.5 4.25 01/29/05 15,000 78,000 174,000
</TABLE>

- ---------------
(1) Harvey L. Kasdan received no grants of stock options during the year ended
December 31, 1995.

(2) These options are exercisable in cumulative one-third installments
commencing one year from date of grant, with full vesting occurring on the
third anniversary date.

(3) All options were granted at 85% of market value at the date of grant.

(4) The potential realizable value of the options granted in 1995 to each of
these Named Officers was calculated by multiplying those options by the
difference of (a) the assumed market price of Common Stock on the tenth
anniversary of the option grant date if the market price of Common Stock
were to increase 0%, 5% or 10% in each year of the option's 10-year term
less (b) the option exercise price. The 0%, 5% and 10% appreciation rates
are mandated by the Securities and Exchange Commission and no representation
is made that Common Stock will appreciate at these assumed rates or at all.

Aggregated Option Exercises in Last Year and Year-End Option Value

The following table sets forth information with respect to the exercise of
stock options during the year ended December 31, 1995 and the final year-end
value of unexercised options. None of the Named Officers exercised stock
appreciation rights during the year ended December 31, 1995 or held any such
rights at the end of such year.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR END(#) FISCAL YEAR-END($)(1)
SHARES ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---------------------- --------------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Fred H. Deindoerfer... -- $-- 69,333/84,667 $355,333/$218,417
Achille M.
Bigliardi........... -- -- 21,133/30,467 92,448/ 95,192
Harvey L. Kasdan...... -- -- 24,400/16,000 119,343/ 58,667
Alan E. Koontz........ -- -- 6,667/33,333 27,700/ 127,900
</TABLE>

- ---------------
(1) Represents the difference between the closing price of Common Stock on
December 31, 1995 and the exercise price of the options.

COMPENSATION OF DIRECTORS

Under the Company's standard compensation arrangement with its directors,
each non-employee director receives a $13,500 per year retainer for consulting
services provided to the Company, which includes normal, routine services as a
Board member. With the prior approval of the President of the Company,
additional

43
<PAGE> 46

consulting time is compensated at the rate of $1,125 per day. During 1995, Dr.
O'Malley and Mr. Besbeck, the Company's outside directors, were each paid
$12,000 by the Company for their services. Non-employee directors are also
annually awarded stock options for 5,000 shares of Common Stock, except Mr.
Randall who has waived his rights to such options.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee consists of Dr. O'Malley and Mr. Besbeck. No
member of the Compensation Committee has a relationship that would constitute an
interlocking relationship with executive officers or directors of another
entity. During 1995, Dr. O'Malley and Mr. Besbeck received 6,183 and 1,288
shares of Common Stock, respectively, in connection with the Company's purchase
of their shares of LDA and Dr. O'Malley purchased one unit in the offering by
Poly. See "Certain Relationships and Related Transactions."

44
<PAGE> 47

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

BOEHRINGER MANNHEIM AND AFFILIATES

From 1994 to 1996, the Company entered into two joint development projects
with BMC and BMG. Under the first project, BMC designed and now supplies the
CHEMSTRIP(R)/IRIStrip(TM) urine test strip reader and the
CHEMSTRIP(R)/IRIStrip(TM) urine test strips especially for The Yellow IRIS(R).
The Company is the exclusive distributor of the CHEMSTRIP(R)/IRIStrip(TM) urine
test strips which are currently used in more than eighty percent of the
installations of The Yellow IRIS(R) systems. The second project was the joint
development by the Company and BMG of The Yellow IRIS(R) Model 900UDx(TM) urine
pathology workstation using proprietary technology of both companies. The
Company manufactures the Model 900UDx(TM) for distribution by both companies,
with BMG supplying certain components to the Company on an OEM basis. The
Company has the exclusive right to distribute the Model 900UDx(TM) in the United
States and Canada, and, until the amendments discussed below, BMG had the
exclusive right to distribute it in the rest of the world. Corange, an affiliate
of BMC and BMG, provided approximately $1.2 million of funding to LDA for
development of The White IRIS(R), and the Company and LDA granted BMC an option
to pursue a joint venture with them in hematology. As a result of this
investment and the projects with BMC and BMG, Corange acquired 469,413 shares of
Common Stock and a warrant to purchase another 250,000 shares of Common Stock.
See "Principal and Selling Stockholders."

BMC elected not to pursue the joint venture in hematology with the Company.
BMC and BMG subsequently agreed to several amendments to their contracts with
the Company, strengthening their ties in the supply and distribution of
CHEMSTRIP(R)/IRIStrip(TM) urine test strips while withdrawing from longer term
mutual commitments in the areas of hematology and urine microscopy. BMC agreed
to supply the Company with CHEMSTRIP(R) urine test strip readers and
CHEMSTRIP(R)/IRIStrip(TM) urine test strips at a reduced price and extended the
term of the underlying agreement from 1999 until six years after the last date
of sale of any model of The Yellow IRIS(R) containing a CHEMSTRIP(R) urine test
strip reader. BMC also granted the Company the right to terminate the agreement
on six months' notice and agreed to supply the Company with certain raw
materials should the Company elect to manufacture its own urine test strips. If
the Company terminates the agreement and then elects to purchase the raw
materials for its test strips from BMC, the Company would purchase the raw
materials from BMC at the lowest price available to any BMC customer and pay BMC
a royalty on sales of all urine test strips containing raw materials from BMC.
BMC also granted the Company the non-exclusive right to distribute certain other
BMC urinalysis products to hospitals and clinical reference laboratories in the
United States. In return, the Company relieved BMC of its obligations to
purchase a minimum number of Model 900UDx(TM) systems and to supply certain
technology and components.

The Company and BMG also reaffirmed their mutual commitment to manufacture
and market the Model 900UDx(TM) and extended the term of the underlying
agreement from 2000 until six years after the last date of sale of any Model
900UDx(TM). The Company will continue to manufacture the Model 900UDx(TM) with
BMG providing certain components on an OEM basis at cost. The Model 900UDx(TM)
will be marketed exclusively by the Company in the United States, Canada and
Taiwan, exclusively by BMG in Germany and Italy and by both companies in other
markets.

As compensation to the Company for potentially missed business
opportunities in hematology, Corange has agreed to sell, and the Company has
agreed to purchase, the 469,413 shares of Common Stock and the warrant to
purchase 250,000 shares of Common Stock held by Corange at their original
aggregate purchase price of $2.1 million, or $4.54 per share, a discount from
fair market value. See "Use of Proceeds."

A copy of the Amendment to the Distribution Agreements has been filed as an
exhibit to the Registration Statement (as defined herein). This description is
qualified in its entirety by reference to such exhibit.

LDA SYSTEMS

The Company completed the acquisition of LDA in June 1995 for approximately
498,000 shares of Common Stock and thereby reacquired all rights to The White
IRIS(R) leukocyte differential analyzer. The White IRIS(R) is a new product that
the Company developed in a project funded by LDA. In May 1996, the

45
<PAGE> 48

Company obtained FDA clearance to market The White IRIS(R). In exchange for
their shares of LDA common stock, the Company issued shares of Common Stock to
Corange and certain directors and officers of the Company as follows: Corange,
220,842 shares; Dr. Deindoerfer, 8,708 shares; Dr. O'Malley, 6,183 shares; Dr.
Kasdan, 3,091 shares; Mr. Besbeck, 1,288 shares; Mr. Kyle, 772 shares; and Mr.
Benmaor, 515 shares.

POLY U/A SYSTEMS

Pursuant to a Research and Development Agreement with Poly, Poly is funding
all research and development costs related to four potential urinalysis products
in excess of a $15,000 per month commitment from the Company. Dr. Deindoerfer
serves as President and Mr. Benmaor serves as Vice President, Secretary and
Treasurer of Poly pursuant to an Administrative Services Agreement between the
Company and Poly, but they do not receive any additional compensation for
services rendered to Poly. Dr. O'Malley is a director and the Executive Vice
President and General Manager of Poly and receives an annual retainer of $5,000
and an annual salary of approximately $17,000 from Poly for his services. Poly
raised net proceeds of approximately $2.0 million for this project through an
offering of 128 units at a price of $20,000 per unit. Each unit consisted of
2,000 shares of Poly common stock callable by the Company and a warrant to
purchase 4,000 shares of the Company's Common Stock for $6.50 per share. See
"Risk Factors -- Option to Acquire Poly U/A Systems, Inc." Certain directors and
officers of the Company purchased units in this offering and, as a result, own
shares of Poly common stock as follows: Dr. O'Malley, 2,000 shares; Dr.
Deindoerfer, 2,000 shares; Dr. Kasdan, 2,000 shares; Mr. Bigliardi, 2,000
shares; Mr. Kyle, 500 shares; and Mr. Benmaor, 500 shares. Each of these
individuals owns less than 1% of the total number of outstanding shares of Poly,
and collectively they own 3.5% of the total number of outstanding shares of Poly
common stock. See "Business -- Liquidity and Capital Resources."

TOA MEDICAL ELECTRONICS

As part of a 1988 agreement, the Company granted TOA the right to market
urine sediment analyzers using pre-1989 Company technology, and TOA granted the
Company the exclusive right to distribute in North America any urine sediment
analyzer made by TOA. TOA paid the Company royalties of $98,000 under this
agreement in 1995.

In 1996, TOA commenced an arbitration proceeding before the International
Court of Justice to determine whether it was obligated to allow the Company to
distribute a new product TOA is introducing. TOA seeks a ruling that the
instrument is not covered by the existing distribution agreement. TOA has not
sought damages but is seeking reimbursement of its legal fees. The Company has
asked the arbitration panel to also rule on whether the Company is entitled to
royalties on the new product. See "Business -- Litigation."

46
<PAGE> 49

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of August 1, 1996 by (i) each person known to the
Company to be the beneficial owner of more than five percent of the outstanding
Common Stock, (ii) each of the Company's directors, (iii) each of the persons
named in the Summary Compensation Table and (iv) all directors and executive
officers of the Company as a group. Unless otherwise indicated, the persons
named below have sole voting and investment power with respect to the number of
shares set forth opposite their names, subject to community property laws where
applicable.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(2)
--------------------------
NAME AND ADDRESS(1) NUMBER PERCENT(3)
------------------------------------------------------------ --------- ----------
<S> <C> <C>
Fred H. Deindoerfer(4)...................................... 436,439 6.7%
John A. O'Malley............................................ 26,518 *
Steven M. Besbeck........................................... 17,288 *
Thomas F. Kelley(5)(6)...................................... 89,556 1.4
Edward Randall, III(7)...................................... 853,040 11.8
Jeffrey S. Williams......................................... 5,311 *
Martin S. McDermut.......................................... 0 *
Frank C. Becker............................................. 0 *
Achille M. Bigliardi(8)..................................... 60,466 *
Kenneth R. Castleman........................................ 143 *
Paul Douglas................................................ 0 *
Harvey L. Kasdan............................................ 79,676 1.2
Alan E. Koontz.............................................. 20,005 *
Jimmie R. Kyle.............................................. 38,561 *
Anthony G. Landells......................................... 21,960 *
Joseph S. Whittier(5)....................................... 779 *
E. Eduardo Benmaor.......................................... 23,480 *
Corange International Limited(9)(10)........................ 719,413 10.8
TOA Medical Electronics, Inc.(11)........................... 331,852 5.2
Directors and Executive Officers as a group (17 persons).... 1,673,222 22.3
</TABLE>

- ---------------
* Less than 1%.

(1) Unless otherwise indicated, the mailing address of each person is c/o the
Company, 9162 Eton Avenue, Chatsworth, California 91311.

(2) Includes options and warrants exercisable on or within 60 days of August 1,
1996 as follows: Dr. Deindoerfer, 94,667 shares; Dr. O'Malley, 12,000
shares; Mr. Besbeck, 15,000 shares; Mr. Randall, 853,040 shares; Mr.
Benmaor, 14,000 shares; Mr. Bigliardi, 37,466 shares; Dr. Kasdan, 35,333
shares; Dr. Koontz, 20,000 shares; Mr. Kyle, 20,067 shares; Mr. Landells,
21,960 shares; and Corange, 250,000 shares.

(3) Based on 6,377,805 shares of stock outstanding as of August 1, 1996.

(4) Includes 58,725 shares owned by family members or trusts to which Dr.
Deindoerfer disclaims beneficial ownership shares.

(5) Includes shares subject to escrow as security for any indemnification
claims made by the Company prior to January 31, 1997 pursuant to the
Agreement and Plan of Merger dated January 31, 1996 between the Company and
StatSpin as follows: Dr. Kelley, 10,156 shares; Mr. Whittier, 78 shares.

For the purpose of computing the percentage of outstanding shares held by
each person or group on that date, the abovementioned shares are deemed to
be outstanding, but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person.

47
<PAGE> 50

(6) If the Underwriters' over-allotment option is exercised in full, the
Selling Stockholder, Dr. Kelley, an officer and director of the Company,
will sell up to an aggregate of 20,000 shares of Common Stock and will
beneficially own after the Offering not less than 69,556 shares of Common
Stock, representing less than 1% of the Common Stock outstanding after the
Offering. See "Underwriting."

(7) Mr. Randall's mailing address is 2950 North West Loop, Suite 1050, Houston,
Texas 77092.

(8) Includes warrants to purchase 3,000 shares owned by family members or
trusts to which Mr. Bigliardi disclaims beneficial ownership.

(9) Corange International Limited's mailing address is 22 Church Street,
Hamilton, Bermuda HM MX.

(10) The number of shares beneficially owned after the Offering will reflect the
concurrent repurchase by the Company of outstanding shares of Common Stock
and warrants to purchase Common Stock held by Corange International Limited
with a portion of the net proceeds of the Offering. See "Use of Proceeds."

(11) TOA's mailing address is 3-17, Kaikai-ku, Kobe, Japan.

48
<PAGE> 51

DESCRIPTION OF CAPITAL STOCK

The information included under this caption includes only a summary of
certain provisions of the Company's Certificate of Incorporation and Restated
Bylaws and is subject to the detailed provisions of such documents, copies of
which have been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.

The Company's authorized capital stock consists of 15,600,000 shares of
Common Stock, $.01 par value, and 3,000,000 shares of preferred stock, $.01 par
value (the "Preferred Stock"). As of August 31, 1996, 6,377,805 shares of Common
Stock were outstanding. No shares of Preferred Stock have been issued.

COMMON STOCK

All outstanding shares of the Common Stock are, and all shares of Common
Stock to be outstanding upon completion of the Offering will be, validly issued,
fully paid and non-assessable. Each outstanding share of Common Stock will be
entitled to such dividends as may be declared from time to time by the Company's
Board of Directors consistent with the provisions of the Company's Certificate
of Incorporation, Restated Bylaws and applicable law. See "Dividend Policy."
Each outstanding share is entitled to one vote on all matters submitted to a
vote of stockholders. There are no cumulative voting rights, and, therefore, the
holders of a majority of the shares voting for the election of the classified
Board of Directors can elect all of the Directors in any class up for election,
if they so choose. In the event of liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to receive on a pro rata basis any
assets remaining after provision for payment of creditors and after payment of
any liquidation preferences to holders of Preferred Stock. Holders of Common
Stock have no conversion rights or preemptive rights to purchase or subscribe
for additional Common Stock or any other securities of the Company.

PREFERRED STOCK

The authorized Preferred Stock of the Company is available for issuance
from time to time at the discretion of the Board of Directors of the Company
without stockholder approval. The Board of Directors has the authority to
prescribe, for each series of Preferred Stock it establishes, the number of
shares in that series, the consideration (not less than its par value) for such
shares in that series and the designations, powers, preferences, rights,
qualifications, limitations and restrictions of the shares in that series.
Depending upon the rights of such Preferred Stock, the issuance of Preferred
Stock could have an adverse effect on holders of Common Stock by delaying or
preventing a change in control of the Company, making removal of the present
management of the Company more difficult or resulting in restrictions upon the
payment of dividends and other distributions to the holders of Common Stock. The
Company currently has no intention to issue any shares of any class or series of
its Preferred Stock.

CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK

After the Offering, there will be approximately 6.7 million shares of
Common Stock and 3.0 million shares of Preferred Stock available for future
issuance. Delaware law does not require stockholder approval for any issuance of
authorized shares. These additional shares may be used for a variety of
corporate purposes, including future public offerings to raise additional
capital or to facilitate corporate acquisitions. The Company currently does not
have any plans to issue additional shares of Common Stock or Preferred Stock.

One of the effects of the existence of unissued and unreserved Common Stock
and Preferred Stock may be to enable the Board of Directors to issue shares to
persons friendly to current management, which issuance could render more
difficult or discourage an attempt to obtain control of the Company by means of
a merger, tender offer, proxy contest or otherwise, and thereby protect the
continuity of the Company's management and possibly deprive the stockholders of
opportunities to sell their shares of Common Stock at prices higher than
prevailing market prices. Such additional shares also could be used to dilute
the stock ownership of persons seeking to obtain control of the Company pursuant
to the operation of a stockholders' rights plan or otherwise.

49
<PAGE> 52

PROVISIONS OF CERTIFICATE OF INCORPORATION AND RESTATED BYLAWS AFFECTING CHANGES
IN CONTROL

The Certificate of Incorporation and Restated Bylaws provide that the Board
of Directors will be divided into three classes of directors, each class to be
as nearly equal in number as possible. The term of office of one class of
directors expires each year in rotation so that one class is elected at each
annual meeting of stockholders for a full three-year term. Under Delaware law,
members of a classified Board of Directors can be removed by stockholders only
for "cause" unless a corporation's certificate of incorporation otherwise
provides (which the Company's Certificate of Incorporation does not). The
Restated Bylaws provide that the Board of Directors shall consist of three
members. The number of directors may be changed from time to time by resolution
of the Board of Directors and has been fixed at five directors. The affirmative
vote of the holders of a majority of the outstanding shares of capital stock of
the Company entitled to vote is required to amend, alter, change or repeal the
classified board of directors provisions of the Certificate of Incorporation or
to remove a director with cause prior to the expiration of his term. Under the
classified board of directors provisions described above, it would take at least
two elections of directors for any individual or group to gain control of the
Board of Directors. Accordingly, these provisions may discourage a third party
from making a tender offer or otherwise attempting to gain control of the
Company, and may maintain the incumbency of the Board of Directors.

The Certificate of Incorporation prohibits stockholder action by written
consent in lieu of a meeting, and provides that stockholder action can be taken
only at an annual or special meeting of stockholders. Furthermore, under the
Restated Bylaws, only the Board of Directors has the power to call special
meetings of the stockholders. Such provisions may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting unless a
special meeting is called by the Board of Directors.

DELAWARE GENERAL CORPORATION LAW

Pursuant to Section 203 of the Delaware General Corporation Law ("Section
203"), with certain exceptions, a Delaware corporation may not engage in any of
a broad range of business combinations, such as mergers, consolidations and
sales of assets, with an "interested stockholder" for a period of three years
from the date that such person became an interested stockholder unless (a) the
transaction that results in the person's becoming an interested stockholder, or
the business combination, is approved by the board of directors of the
corporation before the person becomes an interested stockholder, (b) upon
consummation of the transaction which results in the stockholder becoming an
interested stockholder the interested stockholder owns at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and officers, and
shares owned by certain employee stock plans or (c) on or after the date the
person becomes an interested stockholder, the business combination is approved
by the corporation's board of directors and authorized at annual and special
meetings of stockholders and not by written consent, by holders of at least
two-thirds of the corporation's outstanding voting stock, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
any person, other than the corporation and any direct or indirect majority-owned
subsidiaries, that is (a) the owner of 15% or more of the outstanding voting
stock of the corporation, (b) an affiliate or associate of the corporation and
the owner of 15% or more of the outstanding voting stock of the corporation at
any time within the three-year period immediately prior to the date on which it
is sought to be determined whether such person is an interested stockholder or
(c) an affiliate or associate of such person.

Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The Company's Certificate of Incorporation does not exclude the
Company from the restrictions imposed under Section 203. The provisions of
Section 203 may encourage companies interested in acquiring the Company to
negotiate in advance with the Company's Board of Directors, because the
stockholder approval requirement would be avoided if a majority of the directors
then in office approve either the business combination or the transaction which
results in the stockholder becoming an interested stockholder. Such provisions
also may have the effect of preventing changes in the management of the Company.
It is possible that such provisions

50
<PAGE> 53

could make it more difficult to accomplish transactions which stockholders may
otherwise deem to be in their best interests.

LIMITATION OF LIABILITY AND INDEMNIFICATION

The Company's Certificate of Incorporation contains certain provisions
permitted under the DGCL relating to the liability of directors. The provisions
eliminate a director's liability for monetary damages for a breach of fiduciary
duty, except in certain circumstances involving wrongful acts, such as the
breach of a director's duty of loyalty or acts or omissions that involve
intentional misconduct or knowing violation of law. The Company's Certificate of
Incorporation also contains provisions requiring the Company to indemnify its
directors and officers to the fullest extent permitted by the DGCL, other than
under Section 145 of the DGCL. The Company believes that these provisions will
assist the Company in attracting and retaining qualified individuals to serve as
directors.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is Continental Stock
Transfer & Trust Company.

51
<PAGE> 54

UNDERWRITING

Subject to the terms and conditions contained in the Underwriting
Agreement, the Company has agreed to sell an aggregate of 3,000,000 shares of
Common Stock to the underwriters named below (the "Underwriters"), for whom
Jefferies & Company, Inc. and Rauscher Pierce Refsnes, Inc. are acting as
representatives (the "Representatives"), and the Underwriters have severally
agreed to purchase from the Company the number of shares of Common Stock set
forth opposite their respective names in the table below at the price set forth
on the cover page of this Prospectus.

<TABLE>
<CAPTION>
NAME NO. OF SHARES
---------------------------------------------------------------- -------------
<S> <C>
Jefferies & Company, Inc. ......................................
Rauscher Pierce Refsnes, Inc. ..................................
M. Kane & Company, Inc. ........................................
---------
Total.................................................
=========
</TABLE>

The Underwriting Agreement provides that the several obligations of the
Underwriters to purchase shares of Common Stock are subject to certain
conditions. The Underwriters are severally committed to purchase all of the
shares of Common Stock offered hereby (other than those covered by the
over-allotment option described below), if any are purchased.

The Underwriters propose to offer the Common Stock to the public initially
at the public offering price set forth on the cover page of this Prospectus, and
to certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a discount not
in excess of $ per share to certain other dealers. After the Offering, the
public offering price, the concession to selected dealers and the reallowance to
other dealers may be changed by the Underwriters. The Representatives have
informed the Company that the Underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.

The Company and the Selling Stockholder have granted the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase up
to 430,000 and 20,000 additional shares of Common Stock, respectively, at the
public offering price, less the underwriting discount. To the extent such option
is exercised, each Underwriter will become severally obligated, subject to
certain conditions, to purchase additional shares of Common Stock proportionate
to such Underwriter's initial commitment as indicated in the preceding table.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the sale of the shares of
Common Stock offered hereby.

The Company and the Selling Shareholder have severally, and not jointly,
agreed to indemnify the Underwriters against certain liabilities, including
civil liabilities under the Securities Act of 1933, or will contribute to
payments the Underwriters may be required to make in respect thereof.

The Company has agreed with the Underwriters not to offer, issue or sell
any shares of Common Stock or securities exercisable for or convertible into
shares of Common Stock ("Securities") for a period of 180 days from the date of
this Prospectus, subject to certain limited exceptions, without the prior
written consent of Jefferies & Company, Inc.

The officers and directors of the Company have agreed with the Underwriters
not to sell, offer to sell, transfer the economic benefit of ownership or
otherwise dispose of any securities convertible or exchangeable for Common Stock
or any shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of Jefferies & Company, Inc.

On May 17, 1996, the Company and MKC entered into an agreement pursuant to
which MKC agreed to provide financial advice and assistance, including
assistance in structuring and conducting the Offering. In consideration for such
services, MKC received a retainer of $10,000 per month from the execution of
such agreement until the Closing of the Offering. MKC also is entitled to 2.0%
of the gross proceeds of the

52
<PAGE> 55

Offering, net of the monthly retainer payments received by it, and a five-year
warrant to purchase up to 30,000 shares of Common Stock (or, if the Underwriters
exercise their over-allotment option in full, up to 34,500 shares of Common
Stock) (the "MKC Warrant"). In addition, the Company has agreed to reimburse MKC
for its reasonable out-of-pocket fees and expenses. This agreement with MKC will
terminate upon the consummation date of the Offering.

Under the MKC Warrant, MKC will have the right to purchase up to 30,000
shares of Common Stock (or, if the Underwriters exercise their over-allotment
option in full, up to 34,500 shares of Common Stock) at a per share exercise
price equal to 120% of the offering price of the Common Stock. The MKC Warrant
is immediately exercisable and expires five years from the closing of the
Offering. In connection with the MKC Warrant, MKC will also receive certain
registration rights. These registration rights provide that MKC will have the
right, during the five year period commencing on the date of the closing of the
Offering, on one occasion, to require the Company to register MKC's resale of
the shares of Common Stock underlying the MKC Warrant (the "Registrable
Securities") by means of a registration statement pursuant to the Securities
Act, or post-effective amendment thereto, as appropriate, so as to enable MKC to
publicly offer the Registrable Securities. Moreover, MKC will also have certain
"piggyback" registration rights with respect to the Registrable Securities. MKC
will have no voting, dividend or other rights as a stockholder of the Company
unless and until it exercises the MKC Warrant. The number of shares of Common
Stock deliverable upon any exercise of the MKC Warrant and the exercise price of
the MKC Warrant are protected by customary anti-dilution provisions. MKC has
agreed not to publicly offer to sell, sell, contract to sell or otherwise
publicly dispose of the shares of Common Stock underlying the MKC Warrant or the
MKC Warrant for at least one year after the date of this Prospectus.

LEGAL MATTERS

Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company by Irell & Manella LLP,
Los Angeles, California. Certain current and former partners of Irell & Manella
LLP own 41,142 shares of Common Stock and options to purchase an additional
5,000 shares of Common Stock. Certain legal matters will be passed upon for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom, Los Angeles, California.

Matters set forth under the captions "Risk Factors -- Intellectual Property
Rights" and "Business -- Intellectual Property" concerning the subject matter of
patents, including the Coulter patent, will be passed upon for the Company by
Limbach & Limbach LLP, San Jose, California, in its capacity as patent counsel
for the Company. Certain partners of Limbach & Limbach LLP own 1,872 shares of
Common Stock.

EXPERTS

The consolidated balance sheets of the Company as of December 31, 1995 and
1994, and the consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995
included in this Prospectus have been included herein in reliance on the report
of Coopers & Lybrand L.L.P., given upon their authority as experts in accounting
and auditing.

The balance sheet of StatSpin as of March 31, 1995 (not presented
separately herein), as included in the consolidated balance sheet of the Company
as of December 31, 1994, and the statements of income and accumulated deficit
and cash flows of StatSpin for each of the two years in the period ended March
31, 1995, as included in the consolidated statements of operations,
stockholders' equity and cash flows of the Company in each of the two years
ended December 31, 1994, included in this Prospectus have been included herein
in reliance on the report of KPMG Peat Marwick LLP.

The consolidated balance sheets of PSI as of December 31, 1995 and 1994,
and the combined and consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1995, included in this Prospectus have been included herein in reliance on the
report of Coopers & Lybrand L.L.P., given upon their authority as experts in
accounting and auditing.

53
<PAGE> 56

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith file reports and other information with the Securities and Exchange
Commission (the "Commission"). The Company also files proxy and information
statements with the Commission. Reports and other information (including the
Company's proxy and information statements) filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission, at 450 Fifth Street, N.W., Room 1024, Washington D.C. 20549; 7 World
Trade Center, Suite 1300, New York, New York 10048; and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such information can be obtained
from the Public Reference Section of the Commission, Washington D.C. 20549 at
prescribed rates. Certain reports, proxy statements and other information filed
by the Company may also be obtained at the Commission's World Wide Web site,
located at http://www.sec.gov. The Company also files its reports and other
information with the AMEX. Such reports and other information may be inspected
at the AMEX, 86 Trinity Street, New York, New York 10005.

This Prospectus does not contain all of the information set forth in the
Company's Registration Statement on Form S-1, as it may be amended (the
"Registration Statement") (File No. 333- ) filed with the Commission under
the Securities Act of which this Prospectus forms a part. This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain portions of which are omitted in accordance with the rules and
regulations of the Commission. Statements contained in this Prospectus as to the
contents of any contract or other document referred to herein or therein are not
necessarily complete, and, in each case, reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.

54
<PAGE> 57

GLOSSARY OF SELECTED TERMS

The following glossary defines certain terms used to describe the Company's
business.

AUTOMATED INTELLIGENT MICROSCOPY (AIM). The synthesis of visual
microscopy, digital image processing and automated image interpretation/pattern
recognition to analyze microscopic specimens. The Yellow IRIS(R), The White
IRIS(R) and PowerGene(TM) are all examples of instruments which are based on AIM
technology.

AUTOMATIC KARYOTYPING. A procedure to capture and digitize an image of a
spread of chromosomes from a dividing nucleus (metaphase) which may be further
enhanced by image processing. Once the enhanced image is prepared, the
individual chromosomes are then automatically separated and matched into their
respective pairs (karyotype).

COMPARATIVE GENOMIC HYBRIDIZATION (CGH). A molecular biology method to
globally view DNA for gain or loss (amplifications or deletions) of genetic
material.

CYTOPROBE. A chemical reagent which reacts with enzymatic granules within
a cell to produce unique color characteristics which are useful in identifying
the cell.

CYTOMETER. A device used to quantitatively measure the characteristics of
cells and other microscopic particles.

DNA. Deoxyribonucleic acid, the chemical composition of chromosomes in the
nuclei of living cells, consisting of two long chains of alternating phosphate
and deoxyribose units twisted into a double helix and joined by hydrogen bonds
between the complementary bases adenine and thymine or cytosine and guanine
bound in unique sequences that determine genetic characteristics.

DNA PROBE ANALYSIS. A molecular biology method using unique short
synthesized sequences of DNA (deoxyribonucleotides) to locate their exact
template along the DNA chain in the nucleus of a cell.

FLORESCENT IN-SITU HYBRIDIZATION (FISH). A technique which allows one to
microscopically see the location of specific sequences of DNA by using DNA
probes which have molecules attached to them which fluoresce when illuminated.

IN VITRO DIAGNOSTIC (IVD) TESTING. Testing conducted outside of the body
in a laboratory apparatus using a specimen obtained from the patient (blood,
urine, tissue, etc.) to identify or monitor a disease.

LEUKOCYTE DIFFERENTIAL ANALYZER. An automated, high-speed laboratory
instrument for classifying the white blood cells (or leukocytes) in a blood
specimen into different categories and determining the relative proportion of
each category.

REFERENCE LABORATORY. A commercial clinical laboratory which performs
general IVD testing of specimens referred from physician offices and more
specialized IVD testing for physician offices and hospitals.

REFRACTOMETER. A device which measures the index of refraction of a
solution, typically to determine its concentration or specific gravity.

SLIDELESS MICROSCOPY. The process of presenting a microscopic specimen to
the optical portion of a microscope without using a conventional microscope
slide. Slideless microscopy is implemented in The Yellow IRIS(R) and The White
IRIS(R) using a patented flowcell through which the specimen literally flows
past a microscope objective.

55
<PAGE> 58

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. AND SUBSIDIARY
Consolidated Financial Statements:
Report of Independent Accountants................................................... F-2
Independent Auditors' Report........................................................ F-3
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996
(unaudited)...................................................................... F-4
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994
and 1995 and for the Six Months Ended June 30, 1995 and 1996 (unaudited)......... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1993, 1994 and 1995 and for the Six Months Ended June 30, 1995 and 1996
(unaudited)...................................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994
and 1995 and for the Six Months Ended June 30, 1995 and 1996 (unaudited)......... F-8
Notes to Consolidated Financial Statements.......................................... F-9
PERCEPTIVE SCIENTIFIC INSTRUMENTS, INC.
Financial Statements:
Report of Independent Accountants................................................... F-22
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996
(unaudited)...................................................................... F-23
Combined and Consolidated Statements of Operations for the Years Ended December 31,
1993, 1994 and 1995 and the Six Months Ended June 30, 1995 and 1996
(unaudited)...................................................................... F-24
Combined and Consolidated Statements of Stockholder's Deficit for the Years Ended
December 31, 1993, 1994 and 1995 and the Six Months Ended June 30, 1995 and 1996
(unaudited)...................................................................... F-25
Combined and Consolidated Statements of Cash Flows for the Years Ended December 31,
1993, 1994 and 1995 and the Six Months Ended June 30, 1995 and 1996
(unaudited)...................................................................... F-26
Notes to Combined and Consolidated Financial Statements............................. F-27
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (Unaudited)
Introduction.......................................................................... F-33
Pro Forma Condensed Combined Balance Sheet as of June 30, 1996........................ F-34
Pro Forma Condensed Combined Statements of Operations:
For the Six Months Ended June 30, 1996.............................................. F-35
For the Year Ended December 31, 1995................................................ F-36
Notes to Pro Forma Condensed Combined Financial Statements............................ F-37
</TABLE>

F-1
<PAGE> 59

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of International Remote Imaging
Systems, Inc.

We have audited the consolidated financial statements of International
Remote Imaging Systems, Inc. and subsidiary, as listed in the index on page F-1
of this Form S-1. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We did not audit
the financial statements of StatSpin, Inc., a wholly owned subsidiary, for the
years ended March 31, 1995 and 1994. The financial statements of StatSpin, Inc.
reflect total assets constituting 9% in 1994 and total revenues of 22% and 27%
in 1994 and 1993, respectively, of the related consolidated totals. The
financial statements of StatSpin, Inc. for the years ended March 31, 1995 and
1994 were audited by other auditors whose reports were furnished to us, and our
opinion, insofar as it relates to the amounts included for StatSpin, Inc. as of
December 31, 1994 and for the years ended December 31, 1994 and 1993, is based
solely on the reports of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

The consolidated financial statements give retroactive effect to the merger
of International Remote Imaging Systems, Inc. and StatSpin, Inc. on February 1,
1996, which has been accounted for as a pooling of interests as described in
Note 1 to the consolidated financial statements.

In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of International Remote Imaging Systems,
Inc. and subsidiary at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

/s/ Coopers & Lybrand L.L.P.

Los Angeles, California
March 20, 1996 (except as to Note 1
which date is April 24, 1996)

F-2
<PAGE> 60

INDEPENDENT AUDITORS' REPORT

The Board of Directors
StatSpin, Inc.:

We have audited the balance sheet of StatSpin, Inc. as of March 31, 1995, and
the related statements of income and accumulated deficit, and cash flows for
each of the two years in the period ended March 31, 1995. These financial
statements, which are not presented separately herein, are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of StatSpin, Inc. at March 31,
1995, and the results of its operations and its cash flows for each of the two
years in the period ended March 31, 1995, in conformity with generally accepted
accounting principles.

KPMG PEAT MARWICK LLP

/s/ KPMG Peat Marwick LLP

May 26, 1995

F-3
<PAGE> 61

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1994 1995
------------ ------------ JUNE 30, 1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 2,573,384 $ 1,511,395 $ 1,228,504
Short-term investments....................................... 2,256,062 4,736,727 2,635,900
Accounts receivable-trade, net of allowance for doubtful
accounts of $89,685 in 1994 and $87,759 in 1995 and 1996... 2,431,638 3,402,007 4,696,226
Accounts receivable -- service contracts..................... 313,144 481,367 621,860
Accounts receivable -- other................................. 575,657 407,245 244,321
Inventories.................................................. 2,179,663 2,869,813 3,954,626
Prepaid expenses and other current assets.................... 190,293 238,683 341,866
Deferred tax asset........................................... -- 800,900 800,900
----------- ----------- -----------
Total current assets.................................. 10,519,841 14,448,137 14,524,203
Property and equipment, at cost, net of accumulated
depreciation............................................... 598,891 995,044 1,387,921
Software development costs, net of accumulated amortization
of $625,816 in 1994, $667,425 in 1995 and $694,628 in
1996....................................................... 40,623 298,030 558,440
Long-term investments........................................ 1,200,000 100,000 --
Deferred warrant costs....................................... 503,145 1,574,780 1,493,740
Deferred tax asset........................................... -- 3,594,100 3,594,100
Other assets................................................. 419,687 1,460,157 2,117,819
----------- ----------- -----------
Total assets.......................................... $ 13,282,187 $ 22,470,248 $ 23,676,223
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................................................ $ 105,877 $ 185,633 $ --
Accounts payable............................................. 921,478 810,819 1,469,542
Accrued expenses............................................. 1,030,472 1,276,099 901,566
Deferred income -- service contracts......................... 683,402 710,907 722,490
----------- ----------- -----------
Total current liabilities............................. 2,741,229 2,983,458 3,093,598
Deferred income -- service contracts........................... 119,913 190,045 216,601
Notes payable, long-term portion............................... 261,107 125,000 --
----------- ----------- -----------
Total liabilities..................................... 3,122,249 3,298,503 3,310,199
----------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value
Authorized: 3,000,000 shares
None issued and outstanding
Common stock, $.01 par value
Authorized: 15,600,000 shares
Shares issued and outstanding:
1994 -- 5,330,327, 1995 -- 6,292,408, 1996 -- 6,377,805.... 53,304 62,924 63,778
Additional paid-in capital................................... 27,418,271 34,154,116 34,469,313
Treasury stock, at cost (96,473 shares in 1994 and 1995,
84,462 in 1996)............................................ (453,386) (453,386) (377,980)
Unearned compensation........................................ (93,130) (95,884) (160,531)
Accumulated deficit.......................................... (16,765,121) (14,496,025) (13,628,556)
----------- ----------- -----------
Total stockholders' equity............................ 10,159,938 19,171,745 20,366,024
----------- ----------- -----------
Total liabilities and stockholders' equity............ $ 13,282,187 $ 22,470,248 $ 23,676,223
=========== =========== ===========
</TABLE>

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

F-4
<PAGE> 62

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales of IVD imaging systems.... $ 5,029,398 $ 4,559,044 $ 4,870,127 $ 2,150,323 $ 2,593,090
Sales of IVD imaging system
supplies and service.......... 3,994,896 5,024,521 6,737,444 3,167,241 4,166,294
Sales of small instruments and
supplies...................... 3,368,480 2,885,712 3,414,087 1,565,596 2,369,632
----------- ----------- ----------- ----------- ----------
Net sales....................... 12,392,774 12,469,277 15,021,658 6,883,160 9,129,016
----------- ----------- ----------- ----------- ----------
Cost of goods -- IVD imaging
systems....................... 2,365,907 2,178,318 2,248,581 957,386 1,200,268
Cost of goods -- IVD imaging
system supplies and service... 1,937,489 2,495,797 3,174,290 1,567,088 2,095,949
Cost of goods -- small
instruments and supplies...... 2,038,342 1,824,913 1,937,653 914,014 1,198,435
----------- ----------- ----------- ----------- ----------
Cost of goods sold.............. 6,341,738 6,499,028 7,360,524 3,438,488 4,494,652
----------- ----------- ----------- ----------- ----------
Gross margin.................... 6,051,036 5,970,249 7,661,134 3,444,672 4,634,364
Marketing and selling........... 2,115,435 2,085,022 2,921,442 1,354,069 1,674,364
General and administrative...... 1,742,813 1,726,902 2,168,423 947,008 1,489,308
Research and development, net... 879,360 663,231 1,220,028 663,990 591,224
Acquisition of in-process
research and development...... -- -- 2,900,430 3,175,645 --
----------- ----------- ----------- ----------- ----------
Operating income (loss)......... 1,313,428 1,495,094 (1,549,189) (2,696,040) 879,468
Other income (expense):
Interest income............... 110,456 167,924 309,929 175,014 136,640
Interest expense.............. (81,899) (73,238) (42,699) (36,619) (5,366)
Other income.................. 38,558 111,240 110,530 66,949 31,727
----------- ----------- ----------- ----------- ----------
Income (loss) before provision
for income taxes.............. 1,380,543 1,701,020 (1,171,429) (2,490,696) 1,042,469
Provision (benefit) for income
taxes......................... 57,906 79,456 (3,528,044) 28,300 175,000
----------- ----------- ----------- ----------- ----------
Net income (loss)............... $ 1,322,637 $ 1,621,564 $ 2,356,615 $(2,518,996) $ 867,469
=========== =========== =========== =========== ==========
Net income (loss) per share..... $ 0.25 $ 0.28 $ 0.37 $ (0.46) $ 0.13
=========== =========== =========== =========== ==========
Weighted average number of
common shares and common share
equivalents outstanding for
the period.................... 5,355,297 5,698,620 6,418,518 5,485,933 6,915,143
=========== =========== =========== =========== ==========
</TABLE>

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

F-5
<PAGE> 63

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCKHOLDERS' UNEARNED
------------------- PAID-IN TREASURY NOTES COMPEN- ACCUMULATED
SHARES AMOUNT CAPITAL STOCK RECEIVABLE SATION DEFICIT TOTAL
---------- ------- ----------- ----------- ------------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1992, as previously
reported............. 4,740,011 $47,400 $25,255,612 $ -- $ (28,306) $(57,816 ) $(19,177,497) $ 6,039,393
Adjustment for StatSpin
Technologies pooling
of interest.......... 340,260 3,403 798,579 -- -- -- (531,825 ) 270,157
---------- ------- ----------- ----------- ------------- --------- ------------ -----------
Balance, December 31,
1992, as restated.... 5,080,271 50,803 26,054,191 (28,306) (57,816 ) (19,709,322 ) 6,309,550
Repurchase of common
stock................ (26,200) (262) 262 (142,016) -- -- -- (142,016)
Common stock issued on
exercise of stock
options.............. 46,533 465 101,282 -- -- -- -- 101,747
Common stock issued
under Employee Stock
Purchase Plan:
for Cash............. 13,971 140 67,336 -- -- -- -- 67,476
for Services......... 13,971 140 67,336 -- -- (67,476 ) -- --
Common stock issued for
cash on exercise of
warrants............. 9,800 98 36,652 -- -- -- -- 36,750
Principal payments
received on
stockholders' notes
receivable........... -- -- -- -- 21,639 -- -- 21,639
Amortization of
unearned
compensation......... -- -- -- -- -- 48,489 -- 48,489
Net income............. -- -- -- -- -- -- 1,322,637 1,322,637
---------- ------- ----------- ----------- ------------- --------- ------------ -----------
Balance, December 31,
1993................. 5,138,346 51,384 26,327,059 (142,016) (6,667) (76,803 ) (18,386,685 ) 7,766,272
Common stock issued on
exercise of stock
options.............. 200,832 2,008 445,015 -- -- -- -- 447,023
Common stock issued
under Employee Stock
Purchase Plan:
for Cash............. 22,811 228 100,559 -- -- -- -- 100,787
for Services......... 22,811 228 100,559 -- -- (100,787 ) -- --
Common stock issued for
cash on exercise of
warrants............. 15,800 158 59,092 -- -- -- -- 59,250
Issuance of warrants... -- -- 385,285 -- -- -- -- 385,285
Principal payments
received on
stockholders' notes
receivable........... -- -- -- -- 6,667 -- -- 6,667
Amortization of
unearned
compensation......... -- -- -- -- -- 84,460 -- 84,460
Repurchase of common
stock................ (70,273) (702) 702 (311,370) -- -- -- (311,370)
Net income............. -- -- -- -- -- -- 1,621,564 1,621,564
---------- ------- ----------- ----------- ------------- --------- ------------ -----------
Balance, December 31,
1994................. 5,330,327 53,304 27,418,271 (453,386) -- (93,130 ) (16,765,121 ) 10,159,938
</TABLE>

F-6
<PAGE> 64

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCKHOLDERS' UNEARNED
-------------------- PAID-IN TREASURY NOTES COMPEN- ACCUMULATED
SHARES AMOUNT CAPITAL STOCK RECEIVABLE SATION DEFICIT TOTAL
---------- -------- ------------ ----------- ------------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock issued
on exercise of
stock options.... 21,900 219 44,231 -- -- -- -- 44,450
Common stock issued
under Employee
Stock Purchase
Plan:
for Cash......... 9,997 100 67,141 -- -- -- -- 67,241
for Services..... 16,976 170 112,219 -- -- (89,915) -- 22,474
Common stock issued
for cash on
exercise of
warrants......... 414,749 4,147 1,551,161 -- -- -- -- 1,555,308
Issuance of
warrants......... -- -- 1,774,733 -- -- -- -- 1,774,733
Common stock issued
in exchange for
LDA Systems, Inc.
callable common
stock............ 498,459 4,984 2,972,360 -- -- -- -- 2,977,344
Amortization of
unearned
compensation..... -- -- -- -- -- 87,161 -- 87,161
Income tax benefit
related to
exercise of
nonqualified
stock options.... -- -- 214,000 -- -- -- -- 214,000
Adjustment to
reflect change in
StatSpin, Inc.'s
fiscal year...... -- -- -- -- -- -- (87,519) (87,519)
Net income......... -- -- -- -- -- -- 2,356,615 2,356,615
---------- -------- ------------ ----------- ------------- ---------- ------------- ------------
Balance, December
31, 1995......... 6,292,408 62,924 34,154,116 (453,386) -- (95,884) (14,496,025) 19,171,745
Common stock issued
for cash on
exercise of stock
options
(unaudited)...... 55,423 554 163,849 -- -- -- -- 164,403
Common stock issued
under Employee
Stock Purchase
Plan:
for Cash
(unaudited).... 14,987 150 113,377 -- -- -- -- 113,527
for Services
(unaudited).... 14,987 150 113,377 -- -- (113,527) -- --
Amortization of
unearned
compensation
(unaudited)...... -- -- -- -- -- 48,880 -- 48,880
Shares issued from
treasury
(unaudited)...... -- -- (75,406) 75,406 -- -- -- --
Net income
(unaudited)...... -- -- -- -- -- -- 867,469 867,469
---------- -------- ------------ ----------- ------------- ---------- ------------- ------------
Balance, June 30,
1996
(unaudited)...... 6,377,805 $ 63,778 $ 34,469,313 $ (377,980) $ -- $ (160,531) $ (13,628,556) $ 20,366,024
======== ======== =========== ========== ============ ========== ============ ===========
</TABLE>

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

F-7
<PAGE> 65

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 1,322,637 $ 1,621,564 $ 2,356,615 $(2,518,996) $ 867,469
Adjustments to reconcile net income to net cash provided
(used) by operations:
Deferred tax benefit................................... -- -- (3,587,000) -- --
Acquisition of in-process research and development..... -- -- 2,882,858 3,175,645 --
Depreciation and amortization.......................... 533,187 548,420 635,048 235,480 389,318
Common stock compensation.............................. 48,489 84,460 109,635 19,781 48,880
Other.................................................. (4,500) -- -- -- --
Changes in assets and liabilities:
Accounts receivable -- trade........................... (189,507) (569,317) (1,029,651) (273,341) (1,294,219)
Account receivable -- other............................ -- -- 168,412 -- 162,924
Notes receivable -- trade.............................. 36,000 13,731 -- -- --
Service contracts...................................... 68,991 23,715 (95,586) (17,070) (102,354)
Inventories............................................ (69,694) 390,479 (804,087) (284,967) (897,813)
Prepaid expenses and other current assets.............. 89,299 (79,561) (33,230) (141,407) (103,183)
Other assets........................................... (138,152) (106,270) 47,239 278,692 (244,662)
Accounts payable....................................... 240,014 266,325 (87,673) (219,781) 658,723
Accrued expenses....................................... 69,868 (151,224) 237,235 (47,677) (436,530)
---------- ----------- ----------- ----------- -----------
Net cash provided (used) by operating activities....... 2,006,632 2,042,322 799,815 206,359 (951,447)
---------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment.................. (438,684) (266,360) (820,838) (275,959) (423,955)
Acquisition of product line............................ -- -- (886,800) (850,000) (788,000)
Software development costs............................. (81,034) (25,411) (299,016) (77,719) (287,613)
Maturities of certificates of deposit.................. 625,000 210,000 215,000 900,000 800,000
Purchases of certificates of deposit................... (625,000) (100,000) -- (900,000) (800,000)
Maturities of held-to-maturity debt securities......... -- 1,000,000 2,700,000 800,000 3,068,000
Purchases of held-to-maturity debt securities.......... -- (3,441,062) (4,295,664) (1,262,937) (867,173)
---------- ----------- ----------- ----------- -----------
Net cash provided (used) by investing activities....... (519,718) (2,622,833) (3,387,318) (1,666,615) 701,259
---------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash...................... 138,497 254,823 1,599,758 362,293 164,403
Repurchase of common stock............................. (142,016) (59,920) -- -- --
Principal payments received on stockholders' notes
receivable........................................... (1,439) 4,569 -- -- --
Increase (decrease) in line of credit borrowings....... 65,046 (160,000) -- -- --
Repayments of notes payable............................ (76,395) (373,605) (256,351) (382,646) (310,633)
Proceeds from notes payable............................ -- 166,660 -- 166,660 --
Issuance of common stock for cash under Employee Stock
Purchase Plan........................................ 67,476 100,787 67,241 22,473 113,527
---------- ----------- ----------- ----------- -----------
Net cash provided (used) by financing activities....... 51,169 (66,686) 1,410,648 168,780 (32,703)
---------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents... 1,538,083 (647,197) (1,176,855) (1,291,476) 282,891
Cash and cash equivalents at beginning of year......... 1,682,498 3,220,581 2,573,384 2,573,384 1,511,395
Adjustment to cash to reflect change in StatSpin Inc.'s
fiscal year.......................................... -- -- 114,866 114,866 --
---------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period............. $ 3,220,581 $ 2,573,384 $ 1,511,395 $ 1,396,774 $ 1,228,504
========== =========== =========== =========== ===========
Supplemental schedule of non-cash financing activities:
Issuance of common stock in exchange for services...... $ 67,476 $ 100,787 $ 109,635 $ 22,473 $ 113,428
Issuance of common stock under a stock for stock
exercise............................................. -- 251,450 -- -- --
Issuance of warrants................................... -- 385,285 1,774,733 468,000 --
Issuance of common stock to acquire shares of LDA...... -- -- 2,977,344 2,977,344 --
Tax benefit related to exercise of nonqualified stock
options.............................................. -- -- 214,000 -- --
Supplemental disclosure of cash flow information:
Cash paid for income taxes............................. 54,490 112,921 21,456 62,379 192,167
Cash paid for interest................................. 76,384 118,379 42,698 25,213 5,366
</TABLE>

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

F-8
<PAGE> 66

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED)

1. FORMATION AND BUSINESS OF THE COMPANY

International Remote Imaging Systems, Inc. (IRIS) was incorporated in
California in 1979 and reincorporated during 1987 in Delaware. IRIS engages in
the business of developing, manufacturing and selling in vitro diagnostic (IVD)
imaging systems and other laboratory instruments based on proprietary
technology.

On February 1, 1996, a newly formed subsidiary of IRIS completed its merger
with StatSpin, Inc., (StatSpin) which became a wholly owned subsidiary of IRIS.
StatSpin manufactures special purpose centrifuges and other small instruments
widely used in clinical, veterinary, physicians' offices and research
laboratories. StatSpin sells its products primarily through leading distributors
to the physician office and veterinary laboratory markets. IRIS issued
approximately 340,000 shares of common stock for all of the outstanding common
stock and appreciation rights of StatSpin and assumed options and warrants to
purchase an additional 126,000 shares of IRIS common stock. This represented an
exchange ratio of 4.095 shares of IRIS common stock for each common share and
stock appreciation right of StatSpin. This transaction was accounted for as a
pooling-of-interests. Accordingly, the consolidated financial statements have
been retroactively restated for all periods presented to include the financial
position, results of operations and cash flows of StatSpin.

StatSpin previously used the fiscal year ended March 31 for its financial
reporting. To conform to the Company's December 31 fiscal year end, StatSpin's
operating results for the period January 1, 1995 through March 31, 1995 have
been included in the operating results of the Company for the fiscal years ended
December 31, 1995 and 1994. The resulting duplication of revenue and net income
of StatSpin for the period from January 1, 1995 through March 31, 1995 amounted
to $710,000 and $87,519, respectively, which has been adjusted by a $87,519
charge to accumulated deficit during the year ended December 31, 1995.

Combined and separate results of IRIS and StatSpin are as follows:

<TABLE>
<CAPTION>
IRIS STATSPIN COMBINED
----------- ----------- ------------
<S> <C> <C> <C>
Year ended December 31, 1993 (StatSpin year
ended March 31, 1994)
Net sales................................ $ 9,024,294 $ 3,368,480 $ 12,392,774
Net income............................... 1,280,562 42,075 1,322,637
Year ended December 31 1994 (StatSpin year
ended March 31, 1995)
Net sales................................ 9,583,565 2,885,712 12,469,277
Net income............................... 1,472,886 148,678 1,621,564
Year ended December 31, 1995
Net sales................................ 11,922,059 3,099,599 15,021,658
Net income............................... 2,091,431 265,184 2,356,615
</TABLE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

UNAUDITED INTERIM FINANCIAL STATEMENTS

In the opinion of IRIS, the accompanying unaudited consolidated financial
statements contain all normal recurring adjustments necessary to present fairly
the financial position of IRIS and subsidiary as of June 30, 1996 and the
results of their operations and cash flows for the six months ended June 30,
1995 and 1996. Interim results are not necessarily indicative of results for a
full year.

F-9
<PAGE> 67

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION

The financial statements include the accounts of IRIS and StatSpin, a
wholly-owned subsidiary acquired on February 1, 1996. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.

CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, AND LONG-TERM INVESTMENTS

Short-term investments principally include certificates of deposit and debt
instruments of the United States Government with maturities greater than three
months and less than one year. Long-term investments represent certificates of
deposit and debt instruments of the United States Government with maturities
greater than one year. For purposes of the statement of cash flows, IRIS
considers all highly liquid debt instruments purchased with a remaining maturity
of three months or less when purchased to be cash equivalents. IRIS places its
cash and investments with high credit quality financial institutions. At times,
these deposits may be in excess of the federally insured limit.

ACCOUNTS RECEIVABLE

IRIS sells predominantly to entities in the healthcare industry. IRIS
grants uncollateralized credit to its customers, primarily domestic hospitals,
clinical and research laboratories. IRIS performs ongoing credit evaluations of
its customers before granting uncollateralized credit and, to date, has not
experienced any material credit related losses.

At December 31, 1995, the Company had accounts receivable from one customer
representing 13% of total trade accounts receivable. For the year ended December
31, 1995, the Company has sales to three customers representing 13% of net
sales.

PROPERTY AND EQUIPMENT AND DEPRECIATION

Property and equipment are recorded at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method
generally over three to five years, the estimated useful lives of the assets.
Leasehold improvements are amortized over the lesser of their useful life or the
remaining term of the lease.

Costs of maintenance and repairs are charged to expense when incurred;
costs of renewals and betterments are capitalized. Upon sale or retirement, the
cost and related accumulated depreciation are eliminated from the respective
accounts, and the resulting gain or loss is included in current income.

SOFTWARE DEVELOPMENT COSTS

IRIS capitalizes certain software development costs in accordance with
Statement of Financial Accounting Standards No. 86 -- "Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed," for new
products and product enhancements once technological feasibility has been
established. IRIS amortizes capitalized software costs using the greater of the
straight line method over the estimated product life of generally one to three
years, or a percentage of total units sold over the projected unit sales.

F-10
<PAGE> 68

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Amortization expense of software development costs was approximately $132,000,
$108,000 and $41,600 for 1993, 1994, and 1995, respectively, and $20,100 and
$27,200 for the six months ended June 30, 1995 and 1996 (unaudited),
respectively.

DEFERRED WARRANT COSTS

Deferred warrant costs result from the issuance of warrants in conjunction
with various development, distribution and technology license agreements. These
costs are being amortized over the term of the related agreements, or with
respect to perpetual technology license agreements, over the expected life of
the related technology of, generally, ten years.

REVENUE RECOGNITION

IRIS derives revenue from the sale of IVD imaging systems, sales of
supplies and service for its IVD imaging systems and sales of small laboratory
instruments and related supplies. IRIS generally recognizes product revenues
once all of the following conditions have been met: a) an authorized purchase
order has been received in writing, b) customer credit worthiness has been
established, and c) shipment of the product to the customer designated location
has occurred. Estimated installation expense is recognized as part of the
accrual for warranty expense at the time of shipment.

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

WARRANTIES

IRIS recognizes the full estimated cost of warranty expense, including
installation costs, at the time of product shipment.

RESEARCH AND DEVELOPMENT EXPENDITURES

Except for certain software development costs required to be capitalized as
described above (see Software Development Costs), research and development
expenditures are charged to operations as incurred. Net research and development
expense includes total research and development costs incurred, including costs
incurred under research and development contracts, less costs reimbursed under
research and development contracts (See Note 18).

INCOME TAXES

IRIS accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the differences between the financial statement
and the tax bases of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense represents the tax payable
for the period and the change during the period in deferred tax assets and
liabilities.

RECLASSIFICATIONS

Certain reclassifications have been made to the 1993, 1994, and 1995
financial statements to conform with the 1996 presentation.

F-11
<PAGE> 69

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RECENTLY ISSUED ACCOUNTING STANDARDS

In December 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock Based Compensation." In accordance with SFAS No. 123, IRIS will adopt the
disclosure method as provided for in the statement.

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of ("Statement 121").
Statement 121 addresses the accounting for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used. Statement 121 also addresses the accounting for long-lived assets
and certain identifiable intangibles to be disposed of, establishes guidance for
recognizing and measuring impairment losses and requires that the carrying
amount of impaired assets be reduced to fair value. Statement 121 was effective
for fiscal years beginning after December 15, 1995. The impact of the adoption
of Statement 121 was not material to the Company's June 30, 1996 financial
statements.

3. MARKETABLE DEBT SECURITIES

On January 1, 1994, IRIS adopted Statement of Financial Accounting
Standards No. 115, ("SFAS 115") "Accounting for Certain Investments in Debt and
Equity Securities" and determined that all its debt securities should be
classified as "held-to-maturity" based on the Company's intent and ability to
hold those securities to maturity. Under SFAS 115, debt securities classified as
"held-to-maturity" are carried at amortized cost.

At December 31, 1994 and 1995 and June 30, 1996, the carrying value of
marketable debt securities approximates fair value and is included in short-term
and long-term investments:

<TABLE>
<CAPTION>
EXPECTED MATURITY VALUE AND DATE
-------------------------------------
AMORTIZED COST WITHIN ONE YEAR ONE TO FIVE YEARS
-------------- --------------- -----------------
<S> <C> <C> <C>
December 31, 1994
U.S. Treasury Bills.................. $ 1,641,062 $ 1,700,000 $ --
U.S. Treasury Notes.................. 802,028 -- 800,000
December 31, 1995
U.S. Treasury Bills.................. 3,236,725 3,318,000 --
U.S. Treasury Notes.................. 803,376 800,000 --
June 30, 1996 (unaudited)
U.S. Treasury Bills.................. 1,435,900 1,470,000 --
U.S. Treasury Notes.................. 400,000 400,000 --
</TABLE>

4. INVENTORIES

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

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------- -----------
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
-----------
<S> <C> <C> <C>
Finished goods............................ $ 520,445 $ 350,907 $ 224,000
Work-in-process........................... 466,182 276,115 431,332
Consumables and related hardware.......... 394,070 603,848 532,404
Raw materials, parts and sub-assemblies... 798,966 1,638,943 2,766,890
---------- ---------- ----------
$ 2,179,663 $ 2,869,813 $ 3,954,626
========== ========== ==========
</TABLE>

F-12
<PAGE> 70

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. PROPERTY AND EQUIPMENT

Property and equipment is composed of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Leasehold improvements...................... $ 257,534 $ 327,178 $ 352,254
Furniture and fixtures...................... 88,058 115,544 116,531
Machinery and equipment..................... 1,935,129 2,422,835 2,791,934
Tooling, dies and molds..................... 417,908 532,070 785,553
Rental units................................ 56,084 166,268 191,578
----------- ----------- -----------
2,754,713 3,563,895 4,237,850
Less accumulated depreciation............... (2,155,822) (2,568,851) (2,849,929)
----------- ----------- -----------
$ 598,891 $ 995,044 $ 1,387,921
=========== =========== ===========
</TABLE>

Property and equipment includes $1,270,363, $1,284,488 and $1,348,448,
respectively, at December 31, 1994 and 1995 and June 30, 1996 (unaudited) of
fully depreciated assets which remain in service. Depreciation expense was
$272,401, $327,293 and $449,653 for 1993, 1994, and 1995, respectively, and
$164,169 and $281,078 for the six months ended June 30, 1995 and 1996
(unaudited), respectively. Maintenance and repairs expense for 1993, 1994 and
1995 was $41,629, $64,870, and $55,250, respectively, and for the six months
ended June 30, 1995 and 1996 was $36,019 and $26,406 (unaudited), respectively.

Rental units are carried at cost less accumulated depreciation ($136,136
and $163,952 at December 31, 1994 and 1995 and $187,060 at June 30, 1996
(unaudited)). Future minimum rental revenue on noncancellable leases as of
December 31, 1995 is approximately $306,000, due during 1996.

6. ACCRUED EXPENSES

Accrued expenses are composed of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Accrued bonuses.............................. $ 206,451 $ 366,372 $ 198,519
Accrued commissions.......................... 55,133 76,079 --
Accrued payroll.............................. 87,298 88,228 55,122
Accrued vacation............................. 109,999 135,832 137,104
Accrued taxes and other...................... 22,773 70,642 140,331
Accrued professional fees.................... 117,388 155,552 12,389
Accrued warranty expense..................... 344,822 307,323 279,198
Accrued -- other............................. 86,608 76,071 78,903
----------- ----------- --------
$ 1,030,472 $ 1,276,099 $ 901,566
=========== =========== ========
</TABLE>

7. NOTES PAYABLE

StatSpin had notes payable to stockholders with outstanding balances of
$200,324 and $185,638 at December 31, 1994 and 1995, respectively. The notes
bore interest at 11% to 12% per year and were due in 1996 through 1997.

F-13
<PAGE> 71

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In addition, StatSpin had a note payable to the Massachusetts Technology
Development Corporation with outstanding balances of $166,660 and $124,995 at
December 31, 1994 and 1995, respectively. The note bore interest at 9% per year
and was due in 1998.

Following consummation of the merger with StatSpin, all note obligations
were paid off in full by IRIS.

8. INCOME TAXES

The provision (benefit) for income taxes consisted of the following:

<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- ------------
<S> <C> <C> <C>
Currently payable:
Federal..................................... $ 26,000 $ 30,000 $ 26,000
State....................................... 31,906 49,456 32,956
------- ------- -----------
57,906 79,456 58,956
------- ------- -----------
Deferred:
Federal..................................... -- -- (3,537,000)
State....................................... -- -- (50,000)
------- ------- -----------
-- -- (3,587,000)
------- ------- -----------
$ 57,906 $ 79,456 $ (3,528,044)
======= ======= ===========
</TABLE>

The provision (benefit) for income taxes differs from the amount obtained
by applying the federal statutory income tax rate to income before income taxes
for the years ended December 31, 1993, 1994 and 1995 as follows:

<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- -----------
<S> <C> <C> <C>
Tax provision (benefit) computed at Federal
statutory rate............................... $ 469,385 $ 578,347 $ (398,286)
Increase (decrease) in taxes due to:
Reinstatement of fully reserved deferred tax
assets.................................... -- -- (3,587,000)
Utilization of net operating loss
carryforward.............................. (521,993) (583,316) (662,819)
Write-off of in-process research and
development............................... -- -- 1,089,962
State taxes, net of federal benefit.......... 18,643 36,979 26,156
Nondeductible expenses....................... 37,214 21,952 (22,057)
Other........................................ 54,657 25,494 26,000
--------- --------- -----------
$ 57,906 $ 79,456 $(3,528,044)
========= ========= ===========
</TABLE>

In 1995, IRIS recognized a deferred tax benefit of $3,587,000 through a
reduction in the Company's deferred tax asset valuation allowance. This
reduction in the valuation allowance resulted principally from the Company's
assessment of the realizability of its net operating loss carryforwards based on
recent operating history as well as an assessment that operations will continue
to generate taxable income. Realization of the deferred tax assets are dependent
upon continued generation of sufficient taxable income prior to expiration of
the loss carryforwards. Although realization is not assured, management believes
it is more likely than not that the remaining net deferred tax assets will be
realized. The amount of the deferred tax assets considered realizable, however,
could be reduced in the future if estimates of future taxable income during the
carryforward period are reduced.

At December 31, 1995, the Company had federal net operating loss
carryforwards of approximately $14.2 million and state net operating loss
carryforwards of approximately $740,000 which expire in fiscal years

F-14
<PAGE> 72

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ending in 1999 through 2010. As of December 31, 1995, IRIS had investment tax
and R&D credit carryforwards of $71,719 expiring in fiscal years through 2003.

The primary components of temporary differences which give rise to the
Company's net deferred tax asset at December 31, 1993, 1994 and 1995 are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Depreciation and amortization............... $ 115,598 $ 129,162 $ 146,200
Allowance for doubtful accounts............. 34,012 32,619 12,900
Accrued liabilities......................... 234,718 189,129 213,100
Deferred revenue -- service contracts....... 186,582 202,164 145,800
Deferred research and development........... -- -- 537,000
Net operating loss carryforwards............ 5,768,479 5,135,843 4,840,000
Other....................................... 74,963 98,281 --
Valuation allowance......................... (6,414,352) (5,787,198) (1,500,000)
------- ------- -------
$ 0 $ 0 $ 4,395,000
======= ======= =======
</TABLE>

9. LDA AND WARRANTS

In October, 1992 LDA Systems, Inc. ("LDA"), completed an initial public
offering of 107,750 units, each unit consisting of one share of callable LDA
Common Stock and ten IRIS Warrants, each five warrants entitling the holder to
purchase one share of IRIS Common Stock for $3.75, exercisable at any time from
November 16, 1992 through July 31, 1995. LDA received net proceeds of $774,000
from the unit offering. These funds were used throughout 1993 to engage IRIS to
conduct research and development, clinical evaluations and pre-market testing of
The White IRIS(R), a proposed new product, in accordance with a research and
development contract. In addition, IRIS committed to fund $500,000 of the
development costs at a rate of $15,000 per month during this period.

On April 25, 1994, LDA completed the sale of additional units to Corange
Limited consisting of 85,714 shares of callable LDA common stock and warrants to
purchase an aggregate of 248,571 shares of IRIS common stock at an exercise
price of $3.75 per share. As part of the investment agreement, Corange was
granted the option to participate with LDA in the joint development,
manufacture, and marketing of certain future hematology instruments. This option
expired October 30, 1995.

IRIS had the option to purchase for cash or shares of IRIS common stock all
of the outstanding shares of LDA common stock at $20 per share. The option
expired 121 days after termination of the research and development agreement,
which was to conclude no later than July 31, 1995. In June 1995, IRIS completed
the acquisition of LDA for approximately 498,000 shares of IRIS Common Stock.
IRIS acquired LDA pursuant to the exercise of its call option under the LDA
Restated Certificate of Incorporation to purchase all the outstanding shares of
LDA Common Stock. Accordingly, IRIS tendered 2.5765 shares of IRIS Common Stock
for each share of LDA Common Stock. As a result of the acquisition, IRIS
incurred a non-recurring charge of approximately $2.9 million against earnings
for 1995 for the acquisition of in-process research and development (i.e. work
in process not yet cleared for interstate commerce by the Food and Drug
Administration).

The following unaudited pro forma combined financial information gives
effect to the acquisition of LDA by IRIS under the purchase method of accounting
as though the acquisition had occurred on January 1, 1994. Substantially all of
the purchase price for the acquisition of LDA by IRIS has been allocated to
in-process research and development. Under the purchase method of accounting,
the purchased in-process research and development has been written off as of the
purchase date. The one time write-off of in-process research and

F-15
<PAGE> 73

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

development of approximately $2.9 million is excluded from the pro forma
information as it represents a non-recurring item.

<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Net revenues.................................... $ 12,469,277 $ 15,021,658
Net income...................................... 480,445 5,077,187
Primary and fully diluted earnings per share.... $ 0.08 $ 0.76
</TABLE>

The pro forma combined financial information is presented for informational
purposes only and is not necessarily indicative of the operating results that
would have occurred had the merger been consummated as of the above dates. In
addition, the pro forma results are not intended to be a projection of future
results.

On May 13, 1996, IRIS obtained clearance from the FDA to commence marketing
The White IRIS(R) leukocyte differential analyzer, its newly developed
workstation for white blood cell classification. The FDA cleared The White
IRIS(R) for commercial use in the classification of normal as well as immature
and other abnormal types of white blood cells.

10. POLY DEVELOPMENT AGREEMENT

On September 29, 1995, Poly U/A Systems, Inc. ("Poly") engaged IRIS to
develop several new products based on IRIS and other technology to further
enhance automation in the urinalysis field. Under the terms of the project, Poly
will have the right to use the IRIS technology and any newly developed
technology for developing, manufacturing and marketing the new products as
stand-alone devices, and IRIS will have the right to use any newly developed
technology for any other purpose and to incorporate the new products into The
Yellow IRIS(R). Poly has retained IRIS to conduct the research, development,
clinical evaluation and pre-market testing of the proposed new products. IRIS
will fund the first $15,000 per month (up to a maximum of $500,000) of the cost
of the project, and Poly will reimburse IRIS for the excess. IRIS has an option
until 121 days after termination of the project (which terminates no later than
July 31, 1998) to acquire all of the Common Stock of Poly at an aggregate price
increasing August 1, 1997 from $4.4 million to $5.1 million. IRIS may pay the
option exercise price in cash or with shares of IRIS Common Stock. IRIS is also
providing financial and administrative services to Poly at cost.

Poly, a privately-held company based in Los Angeles, California, was
organized in June 1995 to undertake the commercial development of several
potential products based on technology developed or licensed by IRIS. In order
to fund its share of the project, Poly, in 1995, raised net proceeds of $2.0
million through the sale of 128 units at a price of $20,000 per unit. Each unit
consists of 2,000 shares of Poly's Callable Common Stock and a warrant to
purchase 4,000 shares of IRIS Common Stock. In the aggregate, investors
purchased 256,000 shares of Poly's callable Common Stock and warrants to
purchase 512,000 shares of IRIS Common Stock. The IRIS warrants are exercisable
at $6.50 per share during the last two years of their three-year duration. In
connection with Poly's sale of units, IRIS also issued warrants to the placement
agent and finder to purchase an aggregate of 150,000 shares of IRIS Common
Stock. These warrants are exercisable at $7.80 per share for a five year period
and include certain registration rights.

11. REFERENCE LAB AGREEMENT

During the first quarter of 1995, IRIS and Boehringer Mannheim Corporation
("BMC") and Boehringer Mannheim GmbH ("BMG"), BMC's German affiliate, announced
a joint project to develop a high capacity automated urinalysis system primarily
for reference laboratories based on the proprietary technologies of both
companies. The program is jointly funded by both companies. In addition to
designing specific components of the new system, BMG has agreed to pay IRIS a
fixed amount of $640,000 for its research and development of the project. In
connection with this project and certain distribution considerations, IRIS
issued Corange International Limited ("Corange") (an affiliate of BMG) warrants
to purchase 250,000 shares of IRIS

F-16
<PAGE> 74

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Common Stock at an exercise price of $7.375 per share and granted Corange
certain registration rights with respect to the shares of IRIS Common Stock
issuable upon exercise of these warrants.

12. PRODUCT LINE ACQUISITION

During the first quarter of 1995, IRIS acquired the digital refractometer
product line of Biovation, Inc. for $850,000 in cash and warrants to purchase
75,000 shares of IRIS Common Stock at an exercise price of $8.125 per share.
IRIS granted Biovation certain registration rights with respect to the shares of
IRIS Common Stock issuable upon exercise of these warrants. The product line
consists of a patented device known as a digital refractometer and the related
consumables used in the operation and maintenance of the refractometer.

In March 1996, IRIS acquired the CenSlide and FloStar urinalysis devices
product line of UroHealth Sciences, Inc., for $788,000 in cash and the
assumption of certain liabilities.

13. CAPITAL STOCK

STOCK ISSUANCES

During 1990, the IRIS Board of Directors adopted a key Employee Stock
Purchase Plan designed to allow selected senior employees of the Company to buy
its shares at 50% of the then current market price, provided that the employee
agrees to hold the shares purchased for a minimum of 2 years. Payment for the
50% portion may be made at the option of the employee either by payroll
deduction or by lump sum payment, but in no event may it exceed more than 15% of
the employee's salary during any year. The remaining 50% portion is recorded as
deferred compensation and amortized over the vesting period. The shares
purchased pursuant to the Plan may not be transferred, except following the
death of the employee or a change in control, for a period of 2 years following
the date of purchase. During the period of the limitation on transfer, the
Company has the option to repurchase the shares at the employee's purchase price
if the employee terminates employment with the Company either voluntarily or as
a result of termination for cause. During 1993, 1994 and 1995, IRIS issued
27,942, 45,622, and 26,973 shares of common stock, respectively, in exchange for
$134,952, $201,574, and $179,630 in cash and services, respectively, under the
Plan. During the six months ended June 1996 (unaudited), IRIS issued 29,974
shares of common stock in exchange for $227,054 in cash and services under the
Plan.

STOCK OPTION PLANS

The following tables set forth information on the Company's five stock
option plans as of December 31, 1995:

<TABLE>
<CAPTION>
OPTIONS
OPTIONS OPTIONS OPTIONS AVAILABLE
PLAN AUTHORIZED EXERCISED OUTSTANDING FOR GRANT
-------------------------------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
1980............................ 200,000 174,468 0 0
1982............................ 84,000 75,034 4,000 0
1983............................ 100,000 74,035 17,400 0
1986............................ 360,000 135,932 223,801 267
1994............................ 700,000 0 368,600 331,400
--------- ------- ------- -------
1,444,000 459,469 613,801 331,667
========= ======= ======= =======
</TABLE>

F-17
<PAGE> 75

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
EXERCISE PRICE
----------------------------
SHARES $ PER SHARE TOTAL
-------- ------------- -----------
<S> <C> <C> <C>
Balance outstanding at December 31, 1992.............. 443,300 1.10 to 4.25 $ 1,004,478
Options issued........................................ 91,000 4.00 to 4.04 364,525
Options canceled...................................... (15,400) 2.59 to 4.00 (59,814)
Options exercised..................................... (46,533) 1.10 to 3.75 (101,746)
------ --------
Balance outstanding at December 31, 1993.............. 472,367 1.10 to 4.25 1,207,443
Options issued........................................ 192,600 3.72 to 5.42 797,028
Options canceled...................................... (28,234) 1.55 to 4.25 (67,470)
Options exercised..................................... (200,832) 1.10 to 3.75 (447,022)
------ --------
Balances outstanding at December 31, 1994............. 435,901 1.10 to 5.42 1,489,979
Options issued........................................ 209,500 4.25 to 7.37 1,195,530
Options canceled...................................... (9,700) 1.57 to 4.00 (26,782)
Options exercised..................................... (21,900) 1.10 to 4.00 (44,450)
------ --------
Balances outstanding at December 31, 1995............. 613,801 1.10 to 7.37 2,614,277
Options issued (unaudited)............................ 229,000 5.63 to 8.50 1,420,958
Options canceled (unaudited).......................... (12,567) 2.90 to 6.27 (56,110)
Options exercised (unaudited)......................... (35,633) 1.75 to 5.00 (91,548)
------ --------
Balance outstanding at June 30, 1996 (unaudited)...... 794,601 $ 3,887,577
====== ========
Options exercisable at December 31, 1995.............. 406,443 1.10 to 7.37 $ 1,428,694
====== ========
Options exercisable at June 30, 1996 (unaudited)...... 390,534 1.10 to 8.50 $ 1,552,332
====== ========
</TABLE>

In connection with the merger with StatSpin, each outstanding option and
warrant of StatSpin was converted into an option to purchase IRIS common stock
at a ratio of 4.095 shares of IRIS common stock for each share of StatSpin
common stock covered by such option or warrant, resulting in options to purchase
an aggregate of 126,000 shares of IRIS common stock. The exercise price per
share for the StatSpin options and warrants have been adjusted by dividing the
initial exercise price by 4.095. During the six months ended June 30, 1996
(unaudited), options to purchase 19,791 shares were exercised at an aggregate
exercise price of $72,495.

WARRANTS

At December 31, 1995 and June 30, 1996 (unaudited), there were warrants
outstanding and exercisable to purchase 250,000 shares of common stock at $7.375
per share until February 6, 1998, 75,000 shares at $8.125 per share until March
30, 1998, 512,000 shares at $6.50 per share until September 29, 1998 and 150,000
shares at $7.80 per share until September 28, 2000.

PREFERRED STOCK

IRIS is authorized to issue 3,000,000 shares of preferred stock in one or
more series with such terms as may be designated by the Board of Directors.
There are no issued and outstanding preferred shares at December 31, 1995.

F-18
<PAGE> 76

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. COMMITMENTS

LEASES

IRIS leases its business locations at a monthly aggregate rent of $20,700,
subject to increases based on the Consumer Price Index. IRIS has the option to
renew one lease for two additional three-year periods commencing July 31, 1997.

At December 31, 1995, the minimum lease payments due over the remaining
life of the facilities leases and other operating leases were:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- ---------
<S> <C>
1996........................................... $ 258,960
1997........................................... 186,069
1998........................................... 85,932
1999........................................... 85,932
2000........................................... 21,483
---------
$ 638,376
=========
</TABLE>

Rent expense under all operating leases during 1993, 1994 and 1995 was
$304,208, $290,294, and $453,762 respectively, and for the six months ended June
30, 1995 and 1996 (unaudited) was $134,457 and $149,844, respectively.

OTHER

Effective September 1, 1988, IRIS entered into consulting and licensing
agreements with Cytocolor, Inc. relating to the use of its patented cytoprobe
for The White IRIS(R). Under the terms of the agreements, IRIS is subject to the
following future minimum royalty payments:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- ---------
<S> <C>
1996........................................... $ 20,000
1997........................................... 20,000
1998........................................... 20,000
1999........................................... 20,000
Years thereafter............................... 280,000
---------
$ 360,000
=========
</TABLE>

In connection with the development agreement with Poly, IRIS has agreed to
fund $15,000 per month (up to a maximum of $500,000) of the cost of the
development project for several new products to enhance automation in the
urinalysis field (see Note 10).

15. EARNINGS PER SHARE

The computation of per share amounts for 1993, 1994 and 1995 and for the
six months ended June 30, 1996, is based on the weighted average number of
common shares and common share equivalents outstanding for the period. Fully
diluted and primary earnings per share were $0.25, $0.28, and $0.37 for the
years ended December 31, 1993, 1994 and 1995, respectively, and $0.13 for the
six months ended June 30, 1996 (unaudited).

The computation of loss per share for the six months ended June 30, 1995 is
based on the weighted average number of common shares outstanding for the
period. Common share equivalents have not been

F-19
<PAGE> 77

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

included in the computation as their inclusion would have been antidilutive.
Loss per share was $0.46 for the six months ended June 30, 1995 (unaudited).

16. LICENSE

Pursuant to earlier payments and certain agreements with TOA Medical
Electronics Co., Ltd. (TOA), TOA has developed a urine sediment analyzer under
license from IRIS using pre-1989 IRIS technology. IRIS received royalties of
$35,000, $111,000, and $98,000 in 1993, 1994, and 1995, and $67,000 and $32,000
for the six months ended June 30, 1995 and 1996 (unaudited), respectively.

17. EXPORT SALES

During 1993, 1994 and 1995, IRIS had export equipment sales of $253,000,
$474,000 and $342,000 respectively, and $139,000 and $143,000 for the six months
ended June 30, 1995 and 1996 (unaudited), respectively.

18. RESEARCH AND DEVELOPMENT CONTRACTS

Reimbursements are recognized under research and development contracts in
amounts equivalent to reimbursable research and development costs incurred on
the related project plus, where contractually provided for, an amount to cover
general and administrative costs of the project.

Reimbursements and costs connected with the research and development
agreements entered into with LDA, Poly and BMG were as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- -------------------------
1993 1994 1995 1995 1996
--------- ----------- ----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Reimbursements..... $ 538,931 $ 1,110,878 $ 842,663 $ 638,150 $ 944,249
Costs.............. 637,552 1,258,405 1,494,873 1,066,055 964,137
---------- ---------- ---------- ---------- --------
Net
costs... $ 98,621 $ 147,527 $ 652,210 $ 427,905 $ 19,888
========== ========== ========== ========== ========
</TABLE>

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

19. SUBSEQUENT EVENTS (UNAUDITED)

On July 31, 1996, IRIS acquired the IVD imaging business of Perceptive
Scientific Instruments, Inc. (PSI) for $9.1 million in cash, a $7.0 million
subordinated debenture due seller and a five year warrant to purchase 875,000
shares of IRIS common stock at $8.00 per share. IRIS paid the cash portion of
the purchase price with funds obtained from a bank under a $7.8 million term
loan and a new $1.5 million revolving line of credit.

PSI's IVD imaging business includes providing genetic analysis
instrumentation and related services through worldwide sales of its proprietary
PowerGene(TM) product line. The PowerGene product line is used in various
procedures for chromosome analysis, including karyotyping, DNA probe analysis
and comparative genomic hybridization analysis.

On September 25, 1996, IRIS entered into an agreement to purchase 469,413
shares of IRIS Common Stock and a warrant to purchase 250,000 shares of IRIS
Common Stock from Corange for $2.1 million on or before December 31, 1996.

F-20
<PAGE> 78

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table summarizes certain financial information by quarter for
1994 and 1995:

<TABLE>
<CAPTION>
1994
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net revenues....................... $ 2,485,373 $ 3,134,915 $ 3,338,746 $ 3,510,243
Gross margin on net revenues....... 1,090,176 1,423,514 1,570,411 1,886,148
Interest and other income, net..... 72,648 34,426 54,318 44,534
Net income......................... 85,943 375,702 491,993 667,926
Net income per share............... $ 0.02 $ 0.07 $ 0.09 $ 0.12
</TABLE>

<TABLE>
<CAPTION>
1995
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net revenues....................... $ 3,167,277 $ 3,716,881 $ 3,743,641 $ 4,393,859
Gross margin on net revenues....... 1,535,807 1,909,883 1,931,539 2,283,905
Interest and other income, net..... 118,042 87,207 65,598 107,913
Net income (loss).................. 397,494 (2,916,490) 563,798 4,311,813
Net income (loss) per share........ $ 0.07 $ (0.53) $ 0.09 $ 0.64
</TABLE>

F-21
<PAGE> 79

REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors
International Remote Imaging Systems, Inc.

Board of Directors
Perceptive Scientific Instruments, Inc.:

We have audited the accompanying consolidated balance sheets of Perceptive
Scientific Instruments, Inc. (a wholly-owned subsidiary of Digital Imaging
Technologies, Inc.) and subsidiary as of December 31, 1995 and 1994, the related
combined and consolidated statements of operations, stockholder's deficit and
cash flows for each of the years in the three-year period ended December 31,
1995. These combined and consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined and consolidated financial statements based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Perceptive
Scientific Instruments, Inc. and Subsidiary as of December 31, 1995 and 1994,
and the combined and consolidated results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1995 in
conformity with generally accepted accounting principles.

As more fully described in Note 10, substantially all of the net assets of
the Company were sold to International Remote Imagining Systems, Inc. on July
31, 1996.

COOPERS & LYBRAND L.L.P.

/s/ Coopers & Lybrand L.L.P.

Houston, Texas
September 13, 1996

F-22
<PAGE> 80

PERCEPTIVE SCIENTIFIC INSTRUMENTS, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- ----------- JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.............................................. $ 90,843 $ 354,421 $ 97,039
Receivables:
Trade.......................................... 702,741 1,868,620 1,740,365
Other.......................................... 26,848 39,522 143,911
Inventories....................................... 595,548 344,166 431,147
Prepaid expenses and other current assets......... 22,710 23,958 34,644
----------- ----------- -----------
Total current assets...................... 1,438,690 2,630,687 2,447,106
Property and equipment, at cost, net................ 525,380 568,186 629,068
Capitalized software costs, net..................... 528,348 655,727 610,488
Other assets........................................ 62,528 23,852 25,262
----------- ----------- -----------
Total assets.............................. $ 2,554,946 $ 3,878,452 $ 3,711,924
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Notes payable..................................... $ -- $ 90,733 $ --
Current maturities of capital lease obligations... 4,600 5,644 5,644
Accounts payable.................................. 342,772 548,727 873,070
Accrued expenses.................................. 216,779 647,611 688,936
Billings in excess of cost and gross profit on
fixed grants................................... -- -- 26,156
Deferred maintenance revenue...................... 174,075 175,738 253,138
Customer deposits................................. -- 82,823 70,548
----------- ----------- -----------
Total current liabilities................. 738,226 1,551,276 1,917,492
Payable to parent company........................... 6,324,249 7,874,989 7,705,611
Capital lease obligations, net of current
maturities........................................ 18,470 13,046 10,923
----------- ----------- -----------
Total liabilities......................... 7,080,945 9,439,311 9,634,026
Commitments and contingencies
Stockholder's deficit:
Preferred stock, no par value, 1,000,000 shares
authorized, no shares issued or outstanding
Common stock, $.01 par value, 1,000,000 shares
authorized, 10 shares issued and outstanding,
and additional paid-in capital................. 1,000 1,000 1,000
Accumulated deficit............................... (4,537,856) (5,569,850) (5,928,015)
Cumulative foreign currency translation
adjustment..................................... 10,857 7,991 4,913
----------- ----------- -----------
Total stockholder's deficit............... (4,525,999) (5,560,859) (5,922,102)
----------- ----------- -----------
Total liabilities and stockholder's
deficit................................. $ 2,554,946 $ 3,878,452 $ 3,711,924
=========== =========== ===========
</TABLE>

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

F-23
<PAGE> 81

PERCEPTIVE SCIENTIFIC INSTRUMENTS, INC.

COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
System sales.................. $ 2,257,017 $ 3,611,992 $ 4,655,242 $ 2,027,269 $ 3,236,977
Service and supply............ 693,924 674,827 728,198 321,303 329,128
Other......................... 18,856 44,234 10,600 36,315 85,608
----------- ----------- ---------- ---------- ----------
Total revenues........ 2,969,797 4,331,053 5,394,040 2,384,887 3,651,713
Costs of sales:
System sales.................. 1,209,408 1,994,143 2,067,008 870,922 1,308,998
Service and supply............ 248,189 271,570 286,326 82,984 60,405
Other......................... 2,912 9,190 -- 43,093 89,415
----------- ----------- ---------- ---------- ----------
Total costs of
sales............... 1,460,509 2,274,903 2,353,334 996,999 1,458,818
----------- ----------- ---------- ---------- ----------
Gross margin.......... 1,509,288 2,056,150 3,040,706 1,387,888 2,192,895
Operating expenses:
Selling, general and
administrative............. 3,193,185 2,572,061 3,223,388 1,308,180 1,652,178
Research and development, net
of grants.................. 86,450 92,806 308,460 132,289 560,044
Bad debt...................... 6,661 35,034 11,273 5,667 --
----------- ----------- ---------- ---------- ----------
Total operating
expenses............ 3,286,296 2,699,901 3,543,121 1,446,136 2,212,222
----------- ----------- ---------- ---------- ----------
Income (loss) from
operations.......... (1,777,008) (643,751) (502,415) (58,248) (19,327)
Other income (expense):
Interest income............... 94,936 115,148 -- -- --
Interest expense.............. (363,272) (506,816) (538,518) (267,141) (309,244)
Foreign currency transaction
gain (loss)................ -- (14,256) 1,957 10,070 (25,887)
Other......................... (1,290) (11,515) 6,982 2,625 (3,707)
----------- ----------- ---------- ---------- ----------
Total other income
(expense)........... (269,626) (417,439) (529,579) (254,446) (338,838)
----------- ----------- ---------- ---------- ----------
Loss before income
taxes............... (2,046,634) (1,061,190) (1,031,994) (312,694) (358,165)
Provision for income taxes...... -- -- -- -- --
----------- ----------- ---------- ---------- ----------
Net loss.............. $(2,046,634) $(1,061,190) $(1,031,994) $ (312,694) $ (358,165)
=========== =========== ========== ========== ==========
</TABLE>

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

F-24
<PAGE> 82

PERCEPTIVE SCIENTIFIC INSTRUMENTS, INC.

COMBINED AND CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT

<TABLE>
<CAPTION>
COMMON STOCK AND CUMULATIVE
ADDITIONAL FOREIGN
PAID-IN CAPITAL EXCHANGE
------------------ ACCUMULATED TRANSLATION
SHARES VALUE DEFICIT ADJUSTMENTS TOTAL
------ ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Stockholder's equity, January 1, 1993....... 10 $ 1,000 $(1,430,032) $ -- $(1,429,032)
Net loss.................................. -- (2,046,634) -- (2,046,634)
Foreign currency translation
adjustments............................ -- -- (1,378) (1,378)
-- ------ ----------- ------- -----------
Stockholder's equity, December 31, 1993..... 10 1,000 (3,476,666) (1,378) (3,477,044)
Net loss.................................. -- (1,061,190) (1,061,190)
Foreign currency translation
adjustments............................ -- -- 12,235 12,235
-- ------ ----------- ------- -----------
Stockholder's equity, December 31, 1994..... 10 1,000 (4,537,856) 10,857 (4,525,999)
Net loss.................................. -- (1,031,994) -- (1,031,994)
Foreign currency translation
adjustments............................ -- -- (2,866) (2,866)
-- ------ ----------- ------- -----------
Stockholder's equity, December 31, 1995..... 10 1,000 (5,569,850) 7,991 (5,560,859)
Net loss (unaudited)...................... -- (358,165) -- (358,165)
Foreign currency translation adjustments
(unaudited)............................ -- -- (3,078) (3,078)
-- ------ ----------- ------- -----------
Stockholder's equity, June 30, 1996
(unaudited)............................... $ 1,000 $(5,928,015) $ 4,913 $(5,922,102)
10
== ====== =========== ======= ===========
</TABLE>

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

F-25
<PAGE> 83

PERCEPTIVE SCIENTIFIC INSTRUMENTS, INC.

COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------- -----------------------
1993 1994 1995 1995 1996
------------ ------------ ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................... $ (2,046,634) $ (1,061,190) $(1,031,994) $ (312,694) $ (358,165)
Adjustments to reconcile net loss to
net cash provided from operating
activities:
Depreciation and amortization....... 98,856 254,768 501,271 259,649 288,373
Changes in operating assets and
liabilities:
Receivables -- trade.............. (349,016) (185,150) (1,165,879) (585,583) 128,255
Inventories....................... (40,784) 162,757 251,382 (6,644) (86,981)
Prepaid expenses and other current
assets......................... (32,404) 153,607 (1,247) 5,932 (10,686)
Accounts payable and accrued
expenses....................... 352,160 (236,208) 636,787 451,097 365,668
Deferred maintenance revenue...... 3,176 (41,810) 1,663 4,888 77,400
Other............................. -- -- 38,676 (10,436) 24,746
----------- ----------- ----------- --------- ---------
Net cash provided by (used in)
operating activities......... (2,014,646) (953,226) (769,341) (193,791) 428,610
Cash flows from investing activities:
Additions to property and equipment.... (33,573) (225,440) (277,817) (86,141) (201,427)
Additions to capitalized software
costs............................... (284,874) (91,088) (393,640) (471,233) (102,589)
Change in receivables -- other......... (14,590) (27,275) (12,674) (194,065) (104,389)
----------- ----------- ----------- --------- ---------
Net cash used in investing
activities................... (333,037) (343,803) (684,131) (751,439) (408,405)
Cash flows from financing activities:
Increase (decrease) in payable to
parent company...................... 2,155,468 1,702,212 1,550,740 716,326 (169,378)
Principal borrowings (payments) on
notes payable....................... -- -- 90,733 -- (90,733)
Principal reductions of capital lease
obligations......................... -- (128,250) (4,380) (2,092) (2,123)
Increase (decrease) in customer
deposits............................ 260,616 (266,616) 82,823 5,432 (12,275)
----------- ----------- ----------- --------- ---------
Net cash provided by (used in)
financing activities......... 2,416,084 1,307,346 1,719,916 719,666 (274,509)
Effect of exchange rate changes on
cash................................... (1,378) 12,234 (2,866) 23,696 (3,078)
----------- ----------- ----------- --------- ---------
Increase (decrease) in cash.............. 67,023 22,551 263,578 (201,868) (257,382)
Cash, beginning of year.................. 1,269 68,292 90,843 90,843 354,421
----------- ----------- ----------- --------- ---------
Cash, end of period...................... $ 68,292 $ 90,843 $ 354,421 $ (111,025) $ 97,039
=========== =========== =========== ========= =========
Supplemental cash flow information:
Cash paid for interest................... $ 363,272 $ 506,816 $ 538,518 $ 267,141 $ 294,457
=========== =========== =========== ========= =========
</TABLE>

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

F-26
<PAGE> 84

PERCEPTIVE SCIENTIFIC INSTRUMENTS, INC.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Perceptive Scientific Instruments, Inc. (the "Company") is engaged in the
development, supply, and servicing of digital imaging systems for biological,
clinical and research applications. The Company owns approximately 99% of the
common stock of Perceptive Scientific International Limited ("PSI Ltd."), a
United Kingdom company. The Company was formed in June 1994 as a wholly-owned
subsidiary of Digital Imaging Technologies, Inc. ("DITI"). Upon formation, the
net assets applicable to the Company's operations, including the investment in
PSI Ltd., were transferred from DITI to the Company. The accompanying financial
statements represent the consolidated financial condition, results of operations
and cash flows of the Company from the date of formation and the combined
results of operations and cash flows of the net assets applicable to the
Company's operations prior to the formation of the Company. All significant
intercompany transactions have been eliminated.

Unaudited Interim Financial Statements

The consolidated financial statements for the six months ended June 30,
1995 and 1996, have been prepared from the Company's books and records without
audit. In the opinion of management, all adjustments, consisting only of normal
recurring items necessary for a fair presentation for the periods indicated,
have been included. 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 effect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Revenue Recognition

Revenue from the sale of digital imaging systems is recognized when the
system is delivered for installation.

The Company provides service under the terms of maintenance contracts which
are generally for a term of one to two years. Service revenue is recognized as
services are provided. Maintenance contract payments received in advance are
deferred and amortized to income ratably over the contract term.

From time to time the Company is awarded grants from agencies of the United
States to conduct research and development. The Company retains all rights to
products developed as a result of the grant projects. The funding available
under a grant is based on qualifying costs incurred, up to a maximum amount, or
a fixed amount. Grant funding on a cost reimbursement basis is recorded as a
reduction of costs incurred. Grant funding on a fixed basis is recorded as a
reduction of costs incurred and the excess of the grant over total estimated
costs, if any, is recognized as income under the percentage-of-completion method
based on costs incurred to total estimated costs.

Concentrations of Credit Risk

The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits.

The Company sells products and provides service to customers primarily in
the health care industry throughout the United States and various foreign
countries. Sales in foreign countries are made through PSI

F-27
<PAGE> 85

PERCEPTIVE SCIENTIFIC INSTRUMENTS, INC.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Ltd. The Company's normal credit terms for trade receivables are 30 days. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. Reserves are maintained for potential credit losses. No
allowance was considered necessary at December 31, 1994 and 1995, and June 30,
1996.

Inventory

Inventory is stated using the first-in, first-out method, at the lower of
actual cost, based on specific identification, or market.

Property and Equipment

Property and equipment are recorded at cost, less accumulated depreciation
and amortization. Depreciation of fixed assets is provided using the
straight-line method over the estimated useful lives of the asset ranging
primarily from 3 to 5 years. Amortization of assets under capital lease is
provided on a straight-line basis over the term of the related lease agreement.

Costs of maintenance and repairs are charged to expense when incurred;
costs of renewals and betterments are capitalized. Upon sale or retirement, the
cost and related accumulated depreciation are eliminated form the respective
accounts, and the resulting gain or loss is included in current income.

Computer Software Costs -- Research and Development and Product Development
Costs

The Company develops computer software for use in the digital imaging
systems. Computer software research and development costs are expensed as
incurred. Computer software product development costs are capitalized beginning
when a product's technological feasibility has been established and ending when
a product is ready for general release to customers. Product development costs
are amortized over a period of three to five years based on the product's
estimated economic life. Unamortized software development costs are evaluated
for impairment on a product-by-product basis at each balance sheet date by
comparing the unamortized costs with the estimated net realizable value.
Estimated net realizable value is the estimated future gross revenues from a
product reduced by the estimated future costs of completing and disposing of a
product, including the costs of performing maintenance and customer support
required to satisfy the Company's responsibility set forth at the time of sale.
To the extent that unamortized costs exceed net realizable value, the excess is
included in current amortization expense. It is at least reasonably possible
that the estimated net realizable value of the Company's products will change in
the near term and such changes will impact the timing of amortization expense of
future periods.

Amortization of capitalized software development costs amounted to $64,724,
$138,070, $266,261 and $147,828 for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1996, respectively.

Income Taxes

The Company, excluding PSI Ltd., is included in the consolidated U.S.
income tax return of DITI. PSI Ltd. files a separate income tax return in the
United Kingdom. U.S. income taxes are determined as if the Company filed a
separate income tax return.

The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". Under the liability method, deferred taxes are based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Deferred tax expense represents the change
in the deferred tax asset/liability balances. The Company provides a valuation
allowance, if necessary, to reduce deferred tax assets to their estimated
realizable value.

F-28
<PAGE> 86

PERCEPTIVE SCIENTIFIC INSTRUMENTS, INC.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Product Warranties

The Company sells products under warranties generally ranging from 1 year
to 2 years. The estimated future cost under existing warranties has been
provided for in the accompanying combined and consolidated financial statements.

Foreign Currency Translation

The assets and liabilities of PSI Ltd. have been translated to U.S. dollars
using the exchange rate in effect at the balance sheet date. Results of
operations have been translated using the average exchange rate during the year.
Resulting translation adjustments have been recorded as a separate component of
stockholder's equity as "Cumulative Foreign Currency Translation Adjustments."
Foreign currency transaction gains and losses are included in the combined and
consolidated statement of operations as they occur.

Recent Accounting Pronouncement

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of ("Statement 121").
Statement 121 addresses the accounting for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used. Statement 121 also addresses the accounting for long-lived assets
and certain identifiable intangibles to be disposed of, establishes guidance for
recognizing and measuring impairment losses and requires that the carrying
amount of impaired assets be reduced to fair value. Statement 121 was effective
for fiscal years beginning after December 15, 1995. The impact of the adoption
of Statement 121 was not material to the Company's June 30, 1996 financial
statements.

2. INVENTORIES

Inventories consisted of the following:

DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
System components............................... $ 435,799 $ 227,890 $ 279,981
Customer service................................ 159,749 116,276 151,166
-------- -------- --------
$ 595,548 $ 344,166 $ 431,147
======== ======== ========
</TABLE>

3. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

DECEMBER 31,
------------------------ JUNE 30,
1994 1995 1996
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Office equipment and furniture................. $ 403,024 $ 537,800 $ 809,847
Demonstration equipment........................ 250,866 335,719 298,701
Marketing equipment............................ 72,010 74,941 74,941
Leasehold improvements......................... -- 55,257 21,655
-------- ---------- ----------
725,900 1,003,717 1,205,144
Less accumulated depreciation and
amortization................................. 200,520 435,531 576,076
-------- ---------- ----------
$ 525,380 $ 568,186 $ 629,068
======== ========== ==========
</TABLE>

F-29
<PAGE> 87

PERCEPTIVE SCIENTIFIC INSTRUMENTS, INC.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. INCOME TAXES

Deferred income taxes under the liability method reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred income tax were as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 1,849,667 $ 2,180,925
Research credit carryfowards............................ 70,700 82,000
----------- -----------
1,920,367 2,262,925
Deferred tax liabilities -- Software development costs and
other................................................... 187,798 235,132
----------- -----------
Net deferred tax assets, before valuation allowance....... 1,732,569 2,027,793
Valuation allowance....................................... (1,732,569) (2,027,793)
----------- -----------
Net deferred tax assets................................... $ -- $ --
=========== ===========
</TABLE>

Under the liability method, a valuation allowance is provided when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. Based on the Company's historical taxable loss record,
management has evaluated that it is more likely than not that the Company's net
deferred tax assets will not be utilized and, accordingly, a valuation allowance
has been provided against the entire balance.

The difference between the benefit for income taxes at the statutory rate
and the recorded income tax provision is primarily the result of the increase in
the valuation allowance against net deferred tax assets.

At December 31, 1995, the Company has available net operating loss
carryforwards attributable to the United States and United Kingdom operations of
approximately $6,200,000 and $55,000, respectively, which, if not utilized, will
expire during the years 2006 through 2010. At December 31, 1995, the Company has
available qualified research credit carryforwards of approximately $82,000
which, if not utilized, expire at various dates through 2010.

5. RELATED PARTY TRANSACTIONS

Substantially all financing requirements of the Company is provided by DITI
and its predecessor. DITI and its predecessor allocates interest expense and
certain salary and overhead costs to the Company under informal arrangements.
Activity between the Company and DITI and its predecessor is recorded in the

F-30
<PAGE> 88

PERCEPTIVE SCIENTIFIC INSTRUMENTS, INC.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

payable to parent account. There are no formal arrangements for repayment of the
outstanding balance. Following is an analysis of activity in the payable to
parent account:

<TABLE>
<S> <C>
Payable to Parent, January 1, 1993.............................. $ 2,375,000
Net borrowings................................................ 966,311
Allocated interest expense.................................... 363,272
----------
Payable to Parent, December 31, 1993............................ 3,704,583
Net borrowings................................................ 2,246,677
Allocated interest expense.................................... 308,899
Allocated salaries and overhead............................... 64,090
----------
Payable to Parent, December 31, 1994............................ 6,324,249
Net borrowings................................................ 682,566
Allocated interest expense.................................... 537,163
Allocated salaries and overhead............................... 331,011
----------
Payable to Parent, December 31, 1995............................ 7,874,989
Net payments.................................................. (746,255)
Allocated interest expense.................................... 286,501
Allocated salaries and overhead............................... 290,376
----------
Payable to Parent, June 30, 1996 (unaudited).................... $ 7,705,611
==========
</TABLE>

Allocated interest, salaries and overhead have been charged to operations
during the periods indicated.

6. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases office space with minimal monthly lease rentals of
$11,462 through December 2001. Rent expense was $208,613, $164,115, $137,615,
and $78,854 for the years ended December 31, 1993, 1994 and 1995, and the six
months ended June 30, 1996, respectively.

Litigation

The Company was a defendant in a lawsuit related to the purchase of assets
from the Company's predecessor. The Company was released as a defendant in April
1994. The Company executed a guarantee for the payment of legal fees for all
defendants of the lawsuit. Legal fees payable at December 31, 1995, and included
in accrued expenses were approximately $256,000. Legal fees incurred during 1995
and charged to expense subsequent to the Company's release from the lawsuit were
approximately $100,000. Management believes that the Company will not incur any
future liabilities with respect to this lawsuit.

Indebtedness of Parent

The Company is co-maker of a $1,000,000 line of credit with a bank, bearing
interest at the prime rate plus 3%, with an original maturity date of March 1,
1996. The line of credit is collateralized by the Company's accounts receivable,
inventories, and property and equipment. All proceeds from the line of credit
have been utilized by DITI and the obligation for unpaid principal is not
reflected in the Company's balance sheet. Subsequent to December 31, 1995, the
line of credit was extended to December 1, 1996, and the amount available was
increased to $1,500,000. The unpaid principal balance on the line of credit was
$1,000,000 and $1,500,000 at December 31, 1995 and June 30, 1996, respectively.
The line of credit was retired on July 31, 1996, with proceeds from the sale of
the Company (see Note 10).

F-31
<PAGE> 89

PERCEPTIVE SCIENTIFIC INSTRUMENTS, INC.

NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. FOREIGN OPERATIONS

Summary financial information of PSI Ltd. is presented below:

DECEMBER 31,
----------------------------------------- JUNE 30,
1993 1994 1995 1996
---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Total assets.................... $ 553,183 $ 673,022 $ 1,493,736 $ 1,317,258
Total liabilities............... 234,520 309,059 1,087,071 817,018
Total stockholder's equity...... 318,663 363,963 406,665 500,240
Total revenue................... 1,068,214 2,019,045 3,081,071 1,995,603
Total income (loss)............. (289,227) 33,492 46,334 96,646
</TABLE>

8. EMPLOYEE RETIREMENT PLAN

All employees of PSI Ltd. are covered by a defined contribution plan
whereby PSI Ltd. provides matching contributions of up to 4.5% of an employee's
salary. Total contributions charged to expense for the years ended December 31,
1993, 1994 and 1995, and the six months ended June 30, 1996, were $26,717,
$34,189, $33,161, and $23,515 respectively.

9. ACCRUED EXPENSES

Accrued expenses consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued warranty costs.................. $ 71,075 $ 109,991 $ 146,458
Commissions............................. 43,841 353,302 262,637
Other................................... 101,863 184,318 279,841
-------- -------- --------
$ 216,779 $ 647,611 $ 688,936
======== ======== ========
</TABLE>

10. SUBSEQUENT EVENT

On July 31, 1996, substantially all of the net assets of the Company, with
the exception of cash, intercompany liabilities, and other defined obligations,
and substantially all of the net assets of an affiliated company were acquired
by International Remote Imaging Systems, Inc. ("IRIS") for a purchase price
consisting of $9.1 million in cash, an 8.5% subordinated note payable due 2001
in the amount of $7.0 million, and a warrant to purchase 875,000 shares of
IRIS's common stock at an exercise price of $8 per share. The purchase agreement
excludes any future obligations that may arise with respect to the litigation
described in Note 6 from the liabilities assumed by IRIS. Furthermore, net
operating and research tax credit carryforwards described in Note 4 are not
available to IRIS as a result of the net asset purchase.

F-32
<PAGE> 90

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)

The following unaudited pro forma condensed combined balance sheet as of
June 30, 1996 and the unaudited pro forma condensed combined statements of
operations for the year ended December 31, 1995 and the six months ended June
30, 1996 give effect to the acquisition, which occurred in July 1996, of the IVD
imaging business of Perceptive Scientific Instruments, Inc. ("PSI Acquisition")
by International Remote Imaging Systems, Inc. ("IRIS"), and the issuance of
3,000,000 shares of Common Stock in this offering for net proceeds estimated to
be $20 million. The total purchase price of PSI is estimated to be $17.03
million, consisting of $9.1 million in cash, a $7.0 million subordinated
debenture and a warrant to purchase 875,000 shares of IRIS common stock at $8.00
per share (warrant valued at $927,000). IRIS paid the cash portion of the
purchase price with funds obtained from a bank under a $7.8 million term loan
and a new $1.5 million revolving line of credit. The total purchase price is
subject to adjustment based on the final closing financial statements of PSI as
of June 30, 1996.

The unaudited pro forma condensed combined balance sheet assumes the
transactions (the PSI Acquisition and the related financing and stock issuance
from this Offering) were consummated on June 30, 1996 and the unaudited pro
forma condensed combined statements of operations assume that each of these
transaction occurred at the beginning of the periods presented. The PSI
Acquisition will be accounted for as a purchase, with the assets acquired and
the liabilities assumed being recorded at estimated fair value. A substantial
portion of the purchase price, currently estimated to be $7.25 million ($4.57
million net of deferred tax benefit) will be allocated to in-process research
and development. Under the purchase method of accounting, the amount allocated
to in-process research and development will be charged to operations as of the
purchase date. The write-off of in-process research and development from the PSI
Acquisition is excluded from the pro forma statements of operations as it
represents a non-recurring item. The adjustments included in the unaudited pro
forma condensed combined financial statements represent the Company's
preliminary determination of the purchase price allocation based upon available
information and there can be no assurance that the actual adjustments will not
differ significantly from the pro forma adjustments reflected in the pro forma
financial information.

The unaudited pro forma condensed combined financial statements are not
necessarily indicative of the results that would have occurred if the foregoing
transactions had been consummated as of the indicated dates or which may occur
in the future. The unaudited pro forma condensed combined financial statements
should be read in conjunction with the historical financial statements of IRIS
and PSI, together with the related notes thereto, included elsewhere in this
Prospectus.

F-33
<PAGE> 91

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
AND PERCEPTIVE SCIENTIFIC INSTRUMENTS, INC.

PRO FORMA CONDENSED COMBINED BALANCE SHEET -- UNAUDITED
JUNE 30, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
ACQUISITION PRO OFFERING
HISTORICAL HISTORICAL PRO FORMA FORMA PRO FORMA PRO FORMA
IRIS PSI ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
---------- ---------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents.... $ 1,229 $ 97 $ (97)(1) $ 1,229 $ 6,050(4) $ 7,279
Short-term investments....... 2,636 -- 2,636 2,636
Accounts
receivable -- trade........ 5,562 1,884 7,446 7,446
Inventories.................. 3,955 431 4,386 4,386
Prepaid expenses and other... 342 35 377 377
Deferred tax asset........... 801 -- 801 801
------- ------- ------- -------
Total current
assets........... 14,525 2,447 16,875 22,925
Property and equipment,
net........................ 1,388 629 2,017 2,017
Software development costs,
net........................ 558 610 1,168 1,168
Deferred tax asset........... 3,594 -- 2,683(2) 6,277 6,277
Other assets................. 3,611 26 8,090(1) 11,727 (273)(5) 11,454
------- ------- ------- -------
Total assets....... $ 23,676 $ 3,712 $ 38,064 $ 43,841
======= ======= ======= =======
Notes payable................ $ -- $ 6 3,700(3) $ 3,706 (3,700)(4) $ 6
Accounts payable............. 1,470 873 2,343 2,343
Accrued expenses............. 902 785 1,687 1,687
Service contracts -- deferred
income..................... 722 253 975 975
------- ------- ------- -------
Total current
liabilities...... 3,094 1,917 8,711 5,011
Payable to parent company.... -- 7,706 (7,706)(1) -- --
Notes payable................ -- 11 12,400(3) 12,411 (8,150)(4) 4,261
Service contracts -- deferred
income..................... 216 -- 216 216
------- ------- ------- -------
Total
liabilities...... 3,310 9,634 21,338 9,488
------- ------- ------- -------
Common stock................. 64 1 (1)(1) 64 30(4) 89
(5)(4)
Additional paid in capital... 33,931 -- 927(1) 34,858 19,970(4) 52,460
(2,095)(4)
(273)(5)
Accumulated deficit.......... (13,629) (5,923) 5,923(1) (18,196) (18,196)
(4,567)(2)
------- ------- ------- -------
Total stockholders'
equity........... 20,366 (5,922) 16,726 34,353
------- ------- ------- -------
Total liabilities
and stockholders'
equity........... $ 23,676 $ 3,712 $ 38,064 $ 43,841
======= ======= ======= =======
</TABLE>

See accompanying notes to pro forma condensed combined financial statements

F-34
<PAGE> 92

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
AND PERCEPTIVE SCIENTIFIC INSTRUMENTS, INC.

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS -- UNAUDITED
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
ACQUISITION OFFERING
HISTORICAL HISTORICAL PRO FORMA PRO FORMA PRO FORMA PRO FORMA
IRIS PSI ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................... $ 9,129 $ 3,652 $ 12,781 $ 12,781
Cost of goods sold........... 4,495 1,459 5,954 5,954
------ ------ ------- -------
Gross margin................. 4,634 2,193 6,827 6,827
Selling, general and
administrative expenses.... 3,164 1,652 356(8) 5,172 (16)(11) 5,156
Research and development
expenses................... 591 560 1,151 1,151
------ ------ ------- -------
Operating income (loss)...... 879 (19) 504 520
Other income (expense):
Interest and other
income.................. 168 (30) 138 138
Interest expense........... (5) (309) (674)(6) (679) 493(10) (186)
309(7)
------ ------ ------- -------
Income (loss) before
provision for income
taxes...................... 1,042 (358) (37) 472
Provision (benefit) for
income taxes............... 175 -- (199)(9) (24) 85(9) 61
------ ------ ------- -------
Net income (loss)............ $ 867 $ (358) $ (13) $ 411
====== ====== ======= =======
Net income (loss) per
share...................... $ 0.13 $ (0.01) $ 0.04
====== ======= =======
Weighted average number of
common shares and common
share equivalents
outstanding for the
period..................... 6,915 (595)(12) 6,320 3,595(13) 9,915
====== ==== ======= ===== =======
</TABLE>

See accompanying notes to pro forma condensed combined financial statements

F-35
<PAGE> 93

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
AND PERCEPTIVE SCIENTIFIC INSTRUMENTS, INC.

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS -- UNAUDITED
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
ACQUISITION OFFERING
HISTORICAL HISTORICAL PRO FORMA PRO FORMA PRO FORMA PRO FORMA
IRIS PSI ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
---------- ---------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales..................... $ 15,022 $ 5,394 $ 20,416 $ 20,416
Cost of goods sold............ 7,361 2,353 9,714 9,714
------- ------ ------- -------
Gross margin.................. 7,661 3,041 10,702 10,702
Selling, general and
administrative expenses..... 5,090 3,235 724(8) 9,049 (32)(11) 9,017
Research and development
expenses.................... 1,220 308 1,528 1,528
Acquisition of in-process
research and development.... 2,900 -- 2,900 2,900
------- ------ ------- -------
Operating income (loss)....... (1,549) (502) (2,775) (2,743)
Other income (expense):
Interest and other income... 420 9 429 429
Interest expense............ (42) (538) (1,356)(6) (1,398) 995(10) (403)
538(7)
------- ------ ------- -------
Income (loss) before provision
for income taxes............ (1,171) (1,031) (3,744) (2,717)
Provision (benefit) for income
taxes....................... (3,528) -- (84)(9) (3,612) 35(9) (3,577)
------- ------ ------- -------
Net income (loss)............. $ 2,357 $ (1,031) $ (132) $ 860
======= ====== ======= =======
Net income (loss) per share... $ 0.37 $ (0.02) $ 0.09
======= ======= =======
Weighted average number of
common shares and common
share equivalents
outstanding for the
period...................... 6,419 (424)(12) 5,995 3,424(13) 9,419
======= ===== ======= ===== =======
</TABLE>

See accompanying notes to pro forma condensed combined financial statements

F-36
<PAGE> 94

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

1. The Company purchased substantially all the net assets of PSI (excluding
cash and the advances payable to PSI's parent) for total consideration of
$17,027, consisting of the following:

<TABLE>
<S> <C>
Cash paid at closing....................................... $ 9,100
Subordinated debenture due seller.......................... 7,000
Warrant to purchase 875,000 shares of common stock......... 927
-------
Total consideration.............................. $ 17,027
=======
</TABLE>

The actual allocation of the purchase price will be based on the estimated
fair value of PSI's net tangible assets and intangible assets at the date of
purchase. For purposes of the pro forma condensed combined balance sheet,
the preliminary allocation has been estimated as follows:

<TABLE>
<S> <C>
Net deficit at June 30, 1996............................... $ (5,922)
Less cash not purchased.................................... (97)
Add payable to parent company not assumed.................. 7,706
Net tangible assets as recorded by PSI..................... 1,687
Excess cost over net assets acquired....................... 15,340
Total............................................ $ 17,027
</TABLE>

The excess cost over net assets acquired has preliminarily been allocated as
follows:

<TABLE>
<S> <C>
International distribution channel......................... $ 4,910
Acquired technology and know how........................... 3,180
-------
8,090
In-process research and development........................ 7,250
-------
$ 15,340
=======
</TABLE>

2. The in-process research and development of $7,250 ($4,567 net of deferred
tax benefit of $2,683) will be written off at the PSI Acquisition date and
has been reflected as a pro-forma adjustment to accumulated deficit.

3. The cash paid at closing of $9,100 was paid from funds obtained from a bank
under a $7,800 term loan and a new $1,500 revolving line of credit, of which
$1,300 was drawn down for the PSI Acquisition. Pro forma adjustments to
notes payable consist of short-term bank debt of $3,700 and long-term bank
debt and subordinated note payable to seller of $5,400 and $7,000,
respectively.

F-37
<PAGE> 95

4. Represents the estimated net proceeds of $20,000 in connection with the
issuance of 3,000,000 shares of Common Stock in this Offering and the
application of the net proceeds therefrom as follows:

<TABLE>
<S> <C> <C>
Paydown on line of credit...................... $ 1,300
Payoff of short-term portion of bank term
loan......................................... 2,400
-------
3,700
Payoff of long-term portion of bank term
loan......................................... 5,400
Paydown on subordinated note to seller......... 2,750
-------
8,150
Repurchase of 469,413 shares of Common Stock... 2,100
Working capital................................ 6,050
--------
$ 20,000
========
</TABLE>

5. Represents a charge against equity for the unamortized deferred warrant cost
associated with a warrant surrendered to the Company in connection with the
repurchase of shares in Note 4 above.

6. Represents interest expense on subordinated note to seller and bank debt
incurred upon the PSI Acquisition.

7. Represents the elimination of the interest expense on PSI's borrowings from
its parent company not assumed by IRIS.

8. Represents amortization of the intangibles over the following estimated
useful lives: acquired technology and know how -- six years; and
international distribution channel -- twenty-five years.

9. To adjust the tax provision to the Company's historical effective tax rate.
The tax benefit in 1995 includes a deferred tax benefit of $3,587 from
reduction in the Company's deferred tax asset valuation allowance.

10. Represents the reduction of the interest expense related to the acquisition
debt financing to reflect the pay-down of such debt with the proceeds from
the issuance of Common Stock in this Offering.

11. Represents the elimination of the amortization expense related to the
deferred warrant costs related to the warrant surrendered to the Company in
connection with the repurchase of shares in Note 4 above.

12. Common share equivalents are not included in the calculation of pro forma
net loss per share because the effect of including the common share
equivalents would be anti-dilutive.

13. Includes common share equivalents and the issuance of 3,000,000 shares of
Common Stock in this Offering.

F-38
<PAGE> 96

NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 13
Price Range of Common Stock........... 14
Dividend Policy....................... 14
Capitalization........................ 15
Selected Consolidated Financial
Data................................ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 27
Management............................ 39
Certain Relationships and Related
Transactions........................ 45
Principal and Selling Stockholders.... 47
Description of Capital Stock.......... 49
Underwriting.......................... 52
Legal Matters......................... 53
Experts............................... 53
Available Information................. 54
Glossary of Selected Terms............ 55
Index to Financial Statements......... F-1
</TABLE>

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

3,000,000 SHARES

[COMPANY LOGO]

INTERNATIONAL REMOTE
IMAGING SYSTEMS, INC.

COMMON STOCK

PROSPECTUS

JEFFERIES & COMPANY, INC.
RAUSCHER PIERCE REFSNES, INC.
M. KANE & COMPANY, INC.

, 1996
<PAGE> 97

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions incurred or to be incurred in connection
with the sale of the Common Stock being registered (all amounts are estimated
except the SEC registration fee, the NASD filing fee and the AMEX listing fee).

<TABLE>
<S> <C>
SEC registration fee........................................ $9,256
NASD filing fee............................................. 3,185
AMEX listing fee............................................
Blue sky fees and expenses (including counsel fees and
expenses).................................................
Printing expenses...........................................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Transfer agent and registrar fees...........................
Miscellaneous...............................................
------
Total............................................. $
======
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article SEVENTH of the Company's Certificate of Incorporation contains
certain provisions permitted under the DGCL relating to the liability of
directors. The provisions eliminate a director's liability for monetary damages
for a breach of fiduciary duty, except in certain circumstances involving
wrongful acts, such as the breach of a director's duty of loyalty or acts or
omissions that involve intentional misconduct or knowing violation of law. The
Company's Certificate of Incorporation also contains provisions requiring the
Company to indemnify its directors and officers to the fullest extent permitted
by the DGCL.

Section 145 of the DGCL provides, in part, that a corporation shall have
the power to indemnify any person who was or is a party or is threatened to be
made a party to any suit or proceedings because such person is or was a
director, officer, employee or agent of the corporation or was serving at the
request of the corporation, as a director, officer, employee or agent of another
corporation, against all costs actually and reasonably incurred by him in
connection with such suit or proceedings if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation. Similar indemnity is permitted to be provided to such persons
in connection with an action or suit by or in the right of the corporation,
provided such person acted in good faith and in a manner he believed to be in or
not opposed to the best interests of the corporation, and provided further
(unless a court of competent jurisdiction otherwise determines) that such person
shall not have been adjudged liable to the corporation.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The Registrant made the following sales of securities in the past three
years that were not registered under the Securities Act:

(1) Since January 1, 1993, the Registrant has sold 102,568 shares of
Common Stock to selected senior employees at purchase prices equal to 50%
of the then current market price pursuant to the Registrant's Key Employee
Stock Purchase Plan. Employees are required to hold the shares purchased
for a period of two years from the date of purchase.

(2) In April 1994, the Registrant issued a warrant to purchase 248,571
shares of Common Stock at an exercise price of $3.75 per share to Corange
in connection with its investment of $1.2 million in LDA, a
Company-sponsored research and development entity. See "Management's
Discussion and Analysis of

II-1
<PAGE> 98

Financial Condition and Results of Operations -- Overview" and "Certain
Relationships and Related Transactions." Corange exercised the warrant in
full in July 1995.

(3) In February 1995, the Registrant issued a warrant to purchase
250,000 shares of Common Stock at an exercise price of $7.375 per share to
Corange in connection with a joint development project with BMC, an
affiliate of Corange. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview" and "Certain
Relationships and Related Transactions."

(4) In March 1995, the Registrant issued a warrant to purchase 75,000
shares of Common Stock at an exercise price of $8.125 per share Biovation
in connection with the acquisition of a product line from Biovation.

(5) From September to November 1995, the Registrant issued warrants to
purchase an aggregate of 512,000 shares of Common Stock at an exercise
price of $6.50 per share to 105 investors in connection with their
investment of an aggregate of $2.56 million in Poly, a Company-sponsored
research and development entity, and warrants to purchase an aggregate of
150,000 shares of Common Stock at an exercise price of $7.80 per share to
the placement agent and the finder as partial consideration for their
services. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview," "-- Liquidity and Capital
Resources" and "Certain Relationships and Related Transactions."

(6) In February 1996, the Registrant issued 340,260 shares of Common
Stock and assumed warrants and options to purchase an additional 126,051
shares of Common Stock at exercise prices ranging from $3.66 to $7.32 per
share to the former securityholders of StatSpin in connection with the
Registrant's acquisition of such company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- PSI and Other
Recent Acquisitions."

(7) In July 1996, the Registrant issued a warrant to purchase 875,000
shares of Common Stock at $8.00 per share to Digital Imaging Technologies,
Inc. in connection with the PSI Acquisition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- PSI and
Other Recent Acquisitions."

The sale of securities in the transactions described above in Paragraphs
(1) and (4) were exempt from registration under the Securities Act in reliance
on Section 4(2) of the Securities Act as transactions by an issuer not involving
a public offering.

The sale of securities in the transactions described above in Paragraphs
(2), (3), (5), (6) and (7) were exempt from registration under the Securities
Act in reliance on Regulation D promulgated thereunder.

II-2
<PAGE> 99

ITEM 16. EXHIBITS

(a) Exhibits

<TABLE>
<CAPTION>
NO. DESCRIPTION
---- -------------------------------------------------------------------------------
<C> <C> <S>
1.1(a) -- Form of Underwriting Agreement between the Company and Jefferies & Company,
Inc. and Rauscher Pierce Refsnes, Inc., as representatives of the several
underwriters named therein*
1.1(b) -- Agreement between the Company and M. Kane & Company, Inc. dated May 15, 1996
3.1 -- Certificate of Incorporation, as amended (1)
3.2 -- Restated Bylaws (2)
4.1 -- Specimen of Common Stock Certificate (3)
5.1 -- Opinion and consent of Irell & Manella LLP*
10.1 -- Lease of the Company's headquarters facility (4)
10.2(a) -- 1982 Stock Option Plans and form of Stock Option Agreement (5)
10.2(b) -- 1983 and 1986 Stock Option Plans, and forms of Stock Option Agreements
for each Plan (6)
10.2(c) -- Amended and Restated 1986 Stock Option Plan (7)
10.2(d) -- 1994 Stock Option Plan and forms of Stock Option Agreements (8)
10.2(e) -- Certificate of Officer With Respect to Amendment of 1994 Stock Option Plan (9)
10.2(f) -- Key Employee Stock Purchase Plan
10.3 -- Various Agreements with TOA Medical Electronics (10)
10.4(a) -- Agreement for a Strategic Alliance in Urinalysis dated January 7, 1994 between
IRIS and Boehringer Mannheim Corporation (11)
10.4(b) -- Research and Development and Distribution Agreement dated February 6, 1995 by
and among IRIS, LDA Systems, Inc. and Corange International Limited (11)
10.4(c) -- Amendment to Distribution Agreements
10.5 -- Warrant Certificate dated March 20, 1995 issued to Biovation, Inc. (11)
10.6(a) -- Technology License Agreement dated as of September 29, 1995 between IRIS and
Poly U/A Systems, Inc. (12)
10.6(b) -- Research and Development Agreement dated as September 29, 1995 between IRIS and
Poly U/A Systems, Inc. (12)
10.6(c) -- $100 Class "A" Note dated September 29, 1995 issued by Poly U/A Systems, Inc.
in favor of IRIS (12)
10.6(d) -- Certificate of Incorporation of Poly U/A Systems, Inc. (See Article FOUR
regarding the IRIS Option) (12)
10.7(a) -- Agreement and Plan of Merger dated January 31, 1996 between IRIS
and StatSpin, Inc. (13)
10.7(b) -- Registration Rights Agreement dated January 31, 1996 between IRIS and StatSpin
Stockholders (13)
10.8(a) -- Asset Purchase Agreement dated as of July 15, 1996 by and among IRIS, Digital
Imaging Technologies, Inc., Perceptive Scientific Instruments, Inc. and
Perceptive Scientific Technologies, Inc. (14)
10.8(b) -- Registration Rights and Standstill Agreement dated July 31, 1996 between IRIS
and Digital Imaging Technologies, Inc. (9)
10.8(c) -- Warrant Certificate dated July 31, 1996 issued to Digital Imaging Technologies
Inc. (9)
10.8(d) -- Stockholder Guaranty Agreement dated July 31, 1996 between Edward Randall, III
and PSII Acquisition Corp., a wholly-owned subsidiary of IRIS (now known as
Perceptive Scientific Instruments, Inc.) (9)
10.8(e) -- Non-Competition Agreement dated as of July 15, 1996 between Edward Randall, III
and PSII Acquisition Corp., a wholly-owned subsidiary of IRIS now known as
Perceptive Scientific Instruments, Inc. (9)
</TABLE>

II-3
<PAGE> 100

<TABLE>
<CAPTION>
NO. DESCRIPTION
---- -------------------------------------------------------------------------------
<C> <C> <S>
10.8(f) -- Technology License Agreement dated July 31, 1996 between Perceptive Scientific
Imaging Systems, Inc. and PSII Acquisition Corp., a wholly-owned subsidiary of
IRIS (now known as Perceptive Scientific Instruments, Inc.) (9)
10.9(a) -- $7,000,000 Subordinated Note dated July 29, 1996 issued by IRIS in favor of
Digital Imaging Technologies, Inc. (9)
10.9(b) -- $1,500,000 Promissory Note dated July 29, 1996 issued by IRIS to City National
Bank (9)
10.9(c) -- Supplemental Terms letter dated July 29, 1996 between IRIS and City National
Bank re: $1,500,000 Promissory Note (9)
10.9(d) -- Commercial Security Agreement dated July 29, 1996 executed by IRIS in favor of
City National Bank re: $1,500,000 Promissory Note (9)
10.9(e) -- $7,800,000 Promissory Note dated July 29, 1996 issued by IRIS to City National
Bank (9)
10.9(f) -- Supplemental Terms letter dated July 29, 1996 between IRIS and City National
Bank re: $7,800,000 Promissory Note (9)
10.9(g) -- Commercial Pledge Agreement dated July 29, 1996 executed by IRIS in favor of
City National Bank re: $7,800,000 Promissory Note (9)
11 -- Statement re: Computation of Per Share Earnings
21.1 -- Subsidiaries of the Registrant
23.1 -- Written consent of Coopers & Lybrand L.L.P.
23.2 -- Written consent of Coopers & Lybrand L.L.P.
23.3 -- Written consent of KPMG Peat Marwick LLP
23.4 -- Written consent of Limbach & Limbach LLP
23.5 -- Written consent of Irell & Manella LLP (included in their opinion filed as
Exhibit 5.1 hereto)
24.1 -- Power of attorney to sign and file amendments hereto (included on the signature
page of this Part II)
27.1 -- 1995 Restated Financial Data Schedule
27.2 -- 1994 Restated Financial Data Schedule
27.3 -- 1993 Restated Financial Data Schedule
</TABLE>

- ---------------
* To be filed by pre-effective amendment.

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

(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994.

(3) Incorporated by reference to the Company's Registration Statement on Form
S-3, as filed with the Securities and Exchange Commission on March 27, 1996
(File No. 333-002001).

(4) The original lease and all prior amendments are incorporated by reference
to the Company's Annual Report on Form 10-K for the year December 31, 1989,
its quarterly report on Form 10-Q for the quarter ended September 30, 1993
and its Annual Report on Form 10-K for the year ended December 31, 1994.

(5) Incorporated by reference to the Company's Registration Statement on Form
S-2, as filed with the Securities and Exchange Commission on September 4,
1985 (File No. 2-99240).

(6) Incorporated by reference to the Company's Registration Statement on Form
S-8, as filed with the Securities and Exchange Commission on May 10, 1982
(File No. 2-77496).

(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.

(8) Incorporated by reference to the Company's Registration Statement on Form
S-8, as filed with the Securities and Exchange Commission on August 8, 1994
(File No. 33-82560).

(9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996.

II-4
<PAGE> 101

(10) Incorporated by reference to the Company's Current Report on Form 8-K dated
July 15, 1988 and its quarterly report on Form 10-Q for the quarter ended
June 30, 1995.

(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.

(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 31, 1995.

(13) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.

(14) Incorporated by reference to the Company's Current Report on Form 8-K filed
July 17, 1996.

(b) Financial Statement Schedules

Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the Financial Statements or Notes
thereto.

ITEM 17. UNDERTAKINGS

(a) Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions listed in Item 14 hereof, or otherwise,
the Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

(b) The Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(2) For purposes of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

II-5
<PAGE> 102

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
hereby certifies that it has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Los Angeles, State of California, on the 23rd day of September 1996.

INTERNATIONAL REMOTE IMAGING
SYSTEMS, INC.

By: /s/ FRED H. DEINDOERFER

------------------------------------
Fred H. Deindoerfer
Chairman of the Board, President and
Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, each person whose signature appears
below constitutes and appoints Fred H. Deindoerfer and Jeffrey S. Williams, or
either of them, as true and lawful attorneys-in-fact with full power of
substitution and resubstitution, for such person in any and all capacities, to
sign any amendments (including pre-effective and post-effective amendments) to
this registration statement, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each of said attorneys-in-fact full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that each of
said attorneys-in-fact, or his or her substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------- -------------------
<C> <S> <C>
/s/ FRED H. DEINDOERFER Chairman of the Board, September 23, 1996
- ------------------------------------------ President and Chief
Fred H. Deindoerfer Executive Officer (principal
executive officer)

/s/ JEFFREY S. WILLIAMS Chief Operating Officer September 23, 1996
- ------------------------------------------
Jeffrey S. Williams

/s/ MARTIN S. MCDERMUT Chief Financial Officer September 23, 1996
- ------------------------------------------ (principal financial
Martin S. McDermut officer)

/s/ E. EDUARDO BENMAOR Secretary, Controller and September 23, 1996
- ------------------------------------------ Principal Accounting Officer
E. Eduardo Benmaor (principal accounting
officer)

/s/ JOHN A. O'MALLEY Director September 23, 1996
- ------------------------------------------
John A. O'Malley
</TABLE>

II-6
<PAGE> 103

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------- -------------------
<C> <S> <C>
/s/ STEVEN M. BESBECK Director September 23, 1996
- ------------------------------------------
Steven M. Besbeck

/s/ THOMAS F. KELLEY Director and Vice President September 23, 1996
- ------------------------------------------
Thomas F. Kelley

/s/ EDWARD RANDALL, III Director September 23, 1996
- ------------------------------------------
Edward Randall, III
</TABLE>

II-7
<PAGE> 104

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
1.1(a) -- Form of Underwriting Agreement between the Company and Jefferies &
Company, Inc. and Rauscher Pierce Refsnes, Inc., as representatives
of the several underwriters named therein*
1.1(b) -- Agreement between the Company and M. Kane & Company, Inc. dated May
15, 1996
3.1 -- Certificate of Incorporation, as amended (1)
3.2 -- Restated Bylaws (2)
4.1 -- Specimen of Common Stock Certificate (3)
5.1 -- Opinion and consent of Irell & Manella LLP*
10.1 -- Lease of the Company's headquarters facility (4)
10.2(a) -- 1982 Stock Option Plans and form of Stock Option Agreement (5)
10.2(b) -- 1983 and 1986 Stock Option Plans, and forms of Stock Option
Agreements
for each Plan (6)
10.2(c) -- Amended and Restated 1986 Stock Option Plan (7)
10.2(d) -- 1994 Stock Option Plan and forms of Stock Option Agreements (8)
10.2(e) -- Certificate of Officer With Respect to Amendment of 1994 Stock
Option
Plan (9)
10.2(f) -- Key Employee Stock Purchase Plan
10.3 -- Various Agreements with TOA Medical Electronics (10)
10.4(a) -- Agreement for a Strategic Alliance in Urinalysis dated January 7,
1994 between IRIS and Boehringer Mannheim Corporation (11)
10.4(b) -- Research and Development and Distribution Agreement dated February
6, 1995 by and among IRIS, LDA Systems, Inc. and Corange
International Limited (11)
10.4(c) -- Amendment to Distribution Agreements
10.5 -- Warrant Certificate dated March 20, 1995 issued to Biovation, Inc.
(11)
10.6(a) -- Technology License Agreement dated as of September 29, 1995 between
IRIS and Poly U/A Systems, Inc. (12)
10.6(b) -- Research and Development Agreement dated as September 29, 1995
between IRIS and Poly U/A Systems, Inc. (12)
10.6(c) -- $100 Class "A" Note dated September 29, 1995 issued by Poly U/A
Systems, Inc. in favor of IRIS (12)
10.6(d) -- Certificate of Incorporation of Poly U/A Systems, Inc. (See Article
FOUR regarding the IRIS Option) (12)
10.7(a) -- Agreement and Plan of Merger dated January 31, 1996 between IRIS
and StatSpin, Inc. (13)
10.7(b) -- Registration Rights Agreement dated January 31, 1996 between IRIS
and StatSpin Stockholders (13)
10.8(a) -- Asset Purchase Agreement dated as of July 15, 1996 by and among
IRIS, Digital Imaging Technologies, Inc., Perceptive Scientific
Instruments, Inc. and Perceptive Scientific Technologies, Inc. (14)
10.8(b) -- Registration Rights and Standstill Agreement dated July 31, 1996
between IRIS and Digital Imaging Technologies, Inc. (9)
10.8(c) -- Warrant Certificate dated July 31, 1996 issued to Digital Imaging
Technologies Inc. (9)
10.8(d) -- Stockholder Guaranty Agreement dated July 31, 1996 between Edward
Randall, III and PSII Acquisition Corp., a wholly-owned subsidiary
of IRIS (now known as Perceptive Scientific Instruments, Inc.) (9)
</TABLE>
<PAGE> 105

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ------------------------------------------------------------------- ------------
<C> <C> <S> <C>
10.8(e) -- Non-Competition Agreement dated as of July 15, 1996 between Edward
Randall, III and PSII Acquisition Corp., a wholly-owned subsidiary
of IRIS now known as Perceptive Scientific Instruments, Inc. (9)
10.8(f) -- Technology License Agreement dated July 31, 1996 between Perceptive
Scientific Imaging Systems, Inc. and PSII Acquisition Corp., a
wholly-owned subsidiary of IRIS (now known as Perceptive Scientific
Instruments, Inc.) (9)
10.9(a) -- $7,000,000 Subordinated Note dated July 29, 1996 issued by IRIS in
favor of Digital Imaging Technologies, Inc. (9)
10.9(b) -- $1,500,000 Promissory Note dated July 29, 1996 issued by IRIS to
City National Bank (9)
10.9(c) -- Supplemental Terms letter dated July 29, 1996 between IRIS and City
National Bank re: $1,500,000 Promissory Note (9)
10.9(d) -- Commercial Security Agreement dated July 29, 1996 executed by IRIS
in favor of City National Bank re: $1,500,000 Promissory Note (9)
10.9(e) -- $7,800,000 Promissory Note dated July 29, 1996 issued by IRIS to
City National Bank (9)
10.9(f) -- Supplemental Terms letter dated July 29, 1996 between IRIS and City
National Bank re: $7,800,000 Promissory Note (9)
10.9(g) -- Commercial Pledge Agreement dated July 29, 1996 executed by IRIS in
favor of City National Bank re: $7,800,000 Promissory Note (9)
11 -- Statement re: Computation of Per Share Earnings
21.1 -- Subsidiaries of the Registrant
23.1 -- Written consent of Coopers & Lybrand L.L.P.
23.2 -- Written consent of Coopers & Lybrand L.L.P.
23.3 -- Written consent of KPMG Peat Marwick LLP
23.4 -- Written consent of Limbach & Limbach LLP
23.5 -- Written consent of Irell & Manella LLP (included in their opinion
filed as Exhibit 5.1 hereto)
24.1 -- Power of attorney to sign and file amendments hereto (included on
the signature page of this Part II)
27.1 -- 1995 Restated Financial Data Schedule
27.2 -- 1994 Restated Financial Data Schedule
27.3 -- 1993 Restated Financial Data Schedule
</TABLE>

- ---------------
* To be filed by pre-effective amendment.

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

(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994.

(3) Incorporated by reference to the Company's Registration Statement on Form
S-3, as filed with the Securities and Exchange Commission on March 27, 1996
(File No. 333-002001).

(5) Incorporated by reference to the Company's Registration Statement on Form
S-2, as filed with the Securities and Exchange Commission on September 4,
1985 (File No. 2-99240).

(6) Incorporated by reference to the Company's Registration Statement on Form
S-8, as filed with the Securities and Exchange Commission on May 10, 1982
(File No. 2-77496).
<PAGE> 106