INTERNATIONAL REMOTE IMAGING SYSTEMS INC /DE/, 10-K, 1996-04-01

INTERNATIONAL REMOTE IMAGING SYSTEMS INC /DE/
10-K, 1996-04-01
LABORATORY ANALYTICAL INSTRUMENTS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------

FORM 10-K

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

For the fiscal year ended December 31, 1995 Commission File No. 0-9767

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

DELAWARE 94-2579751
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

9162 Eton Avenue, Chatsworth, California 91311
(Address of principal executive offices) (Zip Code)

Telephone Number: (818) 709-1244

Securities registered pursuant to Section 12(b) of the Act: Common Stock

Securities registered pursuant to Section 12(g) of the Act: None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K._____

The aggregate market value of shares of Common Stock held by non-affiliates
of the Registrant on March 25, 1996 was $39,766,990 based upon the closing price
of the Common Stock on such date, as reported on the American Stock Exchange.
Solely for the purpose of counting "non-affiliates", in this context shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded. This determination of
affiliate status is not necessarily a determination for other purposes.

The number of shares of Common Stock of the Registrant outstanding as of
March 25, 1996 was 6,308,578.

Part III incorporates information by reference from the Proxy Statement for
the Registrant's 1996 Annual Meeting of Stockholders.

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INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

FORM 10-K ANNUAL REPORT

FISCAL YEAR ENDED DECEMBER 31, 1995

Caption Page
- ------- ----

PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . 1

Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . .13

Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . .13

Item 4. Submission of Matters to a Vote of Security Holders. . . .13

PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . .13

Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . .14

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . .15

Item 8. Financial Statements and Supplementary Data. . . . . . . .19

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . .19

PART III
Item 10. Directors and Executive Officers of the Registrant.. . . .20

Item 11. Executive Compensation . . . . . . . . . . . . . . . . . .20

Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . .20

Item 13. Certain Relationships and Related Transactions . . . . . .20

PART IV
Item 14. Exhibits, Financial Statements, Schedules, and
Reports on Form 8-K. . . . . . . . . . . . . . . . . . . .21

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PART I
ITEM 1. BUSINESS.

(a) GENERAL DEVELOPMENT OF BUSINESS.

International Remote Imaging Systems, Inc. (IRIS) manufactures and
markets The Yellow IRIS-Registered Trademark-, an automated urinalysis
workstation it developed using its patented slideless Automated Intelligent
Microscopy (AIM) technology. IRIS also manufactures and/or markets most of
the disposable reagents and other materials (commonly referred to as
consumables) used in the operation and maintenance of The Yellow
IRIS-Registered Trademark-, including the CHEMSTRIP/IRIStrip-Registered
Trademark- urine test strips, and offers service contracts for its
maintenance and repair. IRIS completed the acquisition of LDA Systems, Inc.
(LDA) in the second quarter of 1995 and with it reacquired all rights to The
White IRIS-Registered Trademark- leukocyte differential analyzer, a major new
product IRIS has been developing, for which IRIS is awaiting clearance from
the Food and Drug Administration (FDA). There can be no assurance, however,
that such clearance will be obtained. See "Narrative Description of Business
- --Future Developments." In 1995, IRIS began implementing a new strategy to
expand its urinalysis business by adding a line of proprietary
cost-effective, outcome-enhancing urinalysis products suitable for
laboratories of all sizes.

(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.

IRIS does business in one industry segment.

IRIS manufactures and markets The Yellow IRIS-Registered Trademark-, an
automated urinalysis workstation it developed using its patented AIM and
other technology to automate the manipulative steps in routine urinalyses
performed by hospital and reference clinical laboratories, including counting
and classifying microscopic particles found in urine specimens. IRIS also
manufactures and/or markets most of the consumables used in the operation and
maintenance of The Yellow IRIS-Registered Trademark-, including
CHEMSTRIP/IRIStrip-Registered Trademark- urine test strips, and offers
service contracts for its maintenance and repair. See "Strategic Alliance
with Boehringer Mannheim -- Distribution of CHEMSTRIP/IRIStrip-Registered
Trademark- Test Strips and Custom Reader." IRIS had a backlog, including
equipment, consumables, rentals and service contracts of $1,280,668 and
$1,026,242 at December 31, 1995 and 1994, respectively.

IRIS believes its technology can be used to design and develop other
computerized, microscopical image analysis instruments dedicated to specific
tasks in the clinical laboratory. IRIS has completed prototype development of
an automated high-speed instrument to classify white blood cells, The White
IRIS-Registered Trademark- leukocyte differential analyzer, and has filed a
510(k) submission with the FDA requesting clearance of The White IRIS-Registered
Trademark- for interstate commerce. See "Future Developments -- The White IRIS-
Registered Trademark-." IRIS also has undertaken considerable development work
on a slide-based imaging cytometer, The Purple IRIS-Registered Trademark-, a
project which requires further significant work and funding to reach commercial
readiness. IRIS intends to complete this project only if it is able to obtain
additional funding for this purpose.

In 1995, IRIS began implementing a new strategy to expand its urinalysis
business by adding a line of proprietary cost-effective, outcome-enhancing
urinalysis products suitable for laboratories of all sizes. As part of this
strategy, IRIS acquired (i) the digital refractometer product line of Biovation,
Inc. in March 1995, (ii) the complete business of StatSpin Technologies in
February 1996 and (iii) the urinalysis business of UroHealth Systems, Inc. in
March 1996. Biovation's digital refractometer is a patented device used for
determining the specific gravity of urine. StatSpin Technologies is a
manufacturer of special purpose centrifuges and other small laboratory
instruments and devices. The urinalysis business of UroHealth Systems consists
primarily of two proprietary product lines: the Cen-Slide-Registered Trademark-
1500 System for centrifugal urine sediment and manual microscopic examination
and the FloStar-Registered Trademark- specimen collection and dispensing
container. See "Recent Acquisitions" below in this section.

THE YELLOW IRIS-REGISTERED TRADEMARK-

The Yellow IRIS-Registered Trademark- is an automated workstation designed
to perform a complete routine urinalysis. Routine urinalysis is one of the most
commonly performed and labor-intensive procedures in laboratory medicine and
consists of (i) the observation of gross appearance, (ii) the measurement of
specific gravity, pH, and the concentrations of several chemical substances and
(iii) the microscopical examination of urine sediment. In July 1995, IRIS
introduced two new models (the Model 300 and Model 500) to The Yellow IRIS-
Registered Trademark- series of urinalysis workstations. A new and faster
workstation, the Model 500, introduces a series of technology upgrades that make
it the most accurate, fastest and easiest-to-use urine profiling system ever
built, replacing the long-established

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Model 450 version of The Yellow IRIS-Registered Trademark-. A new and faster
low-cost Model 300 workstation also replaces the earlier Model 250 version.
IRIS began marketing the new models late in the third quarter of 1995.

Laboratories which do not use The Yellow IRIS-Registered Trademark- measure
specific gravity using a relatively inexpensive instrument, and pH and chemical
substances through the use of test strips, usually with the aid of an automated
test strip reader. Urine sediment examination (the most time-consuming portion
of a manually-performed urinalysis) requires numerous steps making the method
labor-intensive, cumbersome, biohazardous and frequently inefficient. Workload
standards published by the College of American Pathologists allow six minutes
for a manually-performed urinalysis. Also, preparation and spreading of the
sediment suspension on the microscope slide often lacks uniformity. When
numerous sediments are viewed, prolonged peering into the eyepieces of a
microscope becomes tiring. These and other factors contribute to imprecision.

In contrast, The Yellow IRIS-Registered Trademark- urinalysis
workstation accepts uncentrifuged urine. IRIS utilizes AIM-Registered
Trademark- to rapidly capture, analyze and display microscopic images. AIM
is a combination of the IRIS patented Slideless-Registered Trademark-
Microscope and its high-speed image processing technology, which allows
visual examination of a moving specimen without the need to mount it on a
slide. The specimen is made to flow in a plane precisely positioned (to
within microns) in a larger fluid stream within the focus of a microscope.
The method of ensuring proper alignment, particle orientation, focus and
measurement, called imaging flow cytometry, is patented. See "Patents and
Copyrights." Moreover, by another patented technique, AIM allows images of
the urine sediment particles to be concentrated electronically rather than
through the physical process of centrifugation. These images then are
automatically classified and displayed on a video monitor for review.

The combination of a digital image processor, host computer and software
provides essentially "real time" image analysis. However, IRIS believes that
certain rare or subtle image qualities, as well as the unpredetermined artifacts
that sometimes occur, are best dealt with by the trained human eye. Therefore,
The Yellow IRIS-Registered Trademark- allows an operator to interpret and, if
necessary, edit all classifications. Use of The Yellow IRIS-Registered
Trademark- enables clinical laboratories to perform routine urinalyses in less
than one-fourth the time usually required by the manual method; minimizes the
inconvenience of a multiple-step manual preparation of urine sediment;
eliminates multiple handling of urine specimens for chemistry, specific gravity
and microscopic measurements; reduces the biohazard exposure to potentially
infectious specimens; increases the number of abnormalities detected; and
improves the reliability of the results obtained. The Yellow IRIS-Registered
Trademark- also can be connected to the central computer record system of the
hospital or laboratory, allowing direct electronic information transfer.

IRIS also manufactures and/or markets most of the consumables used in
the operation and maintenance of The Yellow IRIS-Registered Trademark-,
including the CHEMSTRIP/IRIStrip-Registered Trademark- urine test strips, and
offers service contracts for its maintenance and repair. See "Strategic
Alliance with Boehringer Mannheim --Distribution of
CHEMSTRIP/IRIStrip-Registered Trademark- Test Strips and Custom Reader."
During the third quarter of 1995, IRIS introduced two new
enhanced-performance models of The Yellow IRIS-Registered Trademark-.

MARKETS AND COMPETITION

Laboratory medicine in the United States is carried out primarily in
hospital and reference clinical laboratories. IRIS has been marketing The
Yellow IRIS-Registered Trademark- since 1983 to these hospitals and reference
laboratories which perform large numbers of urinalyses. With hospitals
affiliated with more than 75% of U.S. medical schools and other leading
hospitals nationwide using The Yellow IRIS-Registered Trademark-, IRIS believes
that it is the leader in automated microscopic urinalysis instruments in the
U.S.

IRIS knows of no other competitor marketing a complete urinalysis system.
Boehringer Mannheim Corporation (a member of the Corange group of companies),
Behring Diagnostics (a division of Hoechst AG) and Miles (owned by Bayer AG)
sell lines of disposable test strips which are useful in determining the
concentration of various chemical substances often found in urine. Some claims
have been made that the use of screening algorithms based on these test strips
can reduce the number of microscopical examinations required by as much as one-
half. IRIS believes that urine test strips are not adequate replacements for
microscopic examinations of urine and believes its position is supported in
recent medical literature which shows that a significant number of
microscopically abnormal specimens can be missed if reliance is placed on test
strip screening to reduce the need for microscopy. Still, individual preference
for such procedures hampers IRIS sales efforts in some hospitals which affects
the market for The Yellow IRIS-Registered Trademark-.

A number of hospitals conduct manual urine sediment analyses using the Kova
and other systems composed largely of disposable plastic parts. The Kova system
is made by Hycor Biomedical, Inc., These systems

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provide a more standardized method of manually handling and preparing urine
sediment for microscopical examination. While these systems help somewhat to
overcome manipulative imprecision, they do so at the added expense of disposable
parts and offer little in time savings. In 1992, UroHealth Sytems, Inc. (then
known as Davstar Industries) introduced a novel disposable combination
sedimentation tube and microscope slide with better opportunities for easing
manipulation and saving labor. IRIS purchased this product line from UroHealth
in March 1996. See "Recent Acquisitions."

Significant international clinical laboratory markets may also exist, and
IRIS has in the past attempted to introduce The Yellow IRIS-Registered
Trademark- in certain of those markets through distributors. IRIS has not yet
achieved any significant amount of international sales. As part of a 1988
agreement, TOA Medical Electronics Co., Ltd. (TOA), a Japanese company, had the
right to act as the distributor of certain IRIS products, including The Yellow
IRIS-Registered Trademark-, in Japan. TOA has not purchased any systems since
1988. The exclusivity of TOA's distributorship was terminated in 1991 for
failure to submit a plan to remedy its lack of performance, and TOA officially
resigned its distributorship in December of 1995.

In addition to those problems inherent in the marketing of a new, capital-
intensive product, the success of any further international marketing efforts
will depend on a variety of factors unique to each market and the international
trade environment, including the changing political and economic environments of
certain countries. IRIS has been concentrating its efforts mainly in the U.S.
market and is likely to continue to do so in 1996. Late in 1991, IRIS
established two distributorships, one in Italy and another in Taiwan, as
first steps in its intended renewal of international efforts. The Taiwanese
distributorship has been actively demonstrating The Yellow IRIS-Registered
Trademark- to potential customers in its market, but has placed only one unit to
date. The Italian distributorship has not been actively demonstrating The
Yellow IRIS-Registered Trademark- to potential customers, and IRIS is currently
in discussions regarding the future of this distributorship.

Under the 1988 agreement, TOA also has the right to market urine sediment
analyzers using pre-1989 IRIS technology. In exchange, TOA agreed to pay IRIS
royalties on sales of such analyzers and granted IRIS the exclusive right to
distribute in North America any urine sediment analyzer made by TOA. In late
1990, TOA introduced a urine sediment analyzer, the UA-1000 and in mid-1993,
introduced an improved model, the UA-2000 into the Japanese market. Despite the
fact that the UA-2000 performs only the urine sediment analysis portion of a
complete urinalysis, as limited by the agreement, it is currently priced
comparably with the more versatile The Yellow IRIS-Registered Trademark-.
Royalty reports from TOA indicate that TOA sold 28 UA-2000s in 1994, and only 12
in 1995, all in Japan. More recently, IRIS learned that TOA is showing a new
urine sediment analyzer based on TOA's particle counting technology, the UF-100,
to selected prospects in the U.S. IRIS subsequently asserted its rights under
the 1988 agreement to distribute the UF-100 in North America. TOA disputes the
right of IRIS to distribute this product and has requested arbitration of the
issue in accordance with the terms of the 1988 agreement.

In general, there are numerous large and well-financed companies, in
addition to TOA, engaged in active research and development programs within and
outside of the clinical laboratory instrumentation field that have considerable
experience in areas of interest to IRIS. IRIS 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 instruments comparable or
superior to The Yellow IRIS-Registered Trademark- or any other product
ultimately developed by IRIS.

STRATEGIC ALLIANCE WITH BOEHRINGER MANNHEIM

During 1994, IRIS developed a strategic alliance with Boehringer Mannheim
Corporation ("BMC"), an Indianapolis-based manufacturer of diagnostic products,
and Boehringer Mannheim GmbH ("BMG"), BMC's German affiliate and a world leader
in clinical chemistry. BMC and BMG are wholly-owned subsidiaries of Corange
Limited ("Corange"), a diversified healthcare company with 1995 worldwide sales
of more than $3.5 billion. Corange's principal lines of business are
diagnostics, therapeutics and orthopedics.

During 1995, all three companies underwent a significant management
restructuring. As a result of the restructuring, together with certain events
which followed the restructuring, IRIS initiated discussions with BMG to address
several concerns. Based on the position of the BMG management to date, IRIS
believes that these concerns can be adequately addressed. Nonetheless, IRIS
cannot predict what changes, if any, in the IRIS/BMG alliance will result from
these discussions.

DISTRIBUTION OF CHEMSTRIP/IRISTRIP-TM- URINE TEST STRIPS AND CUSTOM READER

During the fourth quarter of 1994, IRIS began marketing an improved version
of The Yellow IRIS-Registered Trademark- featuring a new CHEMSTRIP-Registered
Trademark- urine test strip reader and CHEMSTRIP/IRIStrip-TM- urine test strips,
both designed and

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manufactured by BMC especially for The Yellow IRIS-Registered Trademark-. BMC
is the recognized world leader in clinical chemistry and the second largest
producer and seller of urine test strips in the United States. The combination
of the CHEMSTRIP-Registered Trademark- reader with the CHEMSTRIP/IRIStrip-TM-
urine test strips is expected to provide the fastest, most accurate urine test
strip on the market. BMC has selected IRIS to be the exclusive distributor of
the CHEMSTRIP/IRIStrip-TM- urine test strips. The test strips used by the less
advanced version of The Yellow IRIS-Registered Trademark- are currently supplied
to IRIS customers by various laboratory products distributors. IRIS is offering
its existing customers an opportunity to upgrade their existing workstations
with the new CHEMSTRIP-Registered Trademark- reader for use with the
CHEMSTRIP/IRIStrips-TM-. The addition of CHEMSTRIP/IRIStrips-TM- to its product
line has created a significant new source of revenues, as more than sixty
percent of existing IRIS customers now use the new strips. This collaborative
project also involves a joint effort to promote the advantages of using
microscopy with urine test strips. As part of the promotion, BMC and IRIS have
agreed to cooperate on various marketing initiatives, and BMC has committed to
spend at least $150,000 annually on promotional efforts.

JOINT DEVELOPMENT OF REFERENCE LABORATORY SYSTEM

During the first quarter of 1995, IRIS and BMG announced a joint project to
develop an advanced automated urinalysis system for reference laboratories based
on the proprietary technologies of both companies. The new reference laboratory
system is expected to be a high-capacity urinalysis workstation designed to meet
the high volume and other special requirements of reference laboratories.
Following system integration and testing at its facility in Chatsworth,
California, IRIS submitted a 510(k) application to the FDA requesting clearance
of this advanced model of The Yellow IRIS-Registered Trademark- called the
900UDx urine pathology system. Although this project consists primarily of
refining and integrating existing commercially viable technology from both
companies, there can be no assurance that this project will yield a commercially
acceptable product.

IRIS has the exclusive right to distribute the 900UDx urine pathology
system in the United States and Canada. BMG has the exclusive right to
distribute the reference laboratory system in the rest of the world except Italy
and Taiwan. Pending FDA clearance, IRIS intends to review its existing
distributorships in Italy and Taiwan, with a view towards gaining BMG
distribution of the new system in these countries, as well. IRIS will
manufacture the urine pathology systems distributed by both IRIS and BMG, with
BMG supplying some of the components. IRIS will also manufacture all of the
consumables distributed by both parties except the urine test strips which will
be manufactured by BMG.

In connection with this project, IRIS issued to Corange warrants to
purchase 250,000 shares of IRIS 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. In addition, BMG
appointed IRIS a non-exclusive distributor in the United States of BMG's
CHEMSTRIP Super UA Urine Analyzer and CHEMSTRIP 10 SUA reagents for sales in
connection with the new reference laboratory system. BMG also offered IRIS the
exclusive right to distribute in the United States BMG's new Seditron urinalysis
system along with its related consumables. The Seditron is a slide-based
imaging system for examination of urine sediment. It has not yet been evaluated
and submitted for FDA clearance for sale in the United States, and IRIS will
have 180 days from the receipt of a sample Seditron system to evaluate it and
elect whether to accept the distributorship offer.

CORANGE FUNDING FOR THE WHITE IRIS-REGISTERED TRADEMARK- PROJECT

In April 1994, LDA secured $1.2 million of funding from Corange to help
complete commercialization of The White IRIS-Registered Trademark-. Corange
purchased units consisting of 85,714 shares of LDA Common Stock and warrants to
purchase 248,571 shares of IRIS Common Stock at an exercise price of $3.75 per
share. The LDA common stock was exchanged for approximately 220,840 shares of
IRIS as the result of the acquisition of LDA by IRIS in June of 1995. Corange
exercised its warrants to purchase IRIS common stock in July. As part of the
Corange investment, LDA and Corange agreed to pursue discussions concerning a
possible joint venture to develop a hematology workstation and not to pursue
similar discussions with third parties prior to October 20, 1995. Subject to
certain exceptions, IRIS also granted Corange a right of first refusal to
purchase shares of IRIS Common Stock, or any securities convertible into IRIS
Common Stock, which IRIS may issue or sell prior to April 20, 1996. This right
of first refusal does not apply to, among other things, the issuance of shares
of IRIS Common Stock in connection with any merger, consolidation,
reorganization, restructuring or recapitalization.

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FUTURE COLLABORATION

The projects described above in this section are part of an evolving
strategic alliance between IRIS, BMC and BMG, and IRIS intends from time to time
to explore further opportunities for mutually beneficial collaboration with
them. Consistent with that view, BMC, BMG and IRIS have agreed to negotiate
with each other first regarding their participation in the development by any of
them of any new automated urinalysis microscopy systems.

RECENT ACQUISITIONS

BIOVATION PRODUCT LINE

In March 1995, IRIS acquired the digital refractometer product line of
Biovation 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. The average annual
revenues from this product line were approximately $495,000 over Biovation's
last three fiscal years. 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 manufacturing and marketing a patented
device known as a digital refractometer and the related consumables used in the
operation and maintenance of the refractometer. The digital refractometer is
used by some physicians and smaller laboratories for determining the specific
gravity of urine. Among other things, IRIS acquired the U.S. patent for the
refractometer as well as the proprietary formulas for certain related
consumables. Pursuant to a royalty-free license from Biovation, IRIS is
marketing the refractometer and related consumables under the Biovation-
Registered Trademark- tradename through existing distribution channels.

LDA SYSTEMS, INC.

In June 1995, IRIS completed the acquisition of LDA for approximately
498,000 shares of IRIS Common Stock. Prior to the acquisition, IRIS and LDA had
been engaged in a joint program to complete commercial development of The White
IRIS-Registered Trademark- leukocyte differential analyzer -- an instrument
being developed from technology originally pioneered by IRIS. IRIS acquired LDA
pursuant to the exercise of its call option under the LDA Restated Certificate
of Incorporation to purchase all of the outstanding shares of LDA Common Stock.
For this purpose, the IRIS Common Stock was valued at $7.7625 per share -- the
average closing price of a share of IRIS Common Stock on the American Stock
Exchange for the 20 trading days preceding the call date. 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, non-cash charge
of $2.9 million against earnings in the second quarter for the acquisition of
in-process research and development (i.e., work in process not yet cleared for
interstate commerce by the FDA). LDA was merged into IRIS in December 1995.

STATSPIN TECHNOLOGIES

In February 1996, IRIS acquired Norwood, Massachusetts based Norfolk
Scientific, Inc. for approximately 340,000 shares of IRIS common stock and the
assumption of options and warrants to purchase an additional 126,000 shares of
IRIS common stock. Norfolk Scientific, which conducts business under the trade
name "StatSpin Technologies" manufactures special purpose centrifuges and other
small laboratory instruments and consumable plastic devices used in their
operation. StatSpin's products are widely used in clinical, veterinary,
physician's office and research laboratories and distributed to those
laboratories through several distribution channels, including the Curtin
Matheson Scientific Division of Fisher Scientific. StatSpin had net sales of
$3.1 million for the twelve months ended December 31, 1995.

The total consideration paid by IRIS (including the immediately
realizable value of the assumed options and warrants) is estimated at
$3,000,000 based on a negotiated price of $7.58 per share of IRIS common
stock in the transaction. The acquisition was accomplished through the merger
of a newly-formed subsidiary of IRIS into StatSpin, with StatSpin being the
surviving corporation and becoming a wholly-owned subsidiary of IRIS. The
acquisition will be accounted for using the pooling-of-interests method.

CEN-SLIDE-REGISTERED TRADEMARK- AND FLO-STAR-REGISTERED TRADEMARK- PRODUCT LINES

In March 1996, IRIS acquired the urinalysis business of UroHealth
Systems, Inc. for $850,000; $788,000 in cash and $62,000 in the assumption of
liabilities. UroHealth Systems generated revenues of approximately $550,000
from this business in 1995. The business consists primarily of manufacturing
and marketing two proprietary product lines: the Cen-Slide-Registered
Trademark- 1500 System for centrifugal urine sedimentation and manual
microscopic examination and the FloStar-Registered Trademark- urine specimen
collection and dispensing container. These

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products are used primarily by hospital and physician office laboratories in
manually performing routine urinalysis. Among other things, IRIS acquired seven
U.S. patents and eight corresponding foreign patents as well as the design for
the unique centrifuge used in the Cen-Slide-Registered Trademark- system. IRIS
intends to transfer production of these products to its StatSpin subsidiary and
market them under the IRIS/StatSpin label through StatSpin's existing
distribution channels.

LABORATORY REGULATIONS

Regulations issued under the Clinical Laboratory Improvement Amendments of
1988 (CLIA) became effective September 1, 1992. CLIA is intended to increase
the quality of laboratory services to Medicare and Medicaid patients. It brings
physician's offices, clinics and reference laboratories under many of the same
exacting compliance programs as required for hospital laboratories. CLIA
requires laboratory licensure and written operational and quality control
procedures for tests that are carried out in the laboratory. It establishes
personnel standards regarding qualification and training of individuals who
carry out the tests. It also mandates periodic inspection and proficiency
evaluation of the performance of these procedures and individuals. CLIA also
requires the more complex procedures such as clinical microscopy to be performed
by more skilled medical technologists who, today, are in short supply. The
portent of the more demanding CLIA requirements already has caused a shift of
testing away from the physician's office and has brought about the consolidation
of many smaller reference laboratories. IRIS believes that The Yellow IRIS-
Registered Trademark- urinalysis workstation adds operational and quality
improvement plus saves the time of the skilled medical technologists that are in
shortest supply. Therefore, IRIS anticipates the CLIA regulations are likely to
help rather than hinder its sales efforts in the longer term.

BIOHAZARD CONTAINMENT

Early in 1993, the Occupational Safety and Health Administration (OSHA)
mandated that all necessary precautions be taken to ensure the safety of
clinical laboratory personnel handling biohazardous materials including bodily
fluid specimens that may contain life-threatening, blood-borne infectious
pathogens such as Hepatitis B (HBV) and human immunodeficiency viruses (HIV).
Urinalysis as most frequently carried out exposes medical technologists,
technicians and laboratory assistants to potentially infectious urine several
times during its procedure, including through (i) possible aerolization during
high-speed centrifugation, (ii) accidental spillage and splashing in the course
of a number of its manipulative steps, and (iii) cuts which may occur from sharp
edges in the handling of microscope slides, cover slips and chipped or broken
glass and plastic ware. IRIS believes The Yellow IRIS-Registered Trademark-
offers the least manipulative and most contained method for performing
urinalysis today.

COST CONTAINMENT

IRIS must convince potential customers that the advantages of its
instruments justify their capital cost. This task requires considerable effort
and has become even more arduous during recent years due to the introduction of
significant cost containment efforts by the federal government and other
third-party payors. Both public and private payors are increasing pressures to
limit increases in healthcare costs.

Regulations for Medicare disbursements to healthcare providers have had a
profound effect on acquisitions of capital equipment by hospital laboratories.
In an attempt to encourage efficiency, these regulations limit Medicare
disbursements paid to hospitals to a fixed amount for treatment of a particular
malady, regardless of the actual cost of treatment. More recently, enrollment
in health maintenance organizations (HMOs) has been growing rapidly.
Individuals who enroll in an HMO receive a comprehensive benefit package, but
services are available only from a prescribed provider network, including
hospitals, with whom the HMO usually has aggressively negotiated fixed-fees
similar to but often less than those paid by Medicare. Sometimes the fees are
even based on a per capita participation.

IRIS believes that these efforts at cost containment have caused some
hospitals to reduce the number and sometimes the quality of urinalyses being
conducted, thus diminishing the relative cost effectiveness of The Yellow IRIS-
Registered Trademark-. Overall, hospitals have become significantly more
cost-conscious and, in some instances, seem less concerned with the medical
benefits associated with the use of The Yellow IRIS-Registered Trademark-.
Perhaps most importantly, hospitals have imposed more intense reviews of capital
acquisitions, particularly for new systems like The Yellow IRIS-Registered
Trademark-, which address areas that traditionally have not required significant
capital investments.

IRIS is continually responding to these pressures with enhancements to The
Yellow IRIS-Registered Trademark- designed to improve its cost-effectiveness.
IRIS believes that, taking into account all the relevant factors, The Yellow
IRIS-Registered Trademark- is an effective means of controlling laboratory costs
while maintaining quality and safety. Furthermore, laboratories are having to
contend with a widespread shortage of medical technologists and with the
aforementioned new OSHA

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and CLIA regulations. Since IRIS products are designed to reduce the amount of
labor required to perform laboratory tests and the specimen biohazard exposure,
as well as standardize and improve the analytical quality of the urinalysis
procedure, IRIS believes these factors could enhance its competitive position in
the market.

Nonetheless, healthcare is an area of extensive and dynamic change, and
IRIS cannot predict future changes in the healthcare field or their impact on
its business. 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, either nationally or at the
state level. The costs of certain proposals would be funded in part by
reductions in payments by governmental programs, including Medicare and Medicaid
to healthcare providers. At the present time, IRIS believes that the
effectiveness of The Yellow IRIS-Registered Trademark- should be even more
beneficial to hospitals if their revenues are further controlled. However, if
IRIS is unable to convince potential customers of this fact, these changes could
have a material adverse effect on the Company's business, results of operations
and financial condition.

MANUFACTURING AND MARKETING

The Yellow IRIS-Registered Trademark- is assembled and tested at the IRIS
facility in Chatsworth, California, and marketed and serviced through its own
sales and service forces throughout the United States. The basic list price of
The Yellow IRIS-Registered Trademark- is $135,000 including installation,
training and a one-year warranty. Certain extra-price options are also
available. In early 1991, IRIS introduced a lower-priced version of The Yellow
IRIS-Registered Trademark- which currently lists for $88,000. This version of
The Yellow IRIS-Registered Trademark- is better suited for smaller community
hospitals and other areas of less-intensive use such as emergency room and
outpatient laboratories. IRIS also has a leasing program under which it has
several instruments under lease as of December 31, 1995. Under the terms of the
leases, payments may be based on the number of tests performed using The Yellow
IRIS-Registered Trademark- or other factors, and IRIS is responsible for
servicing the instruments. In addition, some hospitals lease The Yellow IRIS-
Registered Trademark- through medical equipment companies which, in turn,
purchase The Yellow IRIS-Registered Trademark- from IRIS. IRIS sells and rents
its workstations through its own direct sales force.

IRIS manufactures and/or markets most of the disposable reagents and other
materials (commonly referred to as consumables) used in the operation and
maintenance of The Yellow IRIS-Registered Trademark-, including the recently
introduced CHEMSTRIP/IRIStrip-TM- urine test strips which are manufactured by
BMC and distributed exclusively by IRIS. See "Strategic Alliance with
Boehringer Mannheim -- Distribution of CHEMSTRIP/IRIStrip-TM- Test Strips and
Custom Reader." IRIS also provides a one-year warranty for its instruments, and
believes that the reliability of the equipment is within industry standards.
Thereafter, service is generally provided under an annual service contract or
less frequently on a per-call basis, both of which generate additional revenues
for IRIS. All warranty and service is provided nationwide by its own field
service organization.

In 1995, IRIS began implementing a new strategy to expand its urinalysis
business by adding a line of proprietary cost-effective, outcome enhancing
urinalysis products suitable for laboratories of all sizes. As
part of this strategy, IRIS acquired (i) the digital refractometer product
line of Biovation, Inc. in March 1995, (ii) the complete business of StatSpin
Technologies in February 1996 and (iii) the urinalysis business of UroHealth
Systems, Inc. in March 1996. See "Recent Acquisitions." The Biovation
digital refractometers are currently being assembled and tested at the IRIS
facility in Chatsworth, California, and the consumables are being
manufactured by the independent suppliers previously used by Biovation. IRIS
markets the refractometer and related consumables under the Biovation
tradename through previously existing distribution channels. IRIS plans to
continue the StatSpin business using primarily its existing management,
facilities and distributors. Finally, IRIS intends to transfer production of
the UroHealth and Biovation product lines to StatSpin and market these
products under the IRIS/StatSpin label through StatSpin's existing
distribution channels.

IRIS depends on outside suppliers for most of its parts and raw materials
and has not experienced any significant problems to date with respect to
procurement of supplies. In an effort to minimize the potential for disruption
of its sources, IRIS attempts to maintain an adequate inventory of parts and raw
materials not readily available from alternative sources. Occassionally,
suppliers modify or discontinue the production of certain key parts and IRIS is
forced to implement design changes to incorporate a new part from the same or a
different vendor. While IRIS has successfully implemented such design changes
in the past without significant adverse effects (and, in some cases, with
significant cost advantages), there can be no assurance that future
modifications or discontinuances will not have an adverse effect on the cost of
goods for IRIS products.

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FUTURE DEVELOPMENTS

THE YELLOW IRIS-REGISTERED TRADEMARK- AND URINALYSIS

IRIS continues to work to increase the cost-effectiveness, speed and
reliability of The Yellow IRIS-Registered Trademark-. IRIS has developed
procedures and software for adapting the AIM technology used in The Yellow
IRIS-Registered Trademark- to other uses such as examining cerebrospinal,
peritoneal, pleural, seminal and other body fluids and determining the
necessity of preparing a urine culture when bacterial infection of the
urinary tract is suspected. Regulatory clearance was obtained in 1992 for
blood cell counting in peritoneal and pleural fluids and peritoneal lavage
and dialyzate, and IRIS began marketing testing of these body fluids as an
optional feature on The Yellow IRIS-Registered Trademark-. IRIS obtained
clearance for cerebrospinal and seminal fluids in 1994 and synovial and
pericardial fluids in 1996. Although none of these tests are done with the
frequency of urinalyses, they take longer when performed manually, and thus
the addition of this capability spreads the capital cost of the instrument
over a larger test base, enhancing the utility and financial justification of
The Yellow IRIS-Registered Trademark-. See "Commercial Regulation." IRIS is
also pursuing further demonstration of its urine culture screening in several
other laboratories in order to satisfy a request from the FDA before this
additional capability is cleared for commerce. IRIS also continues to develop
software and other analytical refinements to increase the speed of The Yellow
IRIS-Registered Trademark- and hardware refinements to further improve its
reliability.

IRIS has made numerous improvements in The Yellow IRIS-Registered
Trademark- over the years, including the IRISensor-TM- camera, IRISpeed
Plus-TM-high-performance software, IRIScope-TM- body fluid cell counting
capabilities, the multi-band image processor, and in July of 1995 introduced
new enhanced versions of both of its models of urinalysis workstations. Many
potential additional improvements are available from IRIS work on The White
IRIS-Registered Trademark- and other projects have been adapted in the
reference laboratory system. IRIS believes sustained incorporation of
on-going improvements into The Yellow IRIS-Registered Trademark- will require
a substantial amount of research and development time and financial
resources. While IRIS believes that it has the technical ability and
financial resources for such an undertaking, IRIS has used alternative
sources of funding, such as the joint development program for
commercialization of The White IRIS-Registered Trademark- with LDA, a
collaborative arrangement with Boehringer Mannheim and a joint development
program with Poly U/A Systems Inc. ("PSI"), described in more detail below.

During the first quarter of 1995, IRIS and BMG announced a joint project to
develop an advanced automated urinalysis system for reference laboratories based
on the proprietary technologies of both companies. The new reference laboratory
system, called the 900UDx urine pathology system, designed to the meet the high
volume and other special requirements of reference laboratories, was unveiled at
the Clinical Laboratory Management Association meeting in Minneapolis in August
and is currently awaiting FDA clearance for commercial introduction. See
"Strategic Alliance with Boehringer Mannheim -- Joint Development of Reference
Laboratory System."

In September 1995, IRIS and PSI entered into a joint project to develop
several new products based on IRIS technology (the PSI Products) to further
enhance automation in the urinalysis field. These products are expected to have
dual potential as both stand-alone products and enhancements to the IRIS
flagship products, The Yellow IRIS-Registered Trademark- series of urinalysis
workstations. Under the terms of this project, PSI 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 the newly developed technology for any other purpose
and to incorporate the new products into The Yellow IRIS-Registered Trademark-.
PSI has retained IRIS to conduct research, development, clinical evaluation and
pre-market testing of the proposed new products. IRIS is funding the first
$15,000 per month, up to a maximum of $500,000, of the cost of the project, and
PSI is reimbursing IRIS for the excess.

PSI, a privately-held company based in Los Angeles, California, was
organized by IRIS in June 1995 to undertake the commercial development of the
PSI Products. In order to fund its share of the project, PSI raised net
proceeds of approximately $2.0 million through the sale of 128 units at a price
of $20,000 per unit. Each unit consisted of 2,000 shares of PSI's Callable
Common Stock and a warrant to purchase 4,000 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. IRIS also issued warrants to the placement agent and
the finder to purchase an aggregate of 150,000 shares of IRIS Common Stock at
$7.80 per share for a period of five years.

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IRIS has an option until 121 days after termination of the project with
PSI (which terminates not later than July 31, 1998) to acquire all of the
Common Stock of PSI at prices rising over time from $14.00 to $20.00 per
share of PSI Common Stock or an aggregate of $3.6 million to $5.1 million for
all the outstanding shares of PSI Common Stock. IRIS may pay the option
exercise price in cash or with shares of IRIS Common Stock valued at the
20-day average closing price just prior to exercise. If, at the time of
exercise, PSI has completed product development and obtained FDA clearance to
market any new products, IRIS would likely capitalize that portion of the
purchase price attributable to completed products and amortize it over the
estimated useful life of the completed technology. IRIS would likely
allocate a substantial portion of the balance of the purchase price (plus any
PSI liabilities outstanding at the time of acquisition) to any products which
have not been completed and approved for marketing by the FDA and would
record a nonrecurring, noncash (if purchased with IRIS stock) charge against
earnings in that amount for the acquisition of in-process research and
development (i.e. work-in-process not yet cleared by the FDA).

THE WHITE IRIS-REGISTERED TRADEMARK- AND HEMATOLOGY

In 1990, upon receiving a Small Business Innovative Research (SBIR) grant,
IRIS shifted its new product efforts to development of The White IRIS-Registered
Trademark- leukocyte differential analyzer. See "Research and Development
Expenditures" below in this section. Automated hematology analyzers currently
on the market can identify five types of white blood cells (leukocytes), known
as a five-part differential analysis, but 30% to 50% of the specimens must then
be examined further microscopically for proper diagnosis. Microscopic
examination is labor intensive and hazardous because it requires removing the
stopper on the blood collection tube, transferring a drop of blood to a
microscope slide, carefully smearing the blood across the slide, drying the
smear, fixing the cells in methanol, applying a stain to the fixed cells,
washing and drying the stained slide, mounting it onto the microscope stage and
finding, observing, classifying and counting 100 or more white blood cells. The
White IRIS-Registered Trademark- leukocyte differential analyzer would be
positioned to replace this lengthy manual procedure, thereby attempting to
complement rather than compete with existing hematology analyzers.

In April, 1992, LDA Systems, Inc. ("LDA") was organized to complete
commercial development of The White IRIS-Registered Trademark-. LDA
successfully closed a public offering of Units in October, 1992. Each Unit
consisted of one share of callable LDA Common Stock and ten IRIS Warrants, each
warrant entitling the holder to purchase one share of IRIS Common Stock for
$0.75. On July 12, 1993, the IRIS warrants were automatically adjusted to
reflect the effect of a 1-for-5 reverse split of the IRIS common stock. As a
result, each five warrants entitled these holders to purchase one share of IRIS
common stock for $3.75. After reimbursing IRIS for the costs of the offering,
the net proceeds to LDA amounted to $774,000.

As a result of the success of the offering, LDA and IRIS entered into a
joint development program in October, 1992 to complete commercial development of
The White IRIS-Registered Trademark-. The program consisted of a Technology
License Agreement and a Research and Development Agreement. Under the
Technology License Agreement, IRIS granted LDA an exclusive, worldwide royalty-
free license to use IRIS technology to develop, manufacture and market The White
IRIS-Registered Trademark-. Under the Research and Development Agreement, LDA
retained IRIS to conduct research, development, clinical evaluation and pre-
market testing of The White IRIS-Registered Trademark-. LDA funded the costs of
performing such work up to an aggregate amount equal to the net proceeds of the
offering less certain expenses, and IRIS funded over a three-year period up to
$500,000 of such costs.

By the end of 1993, LDA had exhausted all of its initial funds. IRIS
temporarily increased its research and development funding while LDA sought
additional funding. LDA secured $1.2 million of additional funding from
Corange in April 1994 and subsequently repaid IRIS $206,000 for the interim
funding in excess of its contractual commitment. As part of the Corange
investment, LDA and Corange agreed to pursue discussions concerning a
possible joint venture to develop a hematology workstation. See "Strategic
Alliance with Boehringer Mannheim -- Corange Funding for The White
IRIS-Registered Trademark- Project."

In June 1995, IRIS completed the acquisition of LDA for approximately
498,000 shares of IRIS Common Stock. As a result of the acquisition, IRIS
incurred a non-recurring, non-cash charge of $2.9 million against earnings in
the second quarter for the acquisition of in-process research and development
(i.e., work in process not yet cleared for interstate commerce by the FDA).
LDA was merged into IRIS in December 1995.

The White IRIS-Registered Trademark- uses a patented stain, 2-
methylpolymethine (2-MPM), which was developed by Cytocolor, Inc. and licensed
exclusively to IRIS. White blood cells express unique colors when stained with
2-MPM. These color differences can be discerned automatically by machine
algorithm. Under the terms of the license, IRIS will

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pay Cytocolor royalties of $1,000 each on the sale of the first 1,000 units of
The White IRIS-Registered Trademark- plus 8% of the net selling price of
consumable products containing 2-MPM, subject to a minimum annual royalty of
$20,000.

To date, IRIS has manufactured six prototype instruments which successfully
incorporate most of the technology considered essential for the commercial
market. Of these, the three most recent instruments were manufactured in
compliance with FDA standards for "good manufacturing practices." Nonetheless,
some additional refinements may be required before The White IRIS-Registered
Trademark- will be ready for the commercial market.

These prototypes can perform a 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. Images of any cells not recognized by the analyzer also can be
saved for subsequent technologist review, thus generally eliminating the need
for most manual specimen preparation. The White IRIS-Registered Trademark- uses
multicolored image analysis, a powerful new and proprietary extension of AIM
technology for which IRIS has obtained its first two patents. IRIS has
identified other potential patent applications in the area of specimen
preparation as well as image analysis. IRIS also owns an exclusive worldwide
license to several patents which cover the unique stain used by The White IRIS-
Registered Trademark-, as well as the multicolor expression of the stain in
white blood cells, subject to certain minimum royalty obligations.

IRIS submitted a 510(K) application for FDA clearance to market The White
IRIS-Registered Trademark- in July of 1995. See "Commercial Regulation."
Assuming such clearance is granted, IRIS expects to bring The White IRIS-
Registered Trademark- to market after having completed its commercial
development. However, there can be no assurance that the project will have
produced a commercially feasible or successful product.

THE PURPLE IRIS-REGISTERED TRADEMARK- AND CYTOLOGY

The Purple IRIS-Registered Trademark- is intended to be a semi-automated
slide-based video microscope designed to perform as a cytopathology
workstation in the objective measure of certain qualities found in biopsy
specimens. Examination of biopsy specimens is the single most
labor-intensive professional activity in surgical pathology today. A biopsy
basically consists of the manual microscopic observation of cells and
histological tissue and the subjective assessment, based on intra and
intercellular appearance, of cancer and its severity. IRIS has completed ten
pilot systems, some of which were evaluated in a number of medical
laboratories. Although those trials demonstrated the clinical utility of The
Purple IRIS-Registered Trademark-, IRIS also believes that operation of The
Purple IRIS-Registered Trademark- must be refined and made capable of
performing additional laboratory procedures before it can become commercially
viable. As a consequence, commercial delivery of instruments cannot be
expected until after further development is completed. IRIS does not
currently plan to conduct any further significant development of The Purple
IRIS-Registered Trademark- unless additional outside funding is secured, an
effort which has been subordinated for the time being to that for The White
IRIS-Registered Trademark-.

POSSIBLE FUTURE PRODUCTS

IRIS believes the technology it has developed may have a number of other
potential applications in the clinical laboratory. These include an
immunochemistry workstation and an automated PAP smear reader. However, no
assurance can be given that any such new products will be developed. Moreover,
the regulatory, technical and financial obstacles to the introduction of any
such products are expected to be significant and could prove insurmountable for
a company the size of IRIS.

RESEARCH AND DEVELOPMENT EXPENDITURES

IRIS spent $1,905,000, $1,580,000 and $1,005,000 for research and
development during 1995, 1994 and 1993, respectively. The 1995, 1994 and 1993
figures include $1,495,000, $1,258,000, and $638,000 of costs incurred under
research and development contracts, principally in conjunction with LDA, PSI and
the joint project with BMG.

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COMMERCIAL REGULATION

The Yellow IRIS-Registered Trademark-, The White IRIS-Registered
Trademark-, and The Purple IRIS-Registered Trademark-, as well as any other
instruments which IRIS may in the future sell to clinical laboratories, are
subject to the provisions of the Federal Food, Drug and Cosmetic Act (FDCA).
However, the requirements imposed on a manufacturer of medical devices, while
exacting, are considerably less burdensome than those imposed on drug
manufacturers. IRIS must advise the Food and Drug Administration (FDA)
through the submission of a 510(k) application that any diagnostic device it
intends to sell to clinical laboratories will provide "substantially
equivalent performance" to a device marketed prior to May 28, 1976, or since
introduced into commerce in compliance with the FDCA. The FDA then must
determine whether or not the information submitted by IRIS justifies
clearance of the product for marketing. The Yellow IRIS-Registered
Trademark- was cleared for marketing as a urinalysis workstation in 1983.
The Purple IRIS-Registered Trademark- was cleared for marketing for general
microscopy in 1988. To date, IRIS has obtained FDA clearance to market The
Yellow IRIS-Registered Trademark- for blood cell counting in eight body
fluids: peritoneal and pleural fluids and peritoneal lavage and dialyzate in
1992, cerebrospinal and seminal fluids in 1994 and synovial and pericardial
fluids in March of 1996. IRIS has also submitted an application for
clearance to market the urine culture screening adaptation of The Yellow
IRIS-Registered Trademark- and is currently collecting additional test data
requested by the FDA for this application. An improved version of The Yellow
IRIS-Registered Trademark- containing a new urine test strip reader for use
with CHEMSTRIP/IRIStrips-TM- was cleared in 1994. In April 1995, the FDA
cleared for marketing by IRIS a new set of urine chemistry controls for use
with a variety of BMC's CHEMSTRIP urine test strips. IRIS submitted
applications for clearance to market The White IRIS-Registered Trademark- in
July of 1995 and the 900UDx urine pathology system in January of 1996.

IRIS has also registered with the FDA as a manufacturer. IRIS must
maintain "Good Manufacturing Practices" involving documentation and
recordkeeping to insure reproductibility and traceability of components and
products as well as "Pre-Production Design Validation" involving product
development procedures ensuring device safety and performance. Noncompliance
with applicable requirements can result in fines, recall or seizure of products,
total or partial suspension of production, refusal of the government to approve
product license applications or to allow the Company to enter into supply
contracts and criminal prosecution. The FDA also has the authority to revoke
product licenses and establishment licenses previously granted. Failure to
comply with present or future regulatory requirements, or new information
reflecting on the safety or effectiveness of an approved product, can lead the
FDA to withdraw its approval to market the product.

Various states have also enacted statutory provisions regulating medical
devices. The impact of such regulations have been minimal on the business of
IRIS. IRIS has been inspected annually by the State of California, and the
results of these inspections have generally been favorable. It has been
inspected twice by the FDA, most recently in March of 1996. During this last
inspection, the company was cited for four minor deficiencies for which remedial
steps are already underway. Although it is IRIS policy to strive for full
compliance and to be prudent in regulatory matters, IRIS cannot predict what
impact, if any, further regulation by the states or the federal government may
have on its business in the future.

PATENTS AND COPYRIGHTS

IRIS is pursuing broad protection of its proprietary technology through
the filing of various patent applications. IRIS has received U.S. patents
relating to (1) its slideless microscope, expiring in 2000; (2) electronic
composition of images, expiring in 2000; (3) the use of image analysis in
measuring the extent of immunochemical reactions carried out on solid
particles, expiring in 2001; (4) optical image modification, expiring in
2002; (5) a logic scheme and artificial intelligence used to perform
microscopic urinalyses and other diagnosis tests, expiring in 2003; (6) a
method for data compression, expiring in 2002; (7) a method for determining
the origin of blood cells and bacteria in urine, expiring in 2003; (8) a
variation of the logic scheme and artificial intelligence patent, expiring in
2003; (9) analyzing particles in dilute fluids, a variation of the electronic
composition of images patent, expiring in 2000; (10) rapid automatic focusing
of microscopic images, expiring in 2009; (11) simultaneous color image
processing, expiring in 2009; (12) novel color descriptors for
differentiating cells, expiring in 2009; (13) differentiating materials based
upon a dynamically changing threshold, expiring in 2010; (14) a method of
extracting quantile measures from cell images, expiring in 2012; (15)
accelerated gravitational separation of whole blood, expiring in 2013; (16) a
broadened version of simultaneous color image processing, expiring in 2012;
(17) a composition of matter of separated phases from whole blood settling by
our accelerated process, expiring in 2013; and (18) a method of
differentiating cells based upon color ratios, expiring in 2009. Five other
U.S. applications and a number of foreign applications corresponding to U.S.
patents and applications have been filed dealing with various areas of IRIS
technology. Numerous additional disclosures of potentially patentable
inventions have been made, some of which may result in additional patent
applications. IRIS has received patents from Great Britain, Australia,
Canada, Germany, France and Japan corresponding to some of its U.S. patents.
In connection with its recent acquisitions,

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IRIS acquired (i) from Biovation the U.S. patent for the method and apparatus
for automatic flow-through digital refractometer, (ii) from StatSpin
Technologies seven U.S. Patents relating to centrifuges and (iii) from UroHealth
Systems eight U.S. Patents for the CenSlide-Registered Trademark-, FloStar-
Registered Trademark- and related urinalysis devices. See "Business -- Recent
Acquisitions." IRIS claims copyright in its software and other features.
Except for the aforementioned limited application license of its earlier
technology granted to TOA and the license granted to Poly U/A Systems in
connection with its development program, IRIS retains exclusive rights to all
its patents and copyrights. See "Markets and Competition" and "Future
Developments -- The White IRIS-Registered Trademark-."

IRIS has an exclusive license from Cytocolor, Inc. for the patented 2-MPM
stain used in The White IRIS-Registered Trademark-. Cytocolor has pursued
patent protection of the 2-MPM stain through the filing of various patent
applications in the U.S. and abroad. Cytocolor has received U.S. patents
relating to (1) differential staining of immature leukocytes, (2) unique
staining properties in both transmitted light and fluorescence microscopy, (3)
staining of major leukocyte subtypes in blood and bone marrow specimens and (4)
differential staining of lymphocyte subpopulations. These patents expire during
the years 2000 to 2003. Corresponding patents have been granted and/or issued
in the United Kingdom, France, Italy, Canada, Germany and Japan.

While IRIS believes it has significant protection based on the above
patents and claims previously made and pending in its other applications
(assuming those claims are also allowed), there can be no assurance that any
additional applications will be approved or that any patents issued will prove
to be of commercial benefit. Although a patent has a statutory presumption of
validity in the United States, both the validity and enforceability of a patent
can be attacked after its issuance. Accordingly, any patents received by IRIS
or Cytocolor may not afford any protection against competitors with similar
products. In addition, the costs of any litigation to enforce patents which may
be obtained by IRIS, or to defend against infringement claims, could be
substantial. IRIS considers the above patents and copyrights to be important to
its business.

Although IRIS knows of no patents which would be infringed by instruments
IRIS may sell, it can give no assurances that such patents have not or will not
be issued. On the other hand, in 1994, IRIS notified Intelligent Medical
Imaging, Inc. (IMI), a new company demonstrating a new slide-based imaging
system at various trade shows, that it believed IMI's system as displayed
infringed at least two of the above mentioned patents. Discussions with IMI
were unsatisfactory, and the companies are now litigating the issues. See
"Legal Proceedings."

IRIS also owns various trademarks for its products, including "IRIS-
Registered Trademark-", "The Yellow IRIS-Registered Trademark-", "The White
IRIS-Registered Trademark-" and "The Purple IRIS-Registered Trademark-" which
have been federally registered. In 1992, IRIS discovered that another company
was using "IRIS" as a trademark for ophthalmic lasers and as part of its trade
name, IRIS Medical Instruments, Inc. IRIS opposed an application by this
company to register the IRIS mark and brought suit for trademark and trade name
infringement. The matter was settled through informal negotiations with IRIS
Medical Instruments agreeing to curtail the use of IRIS in its corporate
identification and limit the use of IRIS as a trademark to only ophthalmic
devices. IRIS more recently opposed an application by Hitachi to use the look-
alike and sound-alike mark "AIRIS" on some of its large body scanners. Through
its recent acquisitions, IRIS acquired rights to the following additional
federally registered trademarks: (i) from Biovation a license to use the
Biovation-Registered Trademark- trademark for sales of clinical laboratory
devices and consumable products, (ii) from StatSpin ownership of the StatSpin-
Registered Trademark-, Safecrit-Registered Trademark-, Lipoclear-Registered
Trademark-, Flagtag-Registered Trademark-, Miniplasma-Registered Trademark-,
MicroMDLC-Registered Trademark-, Microplasma-Registered Trademark-, and
Plasmarotor-Registered Trademark- trademarks, and (iii) from UroHealth Systems
ownership of the CenSlide-Registered Trademark- and FloStar-Registered
Trademark- trademarks. See "Business -- Recent Acquisitions."

EMPLOYEES

At December 31, 1995, IRIS had 83 full-time employees, as compared to 65 at
the end of 1994, including 14 in research and development, 21 in marketing and
sales, 25 in field service, 18 in product reliability and manufacturing and 5 in
corporate management and general administration. IRIS also uses outside
consultants and part-time and temporary employees in production, administration,
marketing and engineering. No employees are covered by collective bargaining
agreements, and IRIS believes that its employee relations are satisfactory. The
success of IRIS operations depends in large part on its ability to attract and
retain experienced personnel. Such experienced personnel are in great demand,
and IRIS 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.

(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES.

IRIS had export sales of $183,000, $199,000, and $0 in 1995, 1994
and 1993, respectively.

12
<PAGE>

TOA was an exclusive distributor of The Yellow IRIS-Registered Trademark-
for the Japanese market, but did not purchase any units from IRIS since 1988.
The exclusivity of TOA's distributorship terminated in 1991 for failure to
submit a plan to remedy its lack of performance, and TOA officially resigned its
distributorship in December 1995.

Late in 1991, IRIS established two new distributorships, one in Italy and
another in Taiwan, as first steps in its intended renewal of international
efforts. The Taiwanese distributorship has been actively demonstrating The
Yellow IRIS-Registered Trademark- to potential customers in its market, but has
placed only ONE unit to date. The Italian distributorship has not been actively
demonstrating The Yellow IRIS-Registered Trademark- to potential customers, and
IRIS is currently in discussions regarding the future of this distributorship.

If IRIS and BMG are successful in the development of the new reference
laboratory system, IRIS will have the exclusive right to distribute the system
in the United States and Canada and BMG will have the exclusive right to
distribute the system in the rest of the world except Italy and Taiwan. Pending
FDA clearance, IRIS intends to review its existing distributorships in Italy and
Taiwan, with a view towards gaining BMG distribution of the new reference
laboratory system in these countries.

ITEM 2. PROPERTIES.

IRIS is located at 9162 Eton Avenue, Chatsworth, California, in
approximately 26,000 square feet of leased office, laboratory and
manufacturing space. The total monthly rent for this space is approximately
$13,600, subject to annual adjustments tied to the Consumer Price Index.
Through its StatSpin subsidiary (acquired in March 1996) located at 85 Morse
Street, Norwood, Massachusetts, IRIS leases an additional 10,851 square feet
of office, laboratory and manufacturing space. The monthly rent for this
space is approximately $7,100. While IRIS does not have any material amount
of unused space in its facilities, it has sufficient capacity now and expects
its capacity to be sufficient to meet any reasonable production increases in
the near term.

ITEM 3. LEGAL PROCEEDINGS.

In 1994, IRIS became aware that a company called Intelligent Medical
Imaging, Inc. (IMI), was demonstrating a new slide-based microscopic imaging
system at various trade shows. After further examination of the IMI system,
IRIS notified IMI that its system infringed at least two IRIS patents. The
parties then entered into negotiations regarding the licensing of these and
possibly other IRIS patents to IMI. The parties were unable to reach an
agreement and, on October 19, 1995, IMI filed a complaint in the United States
District Court for the Southern District of Florida. In its complaint, IMI
seeks, among other things, declaratory judgments that (I) IMI's system does not
infringe either of the two IRIS patents in question, (ii) both of such IRIS
patents are invalid and (iii) both of such IRIS patents are unenforceable
against IMI due to misuse of the patents by IRIS. IMI has also alleged in its
complaint that IRIS is in violation of certain U.S. antitrust laws. IRIS is
vigoroulsy defending both patents and pursuing infringement claims against IMI.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.

The IRIS Common Stock is traded on the American Stock Exchange under the
symbol "IRI." The closing price of the IRIS Common Stock on March 25, 1996 was
$6.75 per share. The following table sets forth the high and low closing prices
reported by the American Stock Exchange for the period January 1, 1994 through
December 31, 1995:

13
<PAGE>

1994 1995
-------------- --------------
HIGH LOW HIGH LOW
---- --- ---- ---
FIRST QUARTER 6-1/8 3-7/8 8-7/8 5-3/8

SECOND QUARTER 5-1/2 4-1/16 8-3/8 6-1/8

THIRD QUARTER 5-7/8 4-3/16 7-1/2 6-1/4

FOURTH QUARTER 7-1/8 4-5/8 7-7/8 6-1/2

As of March 25, 1996, IRIS had approximately 4,752 holders of record of its
Common Stock.

IRIS intends to employ all available funds in the development of its
business. Consequently, it has not and does not intend to pay any cash
dividends in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA.

This information is derived from, and should be read in conjunction
with, Management's Discussion and Analysis of Financial Condition and Results
of Operations and the Company's Financial Statements, including the Notes
thereto.

For the year ended December 31,
----------------------------------------------------------------------
1991 1992 1993 1994 1995
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>

Net revenues. . . . . . . . . . . . . . . . . $5,649,052 $7,806,818 $9,481,454 $10,661,943 $12,764,722
Interest and other income . . . . . . . . . 190,140 201,010 143,790 273,352 405,485
Net income . . . . . . . . . . . . . . . . 172,171 772,377 1,280,562 1,472,886 2,091,431
Net income per share. . . . . . . . . . . . $.04 $.16 $.26 $.28 $.35
Working capital . . . . . . . . . . . . . . 4,311,844 4,675,451 6,351,787 7,196,318 10,799,689
Total assets. . . . . . . . . . . . . . . . 6,356,572 7,861,842 9,545,215 12,128,384 21,207,839
Total liabilities . . . . . . . . . . . . . 1,421,364 1,822,449 2,091,175 2,429,356 2,674,669
Shareholders' equity. . . . . . . . . . . . 4,935,208 6,039,393 7,454,040 9,699,028 18,533,170
Net tangible book value per share . . . . . . $1.05 $1.20 $1.43 $1.76 $1.78
Cash dividends per share . . . . . . . . . . $.00 $.00 $.00 $.00 $.00

</TABLE>

14
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

OVERVIEW

During March 1995, IRIS acquired the digital refractometer product line
from 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. The
product line consists of manufacturing and marketing a patented device known
as a digital refractometer and the related consumables used in its operation
and maintenance. Revenues from this product line averaged approximately
$495,000 over Biovation's last three fiscal years.

During February 1996, IRIS acquired Norwood, Massachusetts based Norfolk
Scientific, Inc. for approximately 340,000 shares of IRIS common stock and
the assumption of options and warrants to purchase an additional 126,000
shares of IRIS common stock. Norfolk Scientific, which conducts business
under the trade name "StatSpin Technologies", manufactures special purpose
centrifuges and other small laboratory instruments and plastic consummable
items used in their operation. StatSpin had net sales of $3.1 million for the
twelve months ended December 31, 1995. The total consideration paid by IRIS
(including the immediately realizable value of the assumed options and
warrants) is estimated at $3,000,000 based on a negotiated price of $7.58 per
share of IRIS common stock in the transaction. The acquisition was
accomplished through the merger of a newly-formed subsidiary of IRIS into
StatSpin, with StatSpin being the surviving corporation and becoming a
wholly-owned subsidiary of IRIS. The acquisition was accounted for using the
pooling-of-interests method. In response to the exercise of demand
registration rights granted in connection with the acquisition, IRIS filed a
registration statement with the Securities and Exchange Commission on March
27, 1996 to register approximately 466,000 shares of IRIS Common Stock which
may be offered for sale from time to time by the former securityholders of
StatSpin.

During March 1996, IRIS acquired the urinalysis business of UroHealth
Systems, Inc. for $850,000 of which $788,000 was cash and $62,000 the
assumption of liabilities. UroHealth Systems generated revenues of
approximately $550,000 from this business in 1995. The business consists
primarily of manufacturing and marketing two proprietary product lines: the
Cen-Slide-Registered Trademark-1500 System for centrifugal urine
sedimentation and manual microscopic examination and the FloStar-Registered
Trademark- urine specimen collection and dispensing container.

There were also several significant developments in 1995 related to
IRIS' core business of marketing major laboratory instruments and related
consumables. IRIS completed the acquisition of LDA Systems, Inc. (LDA) in
June 1995 for approximately 498,000 shares of IRIS Common Stock and thereby
reacquired all rights to The White IRIS-Registered Trademark- leukocyte
differential analyzer. The White IRIS-Registered Trademark- is a major new
product which IRIS was developing in a joint program with LDA similar to the
current program with PSI (described below). IRIS is currently awaiting FDA
clearance to market The White IRIS-Registered Trademark-. However, there can
be no assurance that IRIS can secure FDA clearance or that The White
IRIS-Registered Trademark- will be a commercially feasible or successful
product. As a result of the LDA acquisition, IRIS incurred a non-recurring,
non-cash charge of $2.9 million against earnings in the second quarter for
the acquisition of in-process research and development (i.e., work in process
not yet cleared for interstate commerce by the FDA). See "Business -- Future
Developments -- The White IRIS-Registered Trademark- and Hematology".

Late in the third quarter of 1995, IRIS began marketing two new models (the
Model 300 and Model 500) of its flagship product line, The Yellow IRIS-
Registered Trademark- series of urinalysis workstations. A new and faster
workstation, the Model 500 introduces a series of technology upgrades that make
it the most accurate, fastest and easiest-to-use urine profiling system ever
built, replacing the long-established Model 450 version of The Yellow IRIS-
Registered Trademark-.

A new and faster low-cost Model 300 workstation also replaces the earlier
Model 250 version of The Yellow IRIS-Registered Trademark-. The Model 250 was
introduced in 1991 as a lower priced alternative to The Yellow IRIS-Registered
Trademark- Model 450. The Model 300 is the lower-priced version of the Model
500. The lower-priced version of The Yellow IRIS-Registered Trademark-
accounted for approximately 33% and 36% of all new systems placed during 1995
and 1994, respectively. The

15
<PAGE>

lower-priced version is expected to remain a significant percentage of total
system sales because of its appeal to more numerous community hospitals.
However, the introduction of the new models may change the ratio of sales of
both units as the marketplace determines their relative appeal. While the gross
margin on the lower-priced version is smaller, IRIS believes it contributes
incrementally to the aggregate gross margin earned as it appeals to a market
segment that ordinarily would not buy the more expensive model. Because its
incremental margin exceeds the incremental operational expenses connected with
its sale, it contributes positively to the profitability of IRIS.

In September 1995, IRIS and Poly U/A Systems, Inc. (PSI) entered into a
joint project to develop several new products based on IRIS technology (the PSI
Products) to further enhance automation in the urinalysis field. These products
are expected to have dual potential as both stand-alone products and
enhancements to the IRIS flagship products, The Yellow IRIS-Registered
Trademark- series of urinalysis workstations. Under the terms of this project,
PSI 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 the newly developed
technology for any other purpose and to incorporate the new products into The
Yellow IRIS-Registered Trademark-. PSI has retained IRIS to conduct 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 PSI will reimburse IRIS for the
excess.

IRIS has an option until 121 days after termination of the project with PSI
(which terminates not later than July 31, 1998) to acquire all of the Common
Stock of PSI at prices rising over time from $14.00 to $20.00 per share of PSI
Common Stock or an aggregate of $3.6 million to $5.1 million for all the
outstanding shares of PSI Common Stock. IRIS may pay the option exercise price
in cash or with shares of IRIS Common Stock valued at the 20-day average closing
price just prior to exercise. If, at the time of exercise, PSI has completed
product development and obtained FDA clearance to market any new products, IRIS
would likely capitalize that portion of the purchase price attributable to
completed products and amortize it over the estimated useful life of the
completed technology. IRIS would likely allocate a substantial portion of the
balance of the purchase price (plus any PSI liabilities outstanding at the time
of acquisition) to any products which have not been completed and approved for
marketing by the FDA and would record a nonrecurring, noncash (if purchased with
IRIS stock) charge against earnings in that amount for the acquisition of in-
process research and development (i.e. work-in-process not yet cleared by the
FDA).

In 1994, IRIS developed a strategic alliance with Boehringer Mannheim
Corporation (BMC), an Indianapolis-based manufacturer of diagnostic products,
and Boehringer Mannheim GmbH (BMG), BMC's German affiliate and a world leader in
clinical chemistry. BMC and BMG are wholly-owned subsidiaries of Corange
Limited (Corange), a diversified healthcare company with 1995 worldwide sales of
more than $3.5 billion. All three companies underwent a significant management
restructuring in 1995. As a result of the restructuring, together with certain
events which followed the restructuring, IRIS initiated discussions with BMG to
address several concerns. Based on the position of the BMG management to date,
IRIS believes that these concerns can be adequately addressed. Nonetheless,
IRIS cannot predict what changes, if any, in the IRIS/BMG alliance will result
from these discussions. See "Business -- Strategic Alliance with Boehringer
Mannheim."

The CHEMSTRIP/IRIStrips-TM- became a significant source of revenues in
1995, as more than sixty percent of existing IRIS customers have converted to
the new test strips. IRIS began marketing the new test strips during the fourth
quarter of 1994 concurrently with the introduction of an improved version of The
Yellow IRIS-Registered Trademark- featuring the new CHEMSTRIP-Registered
Trademark- urine test reader. BMC designed and manufactures both the test
strips and the readers especially for The Yellow IRIS-Registered Trademark-.
See "Business -- Strategic Alliance with Boehringer Mannheim -- Distribution of
CHEMSTRIP/IRIStrip-TM- Urine Test Strips and Custom Reader."

In July 1995, IRIS and BMG unveiled a prototype of the new IRIS/BMC 900UDX-
TM- Urine Pathology System, a high-capacity, automated urinalysis system for
reference laboratories based on the proprietary technologies of both companies.
The 900UDX-TM-, part of The Yellow IRIS-Registered Trademark- series of
urinalysis workstations, is being jointly

16
<PAGE>

developed by IRIS and BMG. Pending FDA clearance, the 900UDX-TM- will be
manufactured by IRIS in its Chatsworth, California facility and distributed by
IRIS in North America and through BMG and its affiliates overseas. However,
there can be no assurance that IRIS can secure FDA clearance or that 900UDX-TM-
will be a commercially feasible or successful product. See "Business --
Strategic Alliance with Boehringer Mannheim -- Joint Development of Reference
Laboratory System."

IRIS, like many other companies in the clinical laboratory instrumentation
business, is feeling the impact of Medicare reimbursement regulations and
current economic conditions which have intensified the review of capital
expenditures by hospitals. One result has been slower than expected replacement
sales as IRIS customers postpone capital expenditures and continue using The
Yellow IRIS-Registered Trademark- beyond its five-year anticipated life. On the
other hand, IRIS believes a longer instrument life may benefit new customer
sales by providing greater product justification. IRIS also believes the impact
of intensified capital expenditure reviews may be mitigated by the current
widespread shortage of medical technologists since its products reduce the
number of medical technologists needed in the laboratory and by the increased
interest in better outcomes since its products can produce more accurate and
faster results. See "Business -- Cost Containment."

RESULTS OF OPERATIONS

1995 COMPARED TO 1994

IRIS had net income of $2.1 million for 1995, an increase of $.6 million
(or 42%) from net income of $1.5 million in 1994. An increase of $.3 million
in income from sales was offset by a comparable increase in net costs
associated with research and development contracts. The improvement in income
from sales is primarily attributable to increased sales of workstations,
service contracts and related supplies, including the first full year of
sales of CHEMSTRIP/IRIStrips-TM- and nine months of sales of the recently
acquired Biovation product line, and decreased field service costs. The
$.6 million increase in overall net income was the result of a $3.6 million
non cash deferred tax benefit due to the reduction of the Company's deferred
tax valuation allowance (discussed below), after recognition of a $2.9 million
nonrecurring charge related to the acquisition of LDA. See "Overview" above
regarding the LDA acquisition.

In 1995, IRIS recognized a tax benefit of $3.6 million 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.

These results also include interest income from investments of $307,000 for
1995, compared to $162,000 in 1994. The $145,000 increase in interest income is
due largely to the increased amounts of invested cash. "See Liquidity and
Capital Resources."

The above results also include other income consisting of royalties from
TOA of $98,000 for 1995, compared to $111,000 for 1994. The 1995 royalty amount
reflects an agreement with TOA to temporarily increase the amount of the royalty
from 3% to 5% and the scope of the royalty to apply to revenues on consumables
and service contracts, as well as instruments. These changes were made
retroactive to October 1994 and expire in September 1996, at which time the
scope and amount of the royalty will revert to their original term unless TOA
exercises its right under the temporary agreement to negotiate a permanent
change to the license.

Net sales (excluding revenues from research and development contracts)
increased 24% to $11.9 million for 1995 from $9.6 million during 1994. The $2.3
million increase was attributable primarily to an increase in sales of
workstations and related supplies. Cost of goods sold (excluding the cost of
research and development

17
<PAGE>

contracts) increased from approximately $4.7 million in 1994 to approximately
$5.5 million in 1995 and decreased as a percentage of sales from 49% to 46% as a
result of improved utilization of service parts and increased sales of
consumables.

Total research and development expenses, including the costs of development
contracts, increased to $1.9 million in 1995 from $1.6 million in 1994, as IRIS
continued to invest in the development of new applications and further
improvements in its technology. Research and development expenses related to
The White IRIS-Registered Trademark- decreased to $782,000 for 1995 from
$1,258,000, in 1994, and were offset by related revenues of $202,000 in 1995 and
$1,078,000 in 1994 from LDA. Research and development expenses on this project
decreased significantly following submission to the FDA of an application for
clearance to market The White IRIS-Registered Trademark-, and the offsetting
revenues ceased when IRIS acquired LDA. Research and development expenses
related to the 900UDX-TM- reference laboratory system were $682,000 for 1995 and
were offset by revenues of $640,000 from BMG. Research and development expenses
related to the PSI Products were $30,000 for 1995. Research and development
expenses unrelated to these three projects increased to $410,000 in 1995 from
$321,000 in 1994 as research and development activity, in general, was
intensified. See "-- Overview", "Business -- Future Developments -- The White
IRIS-Registered Trademark- and Hematology", "Business -- Strategic Alliance with
Boehringer Mannheim -- Joint Development of Reference Laboratory System."

Marketing and selling expenses in 1995 increased by almost $665,000, to
$2.4 million, compared to 1994. The increase is due largely to a greater
emphasis on direct marketing. General and administrative expenses of $1.9
million for 1995 increased by $516,000 from 1994. The increase in these
expenses is due to a variety of factors including increases related to enlarged
business and the installation of a new computer network.

1994 COMPARED TO 1993

Net income in 1994 increased to $1,473,000 from $1,281,000 in 1993.
Operating income increased $85,000 to $1,279,000 in 1994 from $1,194,000 in 1993
due to increased sales of service contracts and consumables. Net sales of
workstations were relatively unchanged but contributed less to operating income
in 1994 because of lower margins on replacement systems sold through an
aggressive trade-in program. Net income included interest income from
investments of $162,000 in 1994 and $105,000 in 1993. The $57,000 increase in
interest income is due to increased amounts of invested cash, generally higher
interest rates and redirecting cash from interest-bearing bank accounts to
short- and long-term investments. See "Liquidity and Capital Resources." Net
income also included other income which consisted of royalties from TOA of
$111,000 in 1994 and $35,000 in 1993.

Net sales (excluding revenues from research and development contracts)
increased to $9.6 million in 1994 from $9.0 million in 1993. This increase was
attributable primarily to a $629,000 increase in revenues from service
contracts. Improved sales of workstations and related supplies in the last
three quarters of 1994 were offset by unusually slow sales of workstations
during the first quarter of the year. Costs of goods sold (excluding costs of
research and development contracts) increased to $4.7 million in 1994 from $4.3
million in 1993 and increased as a percent of sales, 49.0% in 1994 compared to
47.7% in 1993, as the result of a higher cost of service parts.

Total research and development expenses, including costs incurred on
development contracts, increased to $1.6 million in 1994 from $1.0 million in
1993 as IRIS continued its work under the Research and Development Agreement
with LDA. Research and development expenses related to The White IRIS-
Registered Trademark- increased to $1,258,000 in 1994 from $638,000 in 1993, but
were offset by related revenues of $1,078,000 and $457,000 in 1994 and 1993,
respectively, from LDA under the Research and Development Agreement. Research
and development expenses unrelated to The White IRIS-Registered Trademark-
decreased slightly to $321,000 in 1994 from $368,000 in 1993.

Marketing and selling expenses in 1994 increased $116,000 in 1994 to $1.7
million as IRIS continued to expand the coverage of its sales territories and
increase its product promotion and participation at trade shows. General and
administrative expenses of $1.4 million in 1994 remained consistent with amounts
spent on general and administrative expenses in 1993.

LIQUIDITY AND CAPITAL RESOURCES

Working capital increased by $3.6 million since December 31, 1994 to a
total of $10.8 million at December 31, 1995. IRIS generated cash of $112,000
from the sale of stock to employees and $1.6 million from the

18
<PAGE>

exercise of warrants issued in connection with LDA offerings. See "Business
- --Future Developments -- The White IRIS-Registered Trademark- and
Hematology". Total accounts receivable increased by approximately $900,000 in
line with the increased sales level in 1995. Inventory increased $804,000 to
accommodate several new products, including the CHEMSTRIP/IRIStrips-TM-.
Total current liabilities were relatively unchanged during the period.

During 1995, IRIS invested approximately $667,000 in new machinery and
equipment, $887,000 in the acquisition of the Biovation product line and
$138,000 in the construction of workstations for rental. During the first
quarter of 1996, IRIS invested $850,000 in the acquisition of the UroHealth
urinalysis business. IRIS currently is considering the purchase of equipment
during 1996 for the manufacture of Cen-Slide-Registered Trademark- and FloStar-
Registered Trademark- products, the principal products of this business. Future
commitments for capital expenditures may also prove necessary to continue IRIS
efforts in research and development and to manufacture and market its existing
products.

IRIS has made numerous improvements in The Yellow IRIS-Registered
Trademark- over the years, and further improvements to The Yellow IRIS-
Registered Trademark- will require a substantial amount of research and
development time and financial resources. While IRIS believes that it has the
technical ability and financial resources for such implementations, IRIS is
currently funding the majority of this work through a collaborative arrangement
with BMG and through a joint development program with PSI. See -- "Overview".

IRIS currently plans to use only modest amounts of its current working
capital for further development of products other than those related to The
Yellow IRIS-Registered Trademark- and The White IRIS-Registered Trademark-.
More vigorous development of The Purple IRIS-Registered Trademark- and other
products depends on securing alternative sources of funding such as the joint
development programs with PSI and BMG. However, there can be no assurance that
IRIS will be successful in more of these kinds of efforts, or any others, to
locate acceptable sources of funding desired for other products.

In an effort to increase interest income on its cash and cash
equivalents, IRIS invests a significant portion of its funds in U.S. Treasury
securities and federally insured certificates of deposit. As a result, short
and long-term investments increased by approximately $1.4 million since
December 31, 1994. IRIS believes that its current cash on hand plus
short-term investments will be sufficient to meet its needs for at least the
next year.

INFLATION

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

NEWLY ISSUED ACCOUNTING STANDARDS:

In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". SFAS No. 121 requires the Company to review the carrying amounts of its
long-lived assets and certain identifiable intangible assets for impairment.
If it is determined the carrying amount of the asset is not recoverable, the
company is required to recognize an impairment loss. The accounting standard
will be implemented during the first quarter of 1996; however, the loss, if
any, has not yet been determined.

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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements included herein are listed in the Index to
Financial Statements in Part IV, Item 14(a)1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

19
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Incorporated by reference is the information which appears under the
caption "Directors and Executive Officers" in the Proxy Statement to be filed
with the Securities and Exchange Commission relating to the Registrant's 1996
Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION.

Incorporated by reference is the information which appears under the same
caption in the Proxy Statement to be filed with the Securities and Exchange
Commission relating to the Registrant's 1996 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

20
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.

(a) The following documents are filed as a part of this report:

1. Index to Financial Statements Page

Report of Independent Public Accountants. 23
Balance Sheets at December 31, 1995 and 1994. 24
Statements of Operations for the Years ended December 31,
1995, 1994, and 1993. 25
Statements of Shareholders' Equity for the Years ended
December 31, 1995, 1994, and 1993. 26
Statements of Cash Flows for the Years ended December 31,
1995, 1994 and 1993. 29
Notes to Financial Statements 30

2. Financial Statement Schedules Covered by the Foregoing Report of
Independent Public Accountants.

The financial statement schedules have been omitted since they are not
required, are not applicable, or the required information is shown in
the Financial Statements or Related Notes.

3. Exhibits

3.1 Articles of Incorporation.1/
3.2 Bylaws.2/
3.3 Amendment to Bylaws (adopted March 17, 1996).
10.1 Lease of the Registrant's principal facilities.3/
10.2 1980 and 1982 Stock Option Plans, and forms of Stock Option
Agreements for each Plan.4/
10.3 1983 and 1986 Stock Option Plans, and forms of Stock Option
Agreements for each Plan.5/
10.4 Amended and Restated 1986 Stock Option Plan.6/
10.5 1994 Stock Option Plan and forms of Stock Option
Agreements.7/
10.6 Various Agreements with TOA.8/
10.7 Agreement for a Strategic Alliance in Urinalysis dated
January 7, 1994 between IRIS and BMC.9/
10.8 Securities Purchase Agreement dated as of April 20, 1994 by
and among IRIS, LDA and Corange International Limited.10/
10.9 Warrant Certificate dated April 22, 1994 issued to Corange
International Limited.9/
10.10 Research and Development and Distribution Agreement dated
February 6, 1995 by and among IRIS, LDA and Corange
International Limited.9/
10.11 Warrant Certificate dated February 6, 1995 issued to Corange
International Limited.9/
10.12 Asset Purchase Agreement dated as of March 20, 1995 between
IRIS and Biovation, Inc.9/
10.13 Warrant Certificate dated March 20, 1995 issued to
Biovation, Inc.9/
10.14 Technology License Agreement dated as of September 29, 1995
between IRIS and PSI.11/
10.15 Research and Development Agreement dated as of September 29,
1995 between IRIS and PSI.11/
10.16 $100 Class "A" Note dated September 29, 1995 issued by PSI
in favor of IRIS.11/
10.17 Certificate of Incorporation of PSI. (See Article FOUR
regarding the IRIS option.)11/
10.18 Agreement and Plan of Merger date January 31, 1996 by and
among IRIS, StatSpin and StatSpin Acquisition Corporation.
10.19 Registration Rights Agreement dated January 31, 1996 between
IRIS and StatSpin Stockholders.
10.20 Employment Agreement dated January 30, 1996 with Thomas F.
Kelley.
10.21 Lease for the facilities of the Registrant's subsidiary,
StatSpin.
11 Statement re Computation of Per Share Earnings.12/
24 Consent of Coopers & Lybrand L.L.P.12/

21
<PAGE>

(b) Reports on Form 8-K

IRIS did not file any Current Reports on Form 8-K during the quarter
ended December 31, 1995. However, IRIS did file a Current Report on Form
8-K on February 16, 1996 with respect to the acquisition of Norfolk
Scientific, Inc., d/b/a StatSpin Technologies, which included certain
financial statements of StatSpin and unauditied pro forma condensed
financial statements reflecting the combination of IRIS and StatSpin using
the pooling of interests accounting method.

(d) See (a)(1) and (2) above.
- ---------------

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/ The original lease and all prior amendments are incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended 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.
4/ 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.
5/ 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.
6/ Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
7/ 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.
8/ 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.
9/ Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
10/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994.
11/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.
12/ Omitted in copy distributed to stockholders in connection with the 1996
Annual Meeting of Stockholders.

22
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in Chatsworth, California, on
March 29, 1996.

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

By: /s/ Fred H. Deindoerfer
----------------------------------------------
Fred H. Deindoerfer,
Chairman of the Board of Directors, President,
Chief Executive Officer, and Chief Financial
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signature Title Date
- --------------------------------------------------------------------------------

/s/ Fred H. Deindoerfer Chairman of the Board of March 29, 1996
- ------------------------- Directors, President,
Fred H. Deindoerfer Chief Executive Officer, and
Chief Financial Officer

/s/ E. Eduardo Benmaor Secretary, Controller, and March 29, 1996
- ------------------------- Principal Accounting Officer
E. Eduardo Benmaor

/s/ John A. O'Malley Director March 29, 1996
- -------------------------
John A. O'Malley

/s/ Steven M. Besbeck Director March 29, 1996
- -------------------------
Steven M. Besbeck

/s/ Thomas F. Kelley Director and Vice President March 29, 1996
- -------------------------
Thomas F. Kelley

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the financial statements of International Remote Imaging
Systems, Inc., as listed in the index on page 21 of this Form 10-K. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of International Remote Imaging
Systems, Inc. at December 31, 1995 and 1994, and the results of its operations
and its 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

23
<PAGE>

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>

At December 31,
---------------------------
1994 1995
------------ ------------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents $ 2,406,284 $ 1,144,356
Short-term investments 2,256,062 4,736,726
Accounts receivable-trade, net of allowance for doubtful
accounts of $35,443 in 1994 and $34,765 in 1995 2,057,503 2,957,491
Accounts receivable - service contracts 313,144 481,367
Accounts receivable-other 575,657 407,245
Inventories 1,717,805 2,543,692
Prepaid expenses and other current assets 179,306 212,536
Deferred tax asset - 800,900
------------ ------------

Total current assets 9,505,761 13,284,313

Property and equipment, at cost, net of accumulated depreciation 503,334 934,857
Software development costs, net of accumulated amortization of
$625,816 in 1994 and $667,425 in 1995 40,623 298,030
Long-term investments 1,200,000 100,000
Deferred warrant costs 503,145 1,574,780
Deferred tax asset -- 3,594,100
Other assets 375,521 1,421,759
------------ ------------
Total assets $ 12,128,384 $ 21,207,839
------------ ------------
------------ ------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 746,142 $ 668,817
Accrued expenses 879,899 1,129,900
Deferred income - service contracts 683,402 685,907
------------ ------------
Total current liabilities 2,309,443 2,484,624
Deferred income - service contracts 119,913 190,045
------------ ------------
Total liabilities 2,429,356 2,674,669
------------ ------------
Commitments and contingencies
Shareholders' 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 - 4,990,067, 1995 - 5,952,148 49,901 59,521
Additional paid-in capital 26,619,692 33,355,537
Treasury stock, at cost (96,473 shares) (453,386) (453,386)
Unearned compensation (93,130) (95,884)
Accumulated deficit (16,424,049) (14,332,618)
------------ ------------
Total shareholders' equity 9,699,028 18,533,170
------------ ------------
Total liabilities and shareholders' equity $ 12,128,384 $ 21,207,839
------------ ------------
------------ ------------

</TABLE>

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

24
<PAGE>

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

For the Year Ended December 31,
-----------------------------------------
1993 1994 1995
-----------------------------------------
<S> <C> <C> <C>

Sales of workstations and related supplies . . . . . . . . . . . . . . . . . . . $ 7,499,703 $ 7,430,489 $ 9,566,997
Service contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,524,591 2,153,076 2,355,062
Research and development contracts . . . . . . . . . . . . . . . . . . . . . . . 457,160 1,078,378 842,663
----------- ----------- -----------

Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,481,454 10,661,943 12,764,722
----------- ----------- -----------

Cost of goods-workstations and supplies. . . . . . . . . . . . . . . . . . . . . 2,976,078 2,922,084 3,865,774
Cost of goods-service contracts. . . . . . . . . . . . . . . . . . . . . . . . . 1,327,318 1,752,031 1,637,896
Cost of research and development contracts . . . . . . . . . . . . . . . . . . . 637,552 1,258,405 1,494,873
----------- ----------- -----------
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,940,948 5,932,520 6,998,543
----------- ----------- -----------

Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,540,506 4,729,423 5,766,179

Marketing and selling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,620,441 1,736,713 2,401,885
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,358,570 1,392,785 1,909,076
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367,723 321,391 409,842
Acquisition of in-process research and development . . . . . . . . . . . . . . . -- -- 2,900,430
----------- ----------- -----------

Operating income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,193,772 1,278,534 (1,855,054)

Other income:
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,232 162,112 307,108
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,558 111,240 98,377
----------- ----------- -----------

Income (loss) before provision for income taxes. . . . . . . . . . . . . . . . . 1,337,562 1,551,886 (1,449,569)
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . 57,000 79,000 (3,541,000)
----------- ----------- -----------

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,280,562 $ 1,472,886 $ 2,091,431
----------- ----------- -----------
----------- ----------- -----------

Earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . $.26 $.28 $.35
---- ----- ----
---- ----- ----
Weighted average number of common shares and common share equivalents
outstanding for the period . . . . . . . . . . . . . . . . . . . . . . . . . . 4,979,785 5,323,108 6,043,006
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

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

25
<PAGE>

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY

Common Stock Additional Shareholders' 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. . . . . 4,740,011 $47,400 $25,255,612 $ -- $(28,306) $(57,816) $(19,177,497) $6,039,393

Repurchase of
common stock . . . . . . . (26,200) (262) 262 (142,016) -- -- -- (142,016)

Common stock issued
for cash 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
shareholders' notes
receivable . . . . . . . . -- -- -- -- 21,639 -- -- 21,639

Amortization of unearned
compensation . . . . . . . -- -- -- -- -- 48,489 -- 48,489

Net income . . . . . . . . -- -- -- -- -- -- 1,280,562 1,280,562
--------- ------- ----------- -------- -------- -------- ------------ ----------

Balance,
December 31, 1993. . . . . 4,798,086 47,981 25,528,480 (142,016) (6,667) (76,803) (17,896,935) 7,454,040

26
<PAGE>

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(continued)

Balance,
December 31, 1993 . . . . 4,798,086 47,981 25,528,480 (142,016) (6,667) (76,803) (17,896,935) 7,454,040

Common stock issued
for cash 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 share-
holders' 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 . . . . . . . . -- -- -- -- -- -- 1,472,886 1,472,886
--------- ------- ----------- -------- -------- -------- ------------ ----------

Balance,
December 31, 1994 . . . . 4,990,067 49,901 26,619,692 (453,386) -- (93,130) (16,424,049) 9,699,028

27
<PAGE>

STATEMENTS OF SHAREHOLDERS' EQUITY
(continued)

Balance,
December 31, 1994. . . . . 4,990,067 49,901 26,619,692 (453,386) -- (93,130) (16,424,049) 9,699,028

Common stock issued
for cash 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

Net income . . . . . . . . -- -- -- -- -- -- 2,091,431 2,091,431
--------- ------- ----------- -------- -------- -------- ------------ ----------

Balance,
December 31, 1995 . . . . 5,952,148 $59,521 $33,355,537 $(453,386) $ -- $(95,884) $(14,332,618) $18,533,170
--------- ------- ----------- --------- -------- -------- ------------ -----------
--------- ------- ----------- --------- -------- -------- ------------ -----------

</TABLE>

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

28
<PAGE>

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS

For the Year Ended December 31,
-----------------------------------------
1993 1994 1995
-----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,280,562 $ 1,472,886 $ 2,091,431
Adjustments to reconcile net income to net cash provided by operations:
Deferred tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- (3,587,000)
Acquisition of in-process research and development . . . . . . . . . . . . . -- -- 2,882,858
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . 443,628 474,135 579,091
Common stock compensation. . . . . . . . . . . . . . . . . . . . . . . . . . 48,489 84,460 109,635
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,500) -- --
Changes in assets and liabilities:
Accounts receivable - trade. . . . . . . . . . . . . . . . . . . . . . . . . . (150,883) (651,526) (899,988)
Account receivable - other . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 168,412
Notes receivable - trade . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000 13,731 --
Service contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,991 23,715 (95,586)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,462 171,422 (804,087)
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . 89,185 (82,251) (33,230)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (122,926) (96,328) (121,466)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,895) 470,103 (77,325)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,823 (93,084) 230,001
----------- ----------- -----------
Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . 1,898,936 1,787,263 442,746
----------- ----------- -----------

Cash flows from investing activities:
Acquisition of property and equipment. . . . . . . . . . . . . . . . . . . . . (345,411) (264,242) (805,193)
Acquisition of product line. . . . . . . . . . . . . . . . . . . . . . . . . . -- -- (886,800)
Software development costs . . . . . . . . . . . . . . . . . . . . . . . . . . (81,034) (25,411) (299,016)
Maturities of certificates of deposit. . . . . . . . . . . . . . . . . . . . . 625,000 210,000 215,000
Purchases of certificates of deposit . . . . . . . . . . . . . . . . . . . . . (625,000) (100,000) --
Maturities of held-to-maturity debt securities . . . . . . . . . . . . . . . . -- 1,000,000 2,700,000
Purchases of held-to-maturity debt securities. . . . . . . . . . . . . . . . . -- (3,441,062) (4,295,664)
----------- ----------- -----------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . (426,445) (2,620,715) (3,371,673)
----------- ----------- -----------

Cash flows from financing activities:
Issuance of common stock for cash. . . . . . . . . . . . . . . . . . . . . . . 138,497 254,823 1,599,758
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . (142,016) (59,920) --
Principal payments received on shareholders' notes receivable. . . . . . . . . 21,639 6,667 --
Issuance of common stock for cash under Employee Stock Purchase Plan . . . . . 67,476 100,787 67,241
----------- ----------- -----------
Net cash provided by financing activities. . . . . . . . . . . . . . . . . . . . 85,596 302,357 1,666,999
----------- ----------- -----------

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . 1,558,087 (531,095) (1,261,928)
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . 1,379,292 2,937,379 2,406,284
----------- ----------- -----------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . $ 2,937,379 $ 2,406,284 $ 1,144,356
----------- ----------- -----------
----------- ----------- -----------
Supplemental schedule of non-cash financing activities:
Issuance of common stock in exchange for services. . . . . . . . . . . . . . . $ 67,476 $ 100,787 $ 109,635
Issuance of common stock under a stock for stock exercise. . . . . . . . . . . -- 251,450 --
Issuance of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 385,285 1,774,733
Issuance of common stock to acquire shares of LDA. . . . . . . . . . . . . . . -- -- 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 . . . . . . . . . . . . . . . . . . . . . . . . . . 50,740 112,465 11,000

</TABLE>

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

29
<PAGE>

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

1. FORMATION AND BUSINESS OF THE COMPANY.

IRIS was incorporated in California in 1979 and reincorporated during 1987
in Delaware. IRIS engages in the business of developing, manufacturing and
selling microscopical image analyzing systems based on proprietary technology.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

Use of Estimates and Assumptions:

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.

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 and
generally grants uncollateralized credit to its customers, primarily domestic
hospitals. 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.

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 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, or a percentage of total
units sold over the projected unit sales. Amortization expense of software
development costs was $132,000, $108,000 and $41,600 for 1993, 1994, and 1995,
respectively.

30
<PAGE>

Deferred Warrant Costs:

Deferred warrant costs are the result of the issuance of warrants in
conjunction with various development agreements and a product line acquisition.
These costs are being amortized on a straight line basis over the expected life
of the related technology of, generally, ten years.

Revenue Recognition:

IRIS derives revenue from the sale of workstations and related supplies,
the sale of service contracts, and research and development contracts. 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 income represents
the revenues to be recognized over the remaining term of the service
contracts.

Revenues 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.

Warranties:

IRIS recognizes the full estimated cost of warranty expense 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.

Income Taxes:

In 1993, IRIS changed its method of accounting for income taxes by adopting
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.

SFAS 109 was applied retroactively to January 1, 1991.

Reclassifications:

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

Newly Issued Accounting Standards:

In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS No. 121 requires the Company to review the carrying amounts of its
long-lived assets and certain identifiable intangible assets for impairment.
If it is determined the carrying amount of the asset is not recoverable, the
company is required to recognize an impairment loss. The accounting standard
will be implemented during the first quarter of 1996; however, the loss, if
any, has not yet been determined.

31
<PAGE>

In December 1995, the Financial Accounting Standard 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.

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, the carrying value of marketable debt
securities approximated fair value and is included in short-term and long-term
investments:

December 31, 1994 Expected Maturity Value and Date
----------------- ----------------------------------
Amortized Cost Within One Year One to Five Years
-------------- --------------- -----------------
U.S. Treasury Bills $1,641,062 $1,700,000
U.S. Treasury Notes 802,028 $800,000

December 31, 1995 Expected Maturity Value and Date
----------------- ----------------------------------
Amortized Cost Within One Year One to Five Years
-------------- --------------- -----------------
U.S. Treasury Bills $3,236,725 $3,318,000 $ --
U.S. Treasury Notes 803,376 800,000 --

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:

December 31,
-------------------------
1994 1995
-------------------------
<S> <C> <C>

Finished goods . . . . . . . . . . $ 471,318 $ 316,218
Work-in-process. . . . . . . . . . 351,682 195,266
Raw materials, parts and
sub-assemblies. . . . . . . . . . 894,805 2,032,208
---------- ----------
$1,717,805 $2,543,692
---------- ----------
---------- ----------

</TABLE>

32
<PAGE>

5. PROPERTY AND EQUIPMENT.

Property and equipment is composed of the following:

December 31,
-------------------------
1994 1995
-------------------------
<S> <C> <C>

Leasehold improvements . . . . . . $ 257,534 $ 327,178
Furniture and fixtures . . . . . . 80,532 108,018
Machinery and equipment. . . . . . 1,736,869 2,221,612
Tooling, dies and molds. . . . . . 135,859 236,694
Rental units . . . . . . . . . . . 56,084 166,268
----------- -----------
2,266,878 3,059,770
Less accumulated depreciation. . . (1,763,544) (2,124,913)
----------- -----------
$ 503,334 $ 934,857
----------- -----------
----------- -----------

</TABLE>

Property and equipment includes $1,270,363 and $1,284,488 respectively, in
1994 and 1995 of fully depreciated assets which remain in service. Depreciation
expense was $246,000, $259,000, and $390,000 for 1993, 1994, and 1995,
respectively. Maintenance and repairs expense for 1993, 1994 and 1995 was
$40,644, $61,643, and $53,450, respectively.

Rental units are carried at cost less accumulated depreciation ($136,136 at
December 31, 1994 and $163,952 at December 31, 1995). 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:

December 31,
------------------------
1994 1995
------------------------
<S> <C> <C>

Accrued bonuses. . . . . . . . . . $ 206,451 $ 366,372
Accrued commissions. . . . . . . . 55,133 76,079
Accrued payroll. . . . . . . . . . 56,074 66,327
Accrued vacation . . . . . . . . . 109,999 135,832
Accrued taxes and other. . . . . . 19,159 64,564
Accrued professional fees. . . . . 88,261 113,403
Accrued warranty expense . . . . . 344,822 307,323
--------- ----------
$ 879,899 $1,129,900
--------- ----------
--------- ----------

</TABLE>

33
<PAGE>

7. INCOME TAXES.

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

1993 1994 1995
-------------------------------------
<S> <C> <C> <C>

Currently payable:
Federal. . . . . . $26,000 $30,000 $ 26,000
State. . . . . . . 31,000 49,000 20,000
------- ------- -----------
57,000 79,000 46,000
------- ------- -----------

Deferred:
Federal. . . . . . -- -- (3,537,000)
State. . . . . . . -- -- (50,000)
------- ------- -----------
-- -- (3,587,000)
------- ------- -----------

$57,000 $79,000 $(3,541,000)
------- ------- -----------
------- ------- -----------

</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 and 1994 and 1995 as follows:

1993 1994 1995
---------------------------------------
<S> <C> <C> <C>

Tax provision (benefit)
computed at Federal
statutory rate. . . . . . . $ 454,771 $ 527,641 ($492,853)
Increase (decrease) in
taxes due to:
Reinstatement of fully
reserved deferred tax
assets. . . . . . . . . . -- -- (3,587,000)
Utilization of net
operating loss
carryforward. . . . . . . (507,379) (532,610) (568,252)
Write-off of purchased
research and
development . . . . . . . -- -- 1,089,962
State taxes, net
of federal benefit. . . . 17,737 36,523 13,200
Nondeductible expenses. . . 37,214 21,952 (22,057)
Other . . . . . . . . . . . 54,657 25,494 26,000
--------- --------- -----------
$ 57,000 $ 79,000 ($3,541,000)
--------- --------- -----------
--------- --------- -----------

</TABLE>

In 1995, IRIS recognized a 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 ending in 2000 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.

34
<PAGE>

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:

December 31,
------------------------------------
1993 1994 1995
------------------------------------
<S> <C> <C> <C>

Depreciation and
amortization. . . . . . . . $ 115,598 $ 129,162 $ 146,200
Allowance for doubtful
accounts. . . . . . . . . . 14,038 14,177 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 . . . . . . . 5,665,640 5,081,225 4,840,000

Valuation allowance. . . . . (6,216,576) (5,615,857) (1,500,000)
----------- ----------- ----------

$ 0 $ 0 $4,395,000
----------- ----------- ----------
----------- ----------- ----------
</TABLE>

8. 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-Registered Trademark-, a proposed new product, in accordance with
a research and development contract. In addition, IRIS committed to fund
$500,000 of the development costs over a three year period commencing in October
1992.

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 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 unadutied 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, including amounts for
liabilities of LDA to be assumed by IRIS has been allocated to in-process
research and development. Under the purchase method of accounting, the
purchased research and development has been written off as of the purchase date.
The one time write-off of in-process research and development of approximately
$2.9 million is excluded from the pro forma information as it represents a non-
recurring item.

35
<PAGE>

1994 1995
--------------------------

Net revenues . . . . . . . . . . . $10,661,943 $12,644,655
Net income . . . . . . . . . . . . $ 331,767 $ 4,812,003
Primary and fully diluted
earnings per share . . . . . . . $ 0.06 $ 0.79

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.

9. PSI DEVELOPMENT AGREEMENT.

On September 29, 1995, Poly U/A Systems, Inc. (PSI) 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, PSI 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-Registered
Trademark-. PSI 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 PSI 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 PSI at prices rising over
time from $14 to $20 per share of PSI Common Stock. 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 PSI at cost.

PSI, 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, PSI, 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 PSI'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 PSI'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 PSI's sale of units, IRIS also
issued warrants to the placement agent and the 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.

10. 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 (an affiliate of BMG) warrants to purchase 250,000 shares of
IRIS 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.

11. 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 Stcok 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.

36
<PAGE>

12. CAPITAL STOCK.

STOCK ISSUANCES:

During 1990, the IRIS Board of Directors adopted an Employee Stock Purchase
Plan designed to allow 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.

Stock Option Plans:

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

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>

37
<PAGE>

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 cancelled. . . . . . . . . . . . . . . . . . . (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 5.00 1,207,443
Options issued . . . . . . . . . . . . . . . . . . . . 192,600 3.72 to 5.42 797,028
Options cancelled. . . . . . . . . . . . . . . . . . . (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 cancelled. . . . . . . . . . . . . . . . . . . (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 $2,614,277
-------- ----------
-------- ----------

Options exercisable at December 31, 1995 . . . . . . . 280,386 1.10 to 7.37 $ 894,603
-------- ----------
-------- ----------

</TABLE>

Warrants:

At December 31, 1995, 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.

13. COMMITMENTS.

Leases:

IRIS leases its primary business location at a monthly rent of $13,623,
subject to increases based on the Consumer Price Index. IRIS has the option to
renew the 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 this lease and three automobile leases were:

Year ended December 31, Amount
------------------------------------------------------------
<S> <C>

1996 $173,028
1997 100,137
--------
$273,165
--------
--------

</TABLE>

Rent expense under all operating leases during 1993, 1994 and 1995 was
$210,269, $194,591,and $358,469 respectively.

38
<PAGE>

Other:

Effective September 1, 1988, IRIS entered into consulting and licensing
agreements with Cytocolor, Inc. relating to the use of its patented leukocyte
stain in The White IRIS-Registered Trademark-, a product currently under
development by IRIS. Under the terms of the agreements, IRIS is subject to the
following future minimum royalty payments:

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 PSI, IRIS has agreed to
fund $15,000 per month (up to a maximum of $500,000) of the cost of the
development project (see Note 9).

14. EARNINGS PER SHARE.

The computation of per share amounts for 1993, 1994 and 1995, 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
$.26, $.28, and $.35 for the years ended December 31, 1993, 1994 and 1995,
respectively.

15. 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 in exchange for 3% royalty on
sales. IRIS received royalties of $35,000, $111,000, and $98,000 in 1993, 1994,
and 1995 respectively.

16. EXPORT SALES.

During 1993, 1994 and 1995, IRIS had export equipment sales of $0,
$199,000 and $183,000 respectively.

17. SUBSEQUENT EVENTS.

StatSpin Merger:

On February 1, 1996, a newly formed subsidiary of IRIS completed its
merger with Norfolk Scientific, Inc., d/b/a StatSpin Technologies,
("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
and 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 the outstanding common
stock and stock appreciation rights of StatSpin and assumed options and
warrants to purchase an additional 126,000 shares of IRIS common stock. This
represents an exchange ratio of 4.095 shares of IRIS for each common share
and each stock appreciation right of StatSpin. This transaction will be
accounted for as a pooling-of-interests.

Pro forma unaudited results of operations assuming the merger has occurred
on January 1, 1993 are as follows:

1993 1994 1995
---- ---- ----

Net revenues $10,930,047 $12,931,705 $15,864,320
Net income $ 929,457 $ 1,322,637 $ 2,356,615
Primary and fully diluted
earnings per share $0.18 $0.25 $0.37

39
<PAGE>

Product Line Acquisition:

In March 1996, IRIS acquired the CenSlide and FloStar urinalysis devices
product line of UroHealth Sciences, Inc., for $850,000 in cash and the
assumption of certain liabilities.

18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

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

1994
----------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------------------------------------------------------------------
<S> <C> <C> <C> <C>

Net revenues $1,857,275 $2,656,315 $2,821,034 $3,327,319
Gross margin on net revenues 761,818 1,130,349 1,267,267 1,569,989

Interest and other income 92,577 53,123 68,602 59,050
Net income 94,819 356,128 441,532 580,407

Net income per share 0.02 0.07 0.08 0.11

1995
----------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------------------------------------------------------------------
<S> <C> <C> <C> <C>

Net revenues $2,731,601 $3,354,727 $3,109,320 $3,569,074
Gross margin on net revenues 1,118,496 1,547,607 1,549,858 1,855,560

Interest and other income 113,558 91,786 85,654 114,487
Net income 309,975 (2,969,089) 501,021 4,249,524

Net income per share 0.06 (0.57) 0.08 0.67

</TABLE>

40
<PAGE>

EXHIBIT 11

STATEMENT RE COMPUTATION OF PER SHARE EARNINGS

Year Ended December 31,
----------------------------------------
1993 1994 1995
----------------------------------------
<S> <C> <C> <C>

Actual Weighted Average Shares Outstanding for the Period. . . . . . . . . . . . 4,783,405 5,043,589 5,654,479
Dilutive Effects of Stock Options and Warrants Using Average
Market Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196,380 257,489 320,814
---------- ---------- ----------
Total Shares Based on Shares Outstanding and the Assumption
that All Share Equivalents Are Exercised at Average Stock
Market Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,979,785 5,301,078 5,975,293
Additional dilutive effect of Stock Options and Warrants Being
Exercised Using Ending Market Price . . . . . . . . . . . . . . . . . . . . . . -- 22,030 67,713
---------- ---------- ----------
Total Shares Based on Shares Outstanding and the Assumption
That All Stock Options and Warrants are Exercised At Ending
Market Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,979,785 5,323,108 6,043,006
---------- ---------- ----------
---------- ---------- ----------

Net Income Applicable to Fully Diluted Earnings Per Share. . . . . . . . . . . . $1,280,562 $1,472,886 $2,091,431
---------- ---------- ----------
---------- ---------- ----------

Fully Diluted Net Income Per Share . . . . . . . . . . . . . . . . . . . . . . . $ 0.26 $ 0.28 $ 0.35
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

41
<PAGE>

EXHIBIT 24

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

We consent to the incorporation by reference in the registration statements
of International Remote Imaging Systems, Inc. on Forms S-8 (File Nos. 2-77496
and 33-10631) and on Form S-3 (File No. 33-02001) of our report dated March 20,
1996, on our audits of the financial statements of International Remote Imaging
Systems, Inc. as of December 31, 1995 and 1994, and for the years ended
December 31, 1995, 1994 and 1993, which report is included in this Annual Report
on Form 10-K.

COOPERS & LYBRAND L.L.P.

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

Los Angeles, California
March 28, 1996

42
<PAGE>

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________________

EXHIBITS

FORM 10-K

_______________________

For the fiscal year ended December 31, 1995 Commission File No. 0-9767

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

43
<PAGE>

EXHIBIT INDEX

The following exhibits are included herewith or the Form 10-K or are
incorporated by reference to documents which have been previously filed with the
Securities and Exchange Commission.

Exhibit
Number Description
------- -----------

3.1 Articles of Incorporation.1/
3.2 Bylaws.2/
3.3 Amendment to Bylaws (adopted March 17, 1996).
10.1 Lease of the Registrant's facilities.3/
10.2 1980 and 1982 Stock Option Plans, and forms of Stock Option
Agreements for each Plan.4/
10.3 1983 and 1986 Stock Option Plans, and forms of Stock Option
Agreements for each Plan.5/
10.4 Amended and Restated 1986 Stock Option Plan.6/
10.5 1994 Stock Option Plan and forms of Stock Option Agreements.7/
10.6 Various Agreements with TOA.8/
10.7 Agreement for a Strategic Alliance in Urinalysis dated January 7,
1994 between IRIS and BMC.9/
10.8 Securities Purchase Agreement dated as of April 20, 1994 by and
among IRIS, LDA and Corange International Limited.10/
10.9 Warrant Certificate dated April 22, 1994 issued to Corange
International Limited.9/
10.10 Research and Development and Distribution Agreement dated
February 6, 1995 by and among IRIS, LDA and Corange International
Limited.9/
10.11 Warrant Certificate dated February 6, 1995 issued to Corange
International Limited.9/
10.12 Asset Purchase Agreement dated as of March 20, 1995 between IRIS
and Biovation, Inc.9/
10.13 Warrant Certificate dated March 20, 1995 issued to Biovation,
Inc.9/
10.14 Technology License Agreement dated as of September 29, 1995
between IRIS and PSI.11/
10.15 Research and Development Agreement dated as of September 29, 1995
between IRIS and PSI.11/
10.16 $100 Class "A" Note dated September 29, 1995 issued by PSI in
favor of IRIS.11/
10.17 Certificate of Incorporation of PSI. (See Article FOUR regarding
the IRIS option.)11/
10.18 Agreement and Plan of Merger date January 31, 1996 by and among
IRIS, StatSpin and StatSpin Acquisition Corporation.
10.19 Registration Rights Agreement dated January 31, 1996 between IRIS
and StatSpin Stockholders.
10.20 Employment Agreement dated January 30, 1996 with Thomas F.
Kelley.
10.21 Lease for the facilities of the Registrant's subsidiary,
StatSpin.
11 Statement re Computation of Per Share Earnings.12/
24 Consent of Coopers & Lybrand L.L.P.12/

_______________

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/ The most recent amendment of the lease is included herewith. The original
lease and all prior amendments are incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended 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.
4/ 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.
5/ 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.
6/ Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
7/ 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.
8/ 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.
9/ Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.

44
<PAGE>

10/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994.
11/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.
12/ Omitted in copy distributed to stockholders in connection with the 1996
Annual Meeting of Stockholders.

<PAGE>

RESOLUTION OF
THE BOARD OF DIRECTORS OF
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
------------------------------------------
a Delaware corporation

(ADOPTED MARCH 17, 1996)

RESOLVED, that the first full sentence of Article III, Section 2(a),
of the Bylaws of this corporation be, and it hereby is, amended to read in
full as follows:

"The Board of Directors shall consist of four (4) members."

RESOLVED FURTHER, that the foregoing amendment to the Bylaws is
approved and adopted; and

RESOLVED FURTHER, that pursuant to Article III, Section 2, of
the Bylaws of this corporation, Thomas F. Kelley be, and he hereby is,
elected as a Class 3 director of this corporation to fill the vacancy on
the Board created by the foregoing increase in the number of directors, to
serve in such capacity until the next annual meeting of stockholders and
until his respective successor has been duly elected and qualified or until
his earlier resignation or removal.

-1-

<PAGE>

AGREEMENT AND PLAN OF MERGER

by and among

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.,
a Delaware corporation,

NORFOLK SCIENTIFIC, INC.
a Massachusetts corporation
doing business as StatSpin Technologies

and

STATSPIN ACQUISITION CORPORATION,
a Massachusetts corporation

Dated as of January 31, 1996

<PAGE>

TABLE OF CONTENTS

PAGE

SECTION 1 THE MERGER AND RELATED MATTERS. . . . . . . . . . . . . . . . . . . 1

1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1.2 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1.3 Consummation of the Merger; Effective Time . . . . . . . . . . . . . . 2

1.4 Articles of Organization; By-Laws. . . . . . . . . . . . . . . . . . . 2

1.5 Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . 2

1.6 Conversion of Capital Stock. . . . . . . . . . . . . . . . . . . . . . 2

1.6.1 Conversion of Outstanding StatSpin Stock . . . . . . . . . . . . . . . 2

1.6.2 Cancellation of StatSpin Treasury Shares . . . . . . . . . . . . . . . 2

1.6.3 Conversion of Merger Sub Stock . . . . . . . . . . . . . . . . . . . . 2

1.6.4 Exchange of Certificates; Fractional Shares . . . . . . . . . . . . . 2

1.7 Conversion of Stock Appreciation Rights. . . . . . . . . . . . . . . . 3

1.7.1 Uncapped StatSpin SAR's. . . . . . . . . . . . . . . . . . . . . . . . 3

1.7.2 Capped StatSpin SAR's. . . . . . . . . . . . . . . . . . . . . . . . . 3

1.7.3 Exchange of Agreements; Fractional Shares. . . . . . . . . . . . . . . 3

1.8 Assumption of Warrants and Stock Options . . . . . . . . . . . . . . . 4

1.9 Escrow of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

1.10 Maximum Merger Consideration . . . . . . . . . . . . . . . . . . . . . 5

1.11 Taking of Necessary Action; Further Action . . . . . . . . . . . . . . 5

1.12 Registration Rights. . . . . . . . . . . . . . . . . . . . . . . . . . 5

1.13 Legend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

-i-

<PAGE>
PAGE

SECTION 2 REPRESENTATIONS AND WARRANTIES OF STATSPIN. . . . . . . . . . . 6

2.1 Existence and Rights . . . . . . . . . . . . . . . . . . . . . . . . . 6

2.2 Agreements Authorized. . . . . . . . . . . . . . . . . . . . . . . . . 6

2.3 No Conflict. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

2.4 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

2.5 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 8

2.6 No Material Changes. . . . . . . . . . . . . . . . . . . . . . . . . . 8

2.7 Undisclosed Liabilities. . . . . . . . . . . . . . . . . . . . . . . . 9

2.8 Contingencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

2.9 Real Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

2.10 Personal Property and Leasehold Improvements . . . . . . . . . . . . .10

2.11 Restrictive Agreements . . . . . . . . . . . . . . . . . . . . . . . .10

2.12 Intellectual Property. . . . . . . . . . . . . . . . . . . . . . . . .10

2.13 Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

2.14 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

2.15 Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

2.16 Acquisition Agreements . . . . . . . . . . . . . . . . . . . . . . . .11

2.17 Business Relations . . . . . . . . . . . . . . . . . . . . . . . . . .11

2.18 Affiliate Transactions . . . . . . . . . . . . . . . . . . . . . . . .11

2.19 Benefit Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

2.20 Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . .13

2.21 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . .13

-ii-

<PAGE>

PAGE

2.22 Permits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

2.23 Labor Relations; Employees . . . . . . . . . . . . . . . . . . . . . .14

2.24 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

2.25 Pooling Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . .15

2.26 Board Approval. . . . . . . . . . . . . . . . . . . . . . . . . . . 15

2.27 No Finder's Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . .15

2.28 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

2.29 Offering Memorandum. . . . . . . . . . . . . . . . . . . . . . . . . .15

2.30 Transaction Expenses . . . . . . . . . . . . . . . . . . . . . . . . .16

SECTION 3 REPRESENTATIONS AND WARRANTIES OF IRIS. . . . . . . . . . . . . . .16

3.1 Existence and Rights . . . . . . . . . . . . . . . . . . . . . . . . .16

3.2 Agreements Authorized. . . . . . . . . . . . . . . . . . . . . . . . .16

3.3 No Conflict. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

3.4 IRIS Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

3.5 IRIS SEC Reports . . . . . . . . . . . . . . . . . . . . . . . . . . .17

3.6 No Material Changes. . . . . . . . . . . . . . . . . . . . . . . . . .17

3.7 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

3.8 No Finder's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . .18

3.9 Operations of Merger Sub . . . . . . . . . . . . . . . . . . . . . . .18

3.10 Offering Memorandum. . . . . . . . . . . . . . . . . . . . . . . . . .18

SECTION 4 COVENANTS OF STATSPIN . . . . . . . . . . . . . . . . . . . . . . .18

4.1 Conduct Prior to Effective Time. . . . . . . . . . . . . . . . . . . .18

-iii-

<PAGE>

PAGE

4.1.1 Capital Stock Changes; Dividends; Redemptions. . . . . . . . . . . . .18

4.1.2 Ordinary Course. . . . . . . . . . . . . . . . . . . . . . . . . . . .18

4.1.3 Certain Personnel. . . . . . . . . . . . . . . . . . . . . . . . . . .18

4.1.4 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

4.1.5 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

4.1.6 Sale or Acquisition of Assets. . . . . . . . . . . . . . . . . . . . .19

4.1.7 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

4.1.8 Related Party Transactions . . . . . . . . . . . . . . . . . . . . . .19

4.1.9 Capital Expenditures and Material Contracts. . . . . . . . . . . . . .19

4.1.10 Amendment of Charter . . . . . . . . . . . . . . . . . . . . . . . . .19

4.1.11 Preservation of Organization . . . . . . . . . . . . . . . . . . . . .19

4.1.12 Standard of Conduct. . . . . . . . . . . . . . . . . . . . . . . . . .19

4.1.13 Prohibited Discussions . . . . . . . . . . . . . . . . . . . . . . . .20

4.2 Transfers of StatSpin Equity Securities. . . . . . . . . . . . . . . .20

4.3 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

4.4 Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

4.5 StatSpin Stockholder Approval. . . . . . . . . . . . . . . . . . . . .20

4.6 Affiliate Agreements . . . . . . . . . . . . . . . . . . . . . . . . .21

4.7 Pooling Accounting . . . . . . . . . . . . . . . . . . . . . . . . . .21

4.8 Representations and Warranties . . . . . . . . . . . . . . . . . . . .21

4.9 Legal Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

4.10 Supplemental Information . . . . . . . . . . . . . . . . . . . . . . .21

-iv-
<PAGE>

PAGE

4.11 Announcements. . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

SECTION 5 COVENANTS OF IRIS . . . . . . . . . . . . . . . . . . . . . . . . .22

5.1 Representations True . . . . . . . . . . . . . . . . . . . . . . . . .22

5.2 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

5.3 Offering Memorandum. . . . . . . . . . . . . . . . . . . . . . . . . .22

5.4 Legal Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

5.5 Benefit Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

5.6 Indemnification of StatSpin Directors and Officers . . . . . . . . . .22

5.7 Tax Compliance, Reporting and Other Actions. . . . . . . . . . . . . .23

5.8 Appointment of Mr. Kelley to IRIS Board. . . . . . . . . . . . . . . .23

SECTION 6 CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . . . . . .23

6.1 Conditions Precedent to Obligations of IRIS. . . . . . . . . . . . . .23

6.1.1 Accuracy of Representations and Warranties. . . . . . . . . . . . . . 23

6.1.2 Compliance with Covenants. . . . . . . . . . . . . . . . . . . . . . .23

6.1.3 Noncompetition Agreement . . . . . . . . . . . . . . . . . . . . . .24

6.1.4 Escrow Agreement . . . . . . . . . . . . . . . . . . . . . . . . . .24

6.1.5 Pooling Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 24

6.1.6 Registration Rights Agreements. . . . . . . . . . . . . . . . . . . . 24

6.1.7 Securityholder Representation Letters . . . . . . . . . . . . . . . . 24

6.1.8 Consents Obtained; Filings. . . . . . . . . . . . . . . . . . . . . . 24

6.1.9 No Material Adverse Effect. . . . . . . . . . . . . . . . . . . . . . 24

6.1.10 Legal Actions or Proceedings . . . . . . . . . . . . . . . . . . . . .24

-v-

<PAGE>

PAGE

6.1.11 All Proceedings To Be Satisfactory . . . . . . . . . . . . . . . . . .25

6.1.12 Opinion of Counsel for StatSpin. . . . . . . . . . . . . . . . . . . .25

6.1.13 IRIS Employee Acknowledgment Form. . . . . . . . . . . . . . . . . . .25

6.1.14 Dissenting Shares. . . . . . . . . . . . . . . . . . . . . . . . . . .25

6.2 Conditions Precedent to Obligations of StatSpin. . . . . . . . . . . .25

6.2.1 Accuracy of Representations and Warranties . . . . . . . . . . . . . .25

6.2.2 Compliance with Covenants. . . . . . . . . . . . . . . . . . . . . . .25

6.2.3 Consents Obtained; Filings . . . . . . . . . . . . . . . . . . . . . .25

6.2.4 AMEX Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

6.2.5 Employment Agreement . . . . . . . . . . . . . . . . . . . . . . . . .26

6.2.6 No Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . .26

6.2.7 All Proceedings To Be Satisfactory . . . . . . . . . . . . . . . . . .26

6.2.8 Opinion of Counsel for IRIS . . . . . . . . . . . . . . . . . . . . .26

6.2.9 Legal Actions or Proceedings . . . . . . . . . . . . . . . . . . . . .26

6.2.10 Registration Rights Agreements . . . . . . . . . . . . . . . . . . . .26

6.2.11 Minimum IRIS Stock Price . . . . . . . . . . . . . . . . . . . . . . .26

6.2.12 Escrow Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . .26

SECTION 7 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . .26

7.1 Indemnification of IRIS. . . . . . . . . . . . . . . . . . . . . . . .26

7.2 Indemnification of StatSpin and the StatSpin Stockholders. . . . . . .27

7.3 Survival of Representations and Warranties . . . . . . . . . . . . . .27

7.4 Deductible Amount. . . . . . . . . . . . . . . . . . . . . . . . . . .27

-vi-

<PAGE>

PAGE

7.5 Effect of Disclosures. . . . . . . . . . . . . . . . . . . . . . . . .27

7.6 Procedures for Indemnification . . . . . . . . . . . . . . . . . . . .27

7.7 Failure to Assume Defense. . . . . . . . . . . . . . . . . . . . . . .28

7.8 Cooperation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28

7.9 Stockholder Representative . . . . . . . . . . . . . . . . . . . . . .28

SECTION 8 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

8.1 Injunction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

8.2 Mutual Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . .29

8.3 Termination Date . . . . . . . . . . . . . . . . . . . . . . . . . . .29

8.4 Material Breach. . . . . . . . . . . . . . . . . . . . . . . . . . . .29

8.5 Effects of Termination . . . . . . . . . . . . . . . . . . . . . . . .29

8.6 Rights to Proceed. . . . . . . . . . . . . . . . . . . . . . . . . . .29

SECTION 9 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . .30

SECTION 10 MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . .34

10.1 Entire Agreement; Modifications. . . . . . . . . . . . . . . . . . . .34

10.2 Meaning of "Knowledge" . . . . . . . . . . . . . . . . . . . . . . . .34

10.3 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34

10.4 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34

10.5 Cooperation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34

10.6 Third-Party Benefits . . . . . . . . . . . . . . . . . . . . . . . . .34

10.7 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . .35

10.8 Remedies Not Exclusive . . . . . . . . . . . . . . . . . . . . . . . .35

-vii-

<PAGE>

PAGE

10.9 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

10.10 Governing Law; Consent to Jurisdiction . . . . . . . . . . . . . . . .36

10.11 Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . .37

10.12 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

10.13 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

10.14 Arbitration as Exclusive Remedy. . . . . . . . . . . . . . . . . . . .37

10.15 Agreement Negotiated . . . . . . . . . . . . . . . . . . . . . . . . .38

10.16 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38

-viii-

<PAGE>

AGREEMENT AND PLAN OF MERGER

This AGREEMENT AND PLAN OF MERGER (the "AGREEMENT") is made and entered
into as of January 31, 1996, by and among INTERNATIONAL REMOTE IMAGING SYSTEMS,
INC., a Delaware corporation ("IRIS"), NORFOLK SCIENTIFIC, INC., a Massachusetts
corporation doing business as "StatSpin Technologies" ("STATSPIN"), STATSPIN
ACQUISITION CORPORATION, a Massachusetts corporation and wholly-owned subsidiary
of IRIS ("MERGER SUB"), with reference to the following facts:

A. IRIS and StatSpin desire to effect a combination of their respective
businesses through a merger of StatSpin and Merger Sub.

B. The Boards of Directors of IRIS and StatSpin believe it is in the best
interests of each company and their respective stockholders to consummate such
combination on the terms and conditions set forth herein.

C. The parties intend that such acquisition qualify as a tax-free
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended, and a "pooling of interests" under Opinion No. 16 of
the Accounting Principles Board.

NOW, THEREFORE, based on the above premises and in consideration of the
mutual covenants and agreements contained herein, the parties agree as follows
(capitalized terms not otherwise defined herein have the meanings set forth in
Section 9):

SECTION 1

THE MERGER AND RELATED MATTERS

1.1 THE MERGER. At the Effective Time, and subject to and upon the terms
and conditions of this Agreement and the applicable provisions of the
Massachusetts Business Corporation Law, (a) Merger Sub shall be merged with and
into StatSpin (the "MERGER"), (b) the separate existence of Merger Sub shall
cease and (c) StatSpin shall continue as the surviving corporation (sometimes
referred to herein as the "SURVIVING CORPORATION") and shall succeed to and
assume all of the rights and obligations of Merger Sub in accordance with the
Massachusetts Business Corporation Law. The Merger shall have the effects set
forth herein and in the applicable provisions of the Massachusetts Business
Corporation Law.

1.2 CLOSING. The closing of the Merger (the "CLOSING") shall take place
at the offices of Irell & Manella, counsel to IRIS, at 1800 Avenue of the Stars,
Suite 900, Los Angeles, California as soon as practicable after the satisfaction
or waiver of the conditions set forth in Section 6. (The date on which the
Closing occurs is hereinafter referred to as the "CLOSING DATE").

<PAGE>

1.3 CONSUMMATION OF THE MERGER; EFFECTIVE TIME. As soon as practicable on
the Closing Date, the parties hereto shall consummate the Merger by executing
and filing articles of merger (the "ARTICLES OF MERGER") with the Secretary of
State of the Commonwealth of Massachusetts in such form as required by, and
executed in accordance with, the Massachusetts Business Corporation Law. The
Merger shall become effective (the "EFFECTIVE TIME") upon the filing of the
Articles of Merger.

1.4 ARTICLES OF ORGANIZATION; BY-LAWS. The Articles of Organization and
By-Laws of Merger Sub, as in effect immediately prior to the Effective Time and
as amended by the Articles of Merger, shall become the Articles of Organization
and By-Laws of the Surviving Corporation and thereafter shall continue in effect
until amended as provided therein and in the Massachusetts Business Corporation
Law.

1.5 DIRECTORS AND OFFICERS. The directors and officers of Merger Sub
immediately prior to the Effective Time shall become the directors and officers
of the Surviving Corporation and shall hold office from the Effective Time until
their respective successors are duly elected or appointed and qualified in the
manner provided in the By-Laws of the Surviving Corporation, or as otherwise
provided by law.

1.6 CONVERSION OF CAPITAL STOCK. At the Effective Time and subject to the
provisions of Sections 1.9 (Escrow of Shares) and 1.10 (Maximum Merger
Consideration), by virtue of the Merger and without any action on the part of
IRIS, StatSpin, Merger Sub or any stockholder of StatSpin:

1.6.1 CONVERSION OF OUTSTANDING STATSPIN STOCK. Each share of
StatSpin Common Stock issued and outstanding immediately prior to the Effective
Time, other than shares held by StatSpin as treasury stock and shares held by
persons exercising dissenters' rights ("DISSENTING SHARES"), shall be converted
into the right to receive 4.0950 shares of IRIS Common Stock (the "EXCHANGE
RATIO").

1.6.2 CANCELLATION OF STATSPIN TREASURY SHARES. Each Share held by
StatSpin as treasury stock immediately prior to the Effective Time shall be
cancelled and extinguished at the Effective Time without any conversion thereof
and no payment shall be made with respect thereto.

1.6.3 CONVERSION OF MERGER SUB STOCK. Each share of common stock,
$.01 par value per share, of Merger Sub issued and outstanding issued and
outstanding immediately prior to the Effective Time shall be converted into one
(1) share of common stock of the Surviving Corporation.

1.6.4 EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES. As soon as
practicable after the Effective Time, each holder of an outstanding
certificate(s) that prior thereto represented a share of StatSpin Common Stock
shall surrender such certificate(s) to the transfer agent for IRIS, together
with a duly executed letter of transmittal or affidavit of loss and such other
documents as may be reasonably requested by IRIS or the transfer agent
(including, without limitation, an indemnification agreement with respect to
lost

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<PAGE>

certificates), and shall thereupon be entitled to receive in exchange therefor a
certificate or certificates representing the number of whole shares of IRIS
Common Stock into which the shares so surrendered shall have been converted. No
fractional shares shall be issued, but in lieu thereof holders of certificates
who would otherwise be entitled to receive a fraction of a share of IRIS Common
Stock shall be paid an amount in cash equal to the value of such fraction of a
share based upon the IRIS Stock Price. The fractional share interests of each
holder shall be aggregated so that no holder receives cash in an amount equal to
or greater than the value of one full share of IRIS Common Stock. Until so
surrendered, each certificate which, prior to the Effective Time, represented
shares of StatSpin Common Stock shall, from and after the Effective Time,
represent only the right to receive shares of IRIS Common Stock and cash in lieu
of any fractional interests. Neither IRIS, its transfer agent, Merger Sub,
StatSpin or the Surviving Corporation shall be liable to any holder of such
certificates for any cash or shares of IRIS Common Stock properly paid to a
public official pursuant to applicable abandoned property, escheat or similar
law.

1.7 CONVERSION OF STOCK APPRECIATION RIGHTS. At the Effective Time and
subject to (A) applicable federal and state withholding requirements, (B) the
provisions of Section 1.9 (Escrow of Shares) and (C) the provisions of Section
1.10 (Maximum Merger Consideration), IRIS shall issue as satisfaction in full
for each StatSpin SAR issued and outstanding immediately prior to the Effective
Time the number of shares of IRIS Common Stock determined in accordance with
this Section 1.7.

1.7.1 UNCAPPED STATSPIN SAR'S. With respect to each holder of a
StatSpin SAR on the Effective Date which is not subject to an SAR Cap, IRIS
shall issue a number of shares of IRIS Common Stock equal to (A) the number of
shares of StatSpin Common Stock with respect to which such holder's StatSpin SAR
has vested MULTIPLIED BY (B) the difference between the StatSpin Stock Price and
the base price of such StatSpin SAR (i.e. the "spread") DIVIDED BY (C) the IRIS
Stock Price.

1.7.2 CAPPED STATSPIN SAR'S. With respect to each holder on the
Effective Date of a StatSpin SAR subject to an SAR Cap, IRIS shall issue a
number of shares of IRIS Common Stock equal to (A) the number of shares of
StatSpin Common Stock with respect to which such holder's StatSpin SAR has
vested MULTIPLIED BY (B) the difference between the SAR Cap and the base price
of such StatSpin SAR (i.e. the "spread") DIVIDED BY (C) the IRIS Stock Price.

1.7.3 EXCHANGE OF AGREEMENTS; FRACTIONAL SHARES. As soon as
practicable after the Effective Time, each holder of an outstanding agreement
that prior thereto represented a StatSpin SAR shall surrender such agreement to
the transfer agent for IRIS, together with a duly executed letter of transmittal
or affidavit of loss and such other documents as may be reasonably requested by
IRIS or the transfer agent (including, without limitation, an indemnification
agreement with respect to lost certificates), and shall thereupon, subject to
applicable federal and state withholding requirements, be entitled to receive in
exchange therefor a certificate or certificates representing the number of whole
shares of IRIS Common Stock into which the StatSpin

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SAR agreement so surrendered shall have been converted. No fractional shares
shall be issued, but in lieu thereof holders of StatSpin SAR agreements who
would otherwise be entitled to receive a fraction of a share of IRIS Common
Stock shall be paid an amount in cash equal to the value of such fraction of a
share based upon the IRIS Stock Price. The fractional share interests of each
holder shall be aggregated so that no holder receives cash in an amount equal to
or greater than the value of one full share of IRIS Common Stock. Until so
surrendered, each agreement which, prior to the Effective Time, represented a
StatSpin SAR shall, from and after the Effective Time, represent only the right
to receive shares of IRIS Common Stock and cash in lieu of any fractional
interests. Neither IRIS, its transfer agent, Merger Sub, StatSpin or the
Surviving Corporation shall be liable to any holder of such StatSpin SAR for any
cash or shares of IRIS Common Stock properly paid to a public official pursuant
to applicable abandoned property, escheat or similar law.

1.8 ASSUMPTION OF WARRANTS AND STOCK OPTIONS. At the Effective Time and
subject to the provisions of Section 1.10 (Maximum Merger Consideration), IRIS
shall assume each outstanding warrant (a "STATSPIN WARRANT"), and each
outstanding option, whether vested or unvested, (a "STATSPIN OPTION"), to
purchase shares of StatSpin Common Stock. From and after the Effective Time,
each outstanding StatSpin Warrant and each outstanding StatSpin Option shall
entitle the holder to purchase shares of IRIS Common Stock on the same terms and
conditions as set forth in such StatSpin Warrant or StatSpin Option (including,
without limitation, any applicable vesting schedule), EXCEPT THAT (i) the holder
shall be entitled to purchase the number, rounded down to the nearest whole
integer, of full shares of IRIS Common Stock such holder would have been
entitled to receive pursuant to the Merger had such holder exercised such
StatSpin Warrant or StatSpin Option in full, including as to unvested shares,
immediately prior to the Effective Time, (ii) the price per share of IRIS Common
Stock shall be an amount, rounded up to the nearest whole cent, equal to (a) the
exercise price per share for the shares of StatSpin Common Stock otherwise
purchasable pursuant to the StatSpin Warrant or StatSpin Option DIVIDED BY (b)
the Exchange Ratio, and (iii) the registration rights of the holder shall be as
set forth in the Registration Rights Agreement which shall supersede any
registration rights previously associated with or contained in such holders
StatSpin Option or StatSpin Warrant. As soon as practicable after the Effective
Time, upon receipt by IRIS of a copy of such StatSpin Warrant or StatSpin
Option, IRIS issue and deliver to the holder thereof an originally signed
agreement evidencing the foregoing assumption of such StatSpin Warrant or
StatSpin Option by IRIS.

1.9 ESCROW OF SHARES. At the Closing, the holders of record of StatSpin
Common Stock at the Effective Time and the holders of record of StatSpin SAR's
at the Effective Time shall deposit in escrow ten percent (10%) of the aggregate
number of shares of IRIS Common Stock received by them in connection with the
Merger (the "ESCROWED SHARES"). For purposes of creating such escrow, each
holder of record of at the Effective Time of StatSpin Common Stock and each
holder of record at the Effective Time of StatSpin SAR's shall contribute a pro
rata number of the shares of IRIS Common Stock based on the number of shares of
IRIS Common Stock to which all such holders are entitled at the Effective Time.
Subject to compliance with the provisions of

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<PAGE>

Sections 1.6.4 (Exchange of Stock Certificates) and 1.7.3 (Exchange of StatSpin
SAR Agreements), as applicable, the Escrowed Shares shall be released in
accordance with the terms of the Escrow Agreement to the holders of record at
the Effective Time of StatSpin Common Stock and the holders or record at the
Effective Time of StatSpin SAR's pro rata based on the number of shares of IRIS
Common Stock to which each holder was entitled at the Effective Time. The
escrow shall be administered in accordance with the terms of the Escrow
Agreement. The parties agree that for federal income tax purposes, the holders
of record at the Effective Time of StatSpin Common Stock and the holders of
record at the Effective Time of StatSpin SAR's will own the Escrowed Shares as
of the Effective Time.

1.10 MAXIMUM MERGER CONSIDERATION. The parties acknowledge that the
Exchange Ratio was based on an exchange of $3,000,000 of IRIS Common Stock for
all of the outstanding StatSpin Common Stock, StatSpin SAR's, StatSpin Warrants
and StatSpin Options. Therefore, the parties agree that the maximum
consideration to be paid by IRIS (including IRIS Common Stock to be reserved for
issuance upon exercise of StatSpin Options and StatSpin Warrants assumed by
IRIS) pursuant to the Merger shall be limited to a number of shares of IRIS
Common Stock equal to $3,000,000 plus the aggregate exercise price of the
outstanding StatSpin Options and StatSpin Warrants divided by the IRIS Stock
Price. In the event that the outstanding StatSpin Common Stock, StatSpin SAR's,
StatSpin Warrants and StatSpin Options at the Effective Time is greater as set
forth on SCHEDULES 2.4(a) AND 2.4(b), the Exchange Ratio shall be
proportionately decreased. No adjustment shall be made in the aggregate
consideration to be paid in the Merger as a result of any cash proceeds received
by StatSpin pursuant to the exercise of currently outstanding StatSpin Warrants
or StatSpin Options.

1.11 TAKING OF NECESSARY ACTION; FURTHER ACTION. If, at any time after the
Effective Time, any such further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of StatSpin and Merger Sub, the officers and directors of
StatSpin and Merger Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.

1.12 REGISTRATION RIGHTS. The shares of IRIS Common Stock issued to
holders of StatSpin Common Stock and holders of StatSpin SAR's in connection
with the Merger, and the shares of IRIS Common Stock issuable upon exercise to
holders of StatSpin Warrants and StatSpin Options assumed by IRIS in connection
with the Merger, shall have the registration rights set forth in the
Registration Rights Agreement.

1.13 LEGEND. Each certificate for IRIS Common Stock issued hereunder or
under any StatSpin Warrant or StatSpin Option assumed hereunder, and each
certificate issued in exchange or upon transfer of any thereof, shall be stamped
or otherwise imprinted with a legend in substantially the following form:

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<PAGE>

The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or qualified under any
applicable state securities laws and may not be transferred, sold,
assigned, pledged or otherwise disposed of unless (i) a registration
statement under the Securities Act of 1933, as amended, shall have become
effective with respect thereto and all applicable qualifications under
state securities laws have been obtained with respect thereto, (ii) or a
written opinion from counsel for the holder reasonably satisfactory to the
issuer has been obtained stating that no such registration or qualification
is required.

SECTION 2

REPRESENTATIONS AND WARRANTIES OF STATSPIN

As an inducement for IRIS to enter into this Agreement, StatSpin hereby
represents and warrants to IRIS that each of the following statements is true
and correct:

2.1 EXISTENCE AND RIGHTS. StatSpin (i) is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Massachusetts, and (ii) has the corporate power and authority to own its
properties and to carry on its business as now conducted. StatSpin has no
interests, direct or indirect, in any partnership, joint venture, corporation or
other business entity. The copies of the Charter and By-Laws of StatSpin, which
have been previously delivered to IRIS, are complete and correct. StatSpin is
duly qualified and in good standing in each jurisdiction in which the character
of its business makes such qualification necessary except where the failure to
so qualify would not have a Material Adverse Effect on StatSpin.

2.2 AGREEMENTS AUTHORIZED. The execution, delivery and performance by
StatSpin of this Agreement, and any related agreements to which it is or will be
a party, have been duly authorized by all necessary corporate action, including,
without limitation, approval by the holders of a majority of the outstanding
shares of StatSpin Common Stock, and do not require StatSpin to provide or
obtain any notice to, or the consent or approval from, any governmental or other
regulatory authority or other person except the following:

(i) the filing of the Articles of Merger with the Secretary of State of the
Commonwealth of Massachusetts;

(ii) the consent of Citizens Bank of Massachusetts under the terms of the
Revolving Loan Agreement dated August 1995 (which consent will not be obtained
with the permission of IRIS based on StatSpin's representation that there are no
amounts currently outstanding thereunder and will not be any amounts outstanding
thereunder on the Closing Date);

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<PAGE>

(iii) the consent of the Massachusetts Technology Development Corporation
under the terms of an Amended and Restated 9% Subordinated Secured Promissory
Note dated February 17, 1995 (which consent will not be obtained with the
permission of IRIS based on StatSpin's representation the outstanding principal
amount thereof does not exceed $125,000);

(iv) the consent of holders of more than 50% of the aggregate principal
amount outstanding of the StatSpin's 12% Subordinated Notes dated March 13, 1992
(which consents will be obtained prior to Closing);

(v) the consent of each holder of a StatSpin Option (which consents will
be obtained prior to Closing); and

(vi) the consent of each holder of a StatSpin Warrant (which consents will
be obtained prior to Closing).

This Agreement, and any related agreements to which StatSpin is or will be a
party, have been (or will be) duly executed and delivered by StatSpin and are
(or upon execution and delivery will be) legal, valid and binding obligations of
StatSpin enforceable against StatSpin in accordance with their terms, subject to
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting or relating to creditors rights generally and general principles of
equity.

2.3 NO CONFLICT. The execution, delivery and performance by StatSpin of
this Agreement and any related agreements will not (i) modify, breach or
constitute grounds for the occurrence or declaration of a default under or allow
another party a right to terminate (with or without notice or lapse of time or
both) any agreement, indenture, undertaking or other instrument to which
StatSpin is a party or by which it or any of its assets may be bound or affected
except for the agreements as to which StatSpin has disclosed under Section 2.2
with respect to which required consents will not be obtained, (ii) violate any
provision of law or any regulation or any order, judgement, or decree of any
court or other agency of government to which StatSpin is subject, (iii) violate
any provision of the Charter or By-Laws of StatSpin, or (iv) result in the
creation or imposition of (or the obligation to create or impose) any Claim on
any of StatSpin's properties except as disclosed in Section 2.2.

2.4 CAPITALIZATION. The authorized capital stock of StatSpin consists
solely of 300,000 shares of StatSpin Common Stock, of which 69,771 shares are
issued and outstanding. SCHEDULES 2.4(a) AND (b) set forth a complete and
accurate list of all outstanding shares of StatSpin Common Stock, StatSpin
Warrants, StatSpin Options and StatSpin SAR's, the holders thereof and the
material terms thereof. StatSpin has terminated its 1984 Incentive Stock Option
Plan and there are no stock options outstanding under such plan. StatSpin does
not hold any shares of StatSpin Common Stock in its treasury. Except as set
forth SCHEDULES 2.4(a) AND (b), StatSpin has no outstanding stock appreciation
right, option, warrant, convertible debt, subscription agreement, rights
agreement or other commitment which either (i) obligates StatSpin to

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<PAGE>

issue, sell or transfer any shares of the capital stock of StatSpin or any
successor-in-interest, (ii) obligates StatSpin to repurchase, redeem or
otherwise acquire any outstanding shares of the capital stock of StatSpin, or
(iii) may be the basis for a claim by any person that such person has an
interest (contingent or otherwise) in the equity of StatSpin or any
successor-in-interest. All of the outstanding shares of the StatSpin Common
Stock are duly and validly issued, fully paid, non-assessable and not subject to
any preemptive rights, are owned of record by the persons in the amounts shown
in SCHEDULE 2.4(a), and to the best knowledge of StatSpin are free and clear of
all Claims (including, without limitation, stockholders agreements, voting
agreements and rights of first refusal) except as set forth on SCHEDULE 2.4(a).

2.5 FINANCIAL STATEMENTS. StatSpin has previously delivered to IRIS
correct and complete copies of (a) audited financial statements for each of
StatSpin's last three fiscal years, together with the notes thereto and the
unqualified independent auditors' reports of KPMG Peat Marwick thereon, and (b)
unaudited interim financial statements for the 6-month periods ended September
30, 1995 and 1994 (such audited and unaudited financial statements,
collectively, the "STATSPIN FINANCIAL STATEMENTS"). The StatSpin Financial
Statements (i) are correct and complete in all material respects (subject, in
the case of the unaudited StatSpin Financial Statements, to normal year-end
adjustments which are not expected to be material in amount and the absence of
footnotes), (ii) present fairly the financial position of StatSpin at such dates
and the results of the operations and cash flows of StatSpin for the periods
covered therein, (iii) are complete and correct in all material respects, and
(iv) have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis.

2.6 NO MATERIAL CHANGES. Since September 30, 1995, StatSpin has conducted
its business only in the ordinary course consistent with past practice, and
there has not been:

(i) except as disclosed on ANY SCHEDULE to this Agreement, any Material
Adverse Effect, or any occurrence or event which could reasonably be expected to
have a Material Adverse Effect, on StatSpin;

(ii) any declaration or payment of any dividend or other distribution on or
in respect of any capital stock of StatSpin, or any direct or indirect
redemption, retirement, purchase or other acquisition of any capital stock of
StatSpin;

(iii) any increase, which is either not in the ordinary course of business
or is in excess of 5% in the aggregate or for any individual, in the
compensation by StatSpin to any of its directors, officers, employees,
consultants or agents, or any hiring of a director, officer, employee,
consultant or agent at a base compensation level in excess of $40,000 per annum,
or

(iv) any transaction involving StatSpin and any Related Party.

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<PAGE>

2.7 UNDISCLOSED LIABILITIES. Except as set forth on SCHEDULE 2.7,
StatSpin has no obligations, indebtedness or liabilities (including without
limitation liabilities to current and former employees, including without
limitation such liabilities arising out of any benefit plan, health plan, dental
plan, long or short term disability plan, life insurance plan, or other similar
plan or policy of StatSpin), contingent or otherwise and whether or not such
liabilities would ordinarily be required under generally accepted accounting
principles to be accrued on a balance sheet or referred to in a footnote, other
than: (i) those disclosed or adequately reserved for on StatSpin's September 30,
1995, balance sheet; (ii) obligations, indebtedness or liabilities incurred
since September 30, 1995 in the ordinary course of business consistent with past
practice; or (iii) obligations and liabilities which do not exceed $30,000 in
the aggregate.

2.8 CONTINGENCIES. Except as set forth on SCHEDULE 2.8 or in the StatSpin
Financial Statements, (i) there are no express product warranties relating to
products manufactured or distributed by StatSpin; (ii) there is no litigation,
arbitration, administrative proceeding, audit request or, to the best knowledge
of StatSpin, investigation pending against StatSpin, its business or its assets;
(iii) StatSpin does not know of any threats of, or reasonable basis for, any
such litigation, arbitration, administrative proceeding or investigation, the
results of which could reasonably be expected to have a Material Adverse Effect
on StatSpin; (iv) neither the Food & Drug Administration ("FDA") nor any
comparable state agency has within the past six (6) years notified, or to the
best StatSpin's knowledge, intends to notify, StatSpin of any violation of the
Federal Food, Drug and Cosmetics Act, the regulations promulgated thereunder or
any comparable state laws or regulations; (v) StatSpin does not know of, and has
never received any notice of, any potential liability under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 or any comparable
state law or regulation; (vi) to the extent due on or before the date hereof,
StatSpin has paid all sales and use taxes arising out of the operation of its
business; and (vi) the StatSpin Financial Statements do not include and, under
generally accepted accounting principles applied on a consistent basis, are not
required to include, any reserves for liabilities relating to product warranties
on the products sold by it. StatSpin is not subject to any order, writ,
injunction or decree of any court or other governmental or regulatory authority.

2.9 REAL PROPERTY. StatSpin does not own or lease any real property other
than the 10,851 square feet of the premises located at 85 Morse Street, Norwood,
Massachusetts (the "PREMISES") which are leased by StatSpin pursuant to the
terms and conditions of that certain Commercial Lease by and between John E.
Reardon and Paul E. Reardon, on the one hand, and StatSpin, on the other hand,
dated February 15, 1990, as amended by that certain First Amendment to Agreement
of Lease dated April 1, 1995. StatSpin has previously delivered a true and
correct copy of such lease to IRIS, and StatSpin is not in default thereunder
which default could reasonable be expected to have a Material Adverse Effect on
StatSpin. To the best knowledge of StatSpin, such lease remains in full force
and effect without any default of the other party thereto.

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<PAGE>

2.10 PERSONAL PROPERTY AND LEASEHOLD IMPROVEMENTS. StatSpin has the
right to use all personal property held by it or used in its business, and the
buildings, offices, and any other structures occupied by StatSpin, and all
computers, machinery, equipment and motor vehicles owned or used by StatSpin are
in the aggregate in good operating condition, except for ordinary wear and tear
and assets which are no longer in use, and are generally adequate and sufficient
for the operation of StatSpin's business as currently conducted.

2.11 RESTRICTIVE AGREEMENTS. Except as set forth on SCHEDULE 2.11,
there are no contracts, agreements or understandings to which StatSpin is a
party or under which StatSpin is bound that in any way preclude or substantially
restrict StatSpin from competing in any geographic area or business sector.

2.12 INTELLECTUAL PROPERTY. SCHEDULE 2.12 identifies all of the
Intellectual Property along with (if applicable) the registration numbers, dates
of issuance and names of the inventors or authors of such patents, marks, names
and registered copyrights and any other related information. Except as set
forth on SCHEDULE 2.12, StatSpin is the exclusive owner of all such Intellectual
Property free and clear of all Claims and is not a party to any license,
agreement or arrangement, whether as licensee, licensor or otherwise, with
respect to any such Intellectual Property. Except as set forth on SCHEDULE
2.12, (i) StatSpin has the unencumbered right and authority to use all of the
Intellectual Property; (ii) to the best knowledge of StatSpin, such use does not
conflict with, infringe on, or violate any rights of others; (iii) StatSpin is
not in default under any license relating to any of the Intellectual Property;
(iv) there have been no claims made against StatSpin asserting the invalidity,
abuse, misuse or unenforceability of any of its Intellectual Property, and, to
the best knowledge of StatSpin, there are no reasonable grounds for the same;
(v) StatSpin has not received a notice of conflict with the asserted rights of
others with respect to any Intellectual Property within the last three years;
and (vi) to the best knowledge of StatSpin, no person is violating or infringing
any of the Intellectual Property.

2.13 INVENTORY. StatSpin's inventory is of a quality saleable in the
normal course of business and contains quantities appropriate for normal
operations subject to inventory reserves reflected in the StatSpin Financial
Statements.

2.14 INSURANCE. StatSpin has in full force and effect the policies of
fire, liability, errors and omissions and other forms of insurance listed on
SCHEDULE 2.14, and the copies of such policies provided to IRIS are accurate and
complete. StatSpin reasonably believes that such policies are adequate in
amount and scope to cover all pending and reasonably anticipated product
liability claims against StatSpin. Furthermore, (i) StatSpin is not in default
in any material respect under any such policies and there is no material
inaccuracy in any application for such policies, (ii) StatSpin's activities and
operations have been conducted in a manner so as to conform in all material
respects to the applicable provisions of such policies, and (iii) StatSpin has
not received a notice of cancellation, non-renewal or premium increase with
respect to any such policy.

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2.15 CONTRACTS. SCHEDULE 2.15 correctly lists all contracts and
commitments, written and oral, to which StatSpin is a party or by which StatSpin
or any of its assets are bound, including all amendments, modifications and
waivers thereto (the "MATERIAL CONTRACTS"), which (i) relate to any Intellectual
Property, (ii) relate to any real property, (iii) restrict StatSpin's ability to
compete in any product line or in any geographic market, (iv) could reasonably
be expected to involve the payment or receipt by StatSpin of more than $30,000
in any 12-month period, (v) relate to the purchase, sale, repurchase, transfer,
registration, issuance or voting of StatSpin Common Stock, StatSpin Warrants or
StatSpin SAR's, (vi) relate to any indebtedness for borrowed money or any
guarantee thereof, (vii) create any lien on any of the assets of StatSpin or
(viii) involve any Related Party; PROVIDED, HOWEVER that Material Contracts
shall not include purchase orders or employment contracts. The copies of the
Material Contracts (including all amendments, modifications and waivers)
previously delivered to IRIS are complete and correct. Each of the Material
Contracts (including all amendments, modifications and waivers) (a) has been
duly authorized, executed and delivered by StatSpin and, to the best knowledge
of StatSpin, the other parties thereto, (b) to the best knowledge of StatSpin,
remains in full force and effect to the extent of its terms without any
amendment, modification or waiver not reflected in the Material Contracts
previously delivered to IRIS, (c) to the best knowledge of StatSpin, is binding
on the parties thereto in accordance with and to the extent of its terms and
applicable laws, subject to bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting or relating to creditors rights generally and
general principles of equity and (d) StatSpin has not received any notice
threatening or declaring, termination as a result of any alleged uncured breach
or default. StatSpin is not in default under any existing note, mortgage, or
other Material Contract, including, without limitation, (i) the 11% Subordinated
Notes dated April 30, 1991, (ii) the 12% Subordinated Notes dated March 13,
1992, (iii) the Amended and Restated 9% Subordinated Secured Note dated February
17, 1995 and (iv) the Revolving Loan Agreement dated August 1995 with Citizens
Bank.

2.16 ACQUISITION AGREEMENTS. Neither StatSpin nor, to the best
knowledge of StatSpin, any stockholder of StatSpin is or intends to be a party
to any agreement, written or oral, with any other person or entity concerning a
merger, consolidation, asset or stock acquisition, disposition or other business
acquisition or business combination transaction involving StatSpin.

2.17 BUSINESS RELATIONS. StatSpin has good commercial working
relationships with its customers, suppliers and distributors. StatSpin has not
received notice that any of its customers, suppliers or distributors intends to
terminate or alter its relationship with StatSpin except for terminations or
alterations which would not, in the aggregate, have a Material Adverse Effect on
StatSpin or the Surviving Corporation. StatSpin reasonably believes that the
Transactions will not adversely affect the relationship of StatSpin (including,
after the Effective Time, Surviving Corporation) with any of its suppliers or
distributors.

2.18 AFFILIATE TRANSACTIONS. Except as disclosed in the notes to the
StatSpin Financial Statements, to the best knowledge of StatSpin, no Related
Party of StatSpin

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(i) owns (other than ownership of less than one percent (1%) of the stock of a
publicly traded corporation), directly or indirectly, individually or
collectively, any interest in any corporation, partnership, firm, association or
sole proprietorship, which is either a competitor, potential competitor,
customer, supplier or distributor of StatSpin or has an existing contractual
relationship with StatSpin; or (ii) owes any money to or is owed any money by
StatSpin, other than indebtedness for compensation earned and not yet paid in
the ordinary course of business.

2.19 BENEFIT PLANS. SCHEDULE 2.19 sets forth all employee benefit
plans, funds, programs or arrangements (including but not limited to employee
benefit plans as defined in Section 3(3) of ERISA) which StatSpin has sponsored
or maintained, or to which it has been required to contribute ("BENEFIT PLANS").
StatSpin has previously delivered to IRIS complete and correct copies of all
Benefit Plan documents (including trust, investment management and custodial
agreements and insurance and annuity policies and contracts) and the most recent
IRS form 5500 Series filing and summary plan description, related to each
Benefit Plan. Except as otherwise described on SCHEDULE 2.19, (i) each Benefit
Plan has been operated in material conformity with its terms and applicable laws
(including but not limited to the Code and ERISA); (ii) all continuation
coverage under any group health plan provided by StatSpin or any entity under
common control or constituting an affiliated service group with StatSpin (within
the meaning of Section 414(b), (c), (m) or (o) of the Code) has been provided in
material conformity with the Code and ERISA; (iii) StatSpin has made all
contributions required to be made by it under any Benefit Plan for all plan
years ending before the Closing Date and has either made or accrued all such
contributions with respect to all periods commencing prior to the date hereof,
including without limitation all employee contributions and corresponding
matching contributions to the 401(k) Plan maintained by StatSpin; (iv) each
funded employee pension plan as defined in Section 3(2) of ERISA is qualified
under Section 401(a) of the Code, as amended by the Retirement Equity Act and
the Deficit Reduction Act of 1984, and nothing has occurred which has resulted
or is likely to result in the revocation of such qualification; (v) neither
StatSpin nor any entity under common control or constituting an affiliated
service group with StatSpin (within the meaning of Section 414(b), (c), (m) or
(o) of the Code) sponsors, maintains or is required to contribute to any defined
benefit pension plan (as defined in Section 3(35) of ERISA), is a party to or
has contributed to any multi-employer plan (as defined in Section 3(37) of
ERISA), has incurred any unsatisfied liability under Title IV of ERISA, or
assumed any liability under Section 4204 of ERISA; (vi) to the best knowledge of
StatSpin, no prohibited transaction (as defined in either Section 4975 of the
Code or Section 406 of ERISA) has occurred with respect to any Benefit Plan;
(vii) StatSpin has complied in all material respects with the reporting and
disclosure requirements under ERISA and the Code to the extent applicable to any
Benefit Plan; and (viii), to the best knowledge of StatSpin, no director or
officer of StatSpin, to the extent he or she is a fiduciary with respect to any
Benefit Plan, has breached any responsibility or obligation imposed upon
fiduciaries under Title I of ERISA or which would result in any claim being made
under, by or on behalf of any Benefit Plan and there has been no actual,
anticipated or threatened litigation, arbitration or governmental administrative
action concerning or involving any such Benefit Plan. StatSpin has, in all
summary plan

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descriptions or other written employee communications relating to any employee
benefit plan (as defined in Section 3(3) of ERISA), reserved its rights to amend
or terminate the Benefit Plan to which the description or other communications
relates and has not represented otherwise in any such description or
communications, nor has StatSpin represented that any health or medical
insurance benefit is available to any employee after such employee's separation
from service with StatSpin except as provided in any disability plan, as
required by law or as disclosed on SCHEDULE 2.19.

2.20 ENVIRONMENTAL MATTERS. Except as disclosed on SCHEDULE 2.20,
StatSpin has complied in all material respects with, and is in material
compliance with, the provisions of all federal, state and local environmental,
health and safety laws, codes and ordinances, and all rules and regulations
promulgated thereunder pertaining to Hazardous Materials, waste, air emissions,
water discharges, and other environmental and health safety matters with respect
to StatSpin's use or occupation of the Premises. StatSpin has not generated,
handled, treated, stored, transported or disposed of any Hazardous Material
other than in material compliance with any applicable federal, state or local
laws, codes, ordinances, rules or regulations applicable to such activity.
StatSpin has no liability for damage to third parties or property or remediation
of contaminated property pursuant to CERCLA or similar state laws relating to
the use, transportation, storage or disposal of Hazardous Material, nor has
StatSpin received notice of, nor does StatSpin have reason to know of, any facts
or circumstances which might reasonably be expected to give rise to liability
relating to the use, transportation, storage, or disposal of Hazardous
Materials, or which might reasonably be expected to give rise to liability for
employee exposure to Hazardous Materials. StatSpin has disposed of, or arranged
for the disposal of, its solid and liquid wastes in compliance with applicable
Hazardous Materials laws. To the best of its knowledge, StatSpin has not
disposed of, or arranged for the disposal of, any waste or Hazardous Materials
to any location which is listed or proposed for listing under CERCLA, or on any
similar state list, or which is the subject of federal, state or local
enforcement actions or other investigations which may lead to liability on the
part of IRIS or the Surviving Corporation for site investigation or cleanup
costs, remedial work, damages to natural resources or for personal injury. To
the best of its knowledge, StatSpin does not lease any property located on a
site which is listed or proposed for listing under CERCLA or on any similar
state list.

2.21 COMPLIANCE WITH LAWS. Except as specifically set forth on ANY
SCHEDULE to this Agreement, StatSpin is not in violation of any applicable law
or regulation, or of any judgment, order, decree or other requirement of any
court, tribunal or governmental body, or any agency or official acting in an
official capacity, the violation of which, individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect on StatSpin.

2.22 PERMITS. StatSpin has all Permits and Licenses required for the
ownership, use and operation of its property and assets, both real and personal,
and all other Permits and Licenses which are necessary or proper for the conduct
of its business. Except as set forth on SCHEDULE 2.22, each Permit and License
is presently valid and in full force and effect; no proceeding is pending or, to
the best knowledge of StatSpin,

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threatened to revoke, limit or negate any such Permit or License; and no such
Permit or License has ever been revoked, limited or negated or been threatened
with such action. Immediately after the Effective Time, each Permit and License
will be valid and in full force and effect with respect to StatSpin. StatSpin
does not know, or have reason to know, of any facts or circumstances which would
reasonably be expected to prevent renewal of any of StatSpin's Permits or
Licenses after the Effective Time prior to their scheduled expiration or require
additional Permits or Licenses in order to operate its business as presently
operated. StatSpin is in compliance in all material respects with its Permits
and Licenses.

2.23 LABOR RELATIONS; EMPLOYEES. StatSpin has good relationships with
its employees and consultants. Except for satisfaction of the SAR's as
expressly provided in this Agreement, StatSpin has not made and is not obligated
to make any payments contingent on the Merger. StatSpin has generally not
required its employees and consultants to execute confidentiality,
non-competition or invention assignment agreements, but StatSpin reasonably
believes that the failure to obtain such agreements from its employees and
consultants will not have a Material Adverse Effect on StatSpin. StatSpin does
not have any employment, severance, change-of-control or similar agreements with
any of its employees other than (i) an Employment Agreement dated as of May 26,
1994 with Thomas F. Kelley, a true and correct copy of which has been previously
delivered to IRIS and (ii) agreements evidencing the StatSpin SAR's listed on
SCHEDULE 2.4(b). StatSpin is not delinquent in payments to any of its employees
or consultants for any wages, salaries, commissions, benefits, bonuses or other
direct or indirect compensation for any services performed by him or her prior
to the date hereof or amounts required to be reimbursed to any of its employees
or consultants. Except as disclosed on SCHEDULE 2.8, there is no pending or (to
the best knowledge of StatSpin) threatened litigation by any employees or
consultants with respect to StatSpin, and there are no pending or (to the best
knowledge of StatSpin) threatened administrative actions or claims with respect
to StatSpin's relationship to any employee or consultant including without
limitation discrimination claims (whether for sex, age, race, religion, national
origin or any other reason). There is no unfair labor practice complaint
against StatSpin pending before the National Labor Relations Board or any
comparable state, local or foreign agency, and there is no labor strike,
dispute, slowdown or stoppage actually pending or, to the best knowledge of
StatSpin, threatened against or involving StatSpin. StatSpin is not a party to
nor is it subject to any collective bargaining agreement and none is currently
being negotiated, and StatSpin is not aware of any union organizing activities
in connection with StatSpin. StatSpin has no plans to terminate, and to the
best knowledge of StatSpin, no executive, salesperson or key employee or
consultant of StatSpin has any plans to terminate, the employment or consulting
relationship of any such person with StatSpin either prior to or after the
Effective Time.

2.24 TAXES. Except as disclosed on SCHEDULE 2.24, StatSpin has (i)
timely filed all returns for Taxes required to be filed on or before the date
hereof or has obtained extensions (without penalty or interest) of the deadline
for filing; (ii) paid or adequately reserved on its September 30, 1995 balance
sheet for all Taxes which may be owed by it as of such date; (iii) adequately
reserved for deferred Taxes in accordance with generally

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accepted accounting principles consistently applied; and (iv) duly withheld,
collected and paid over to the proper governmental authorities all Taxes and
assessments required to have been withheld or collected and paid over by
StatSpin, all as and to the extent prescribed by law. StatSpin has not been
advised of any deficiency claimed or proposed to be claimed against or relating
to StatSpin by any taxing authority which has not been paid, settled or
adequately reserved for on its September 30, 1995 balance sheet, and there are
no matters under discussion with any taxing authority which might reasonably
result in the assessment of additional amounts against or relating to StatSpin.
There are no liens for Taxes (other than for current Taxes not yet due and
payable) upon the assets of StatSpin. StatSpin has previously delivered to IRIS
complete and correct copies of all federal, state and local income tax returns
of or in respect of StatSpin for StatSpin's tax years ended March 31, 1995,
1994, 1993 and 1992. StatSpin is not a party to or bound by any tax indemnity,
tax sharing or tax allocation agreement. StatSpin has never been a member of an
affiliated group of corporations within the meaning of Section 1504 of the Code.
StatSpin has never been a party to any joint venture, partnership, or other
arrangement or contract which could be treated as a partnership for federal
income tax purposes.

2.25 POOLING MATTERS. Neither StatSpin nor any of its Affiliates has,
to the best knowledge of StatSpin based solely upon consultation with its
independent auditors, taken or agreed to take any action that would prevent IRIS
from accounting for the business combination to be effected by the Merger as a
pooling of interests under Opinion No. 16 of the Accounting Principles Board.

2.26 BOARD APPROVAL. The Board of Directors of StatSpin has (i)
approved the Merger, this Agreement and the Articles of Merger and (ii)
recommended that its stockholders approve the Merger, this Agreement and the
Articles of Merger.

2.27 NO FINDER'S FEE. Neither StatSpin nor, to the best of its
knowledge, any of its stockholders, officers, directors, agents or employees
have incurred any liability to any broker, finder or agent for any brokerage
fees, finder's fees, commissions or similar amounts with respect to the
Transactions.

2.28 DISCLOSURE. To the knowledge of StatSpin, the written information
delivered or made available by StatSpin or its representatives to IRIS or its
representatives in connection with the Transactions, taken as whole, does not
contain any untrue statement of a material fact, or omit to state any material
fact necessary in order to make the statements contained herein, in the light of
the circumstances under which it was made, not misleading, except where such
untrue statement or omission was corrected in subsequent information delivered
or made available by StatSpin or its representatives to IRIS or its
representatives.

2.29 OFFERING MEMORANDUM. None of the information provided by StatSpin
for inclusion in the Offering Memorandum will contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order

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to make the statements therein, in light of the circumstances under which they
are made, not misleading.

2.30 TRANSACTION EXPENSES. The fees and expenses incurred by StatSpin
in connection with the negotiation, preparation and execution of this Agreement
and any related agreement, and the consummation of the Transactions, will not
exceed $65,000 in the aggregate.

SECTION 3

REPRESENTATIONS AND WARRANTIES OF IRIS

As an inducement for StatSpin to enter into this Agreement, IRIS
represents and warrants that each of the following statements is complete and
correct:

3.1 EXISTENCE AND RIGHTS. IRIS (i) is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and (ii) has the corporate power and authority to own its properties and to
carry on its business as now conducted. The copies of the Certificates of
Incorporation and By-Laws of IRIS which have been previously delivered to
StatSpin are complete and correct.

3.2 AGREEMENTS AUTHORIZED. The execution, delivery and performance by
IRIS of this Agreement, and any related agreements to which it is or will be a
party, have been duly authorized by all necessary corporate action and do not
require IRIS to provide or obtain any notice to, or the consent or approval
from, any governmental or other regulatory authority or other person except the
American Stock Exchange. This Agreement, and any related agreements to which it
is or will be a party, has been duly executed and delivered by IRIS and is a
legal, valid and binding obligation of IRIS enforceable against IRIS in
accordance with its terms, subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to creditors rights
generally and general principles of equity.

3.3 NO CONFLICT. The execution, delivery and performance by IRIS of
this Agreement and any related agreements will not (i) modify, breach or
constitute grounds for the occurrence or declaration of a default under or allow
another party a right to terminate (with or without notice or lapse of time or
both) any agreement, indenture, undertaking or other instrument to which IRIS is
a party or by which it or any of its assets may be bound or affected, (ii)
violate any provision of law or any regulation or any order, judgement, or
decree of any court or other agency of government to which IRIS is subject,
(iii) violate any provision of the Charter or By-Laws of IRIS, or (iv) result in
the creation or imposition of (or the obligation to create or impose) any Claim
on any of the properties of IRIS.

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3.4 IRIS SHARES. The shares of IRIS Common Stock, when issued in the
Merger in compliance with this Agreement, will be duly and validly issued, fully
paid and non-assessable.

3.5 IRIS SEC REPORTS. IRIS has previously furnished to StatSpin
complete and correct copies of the IRIS Annual Report on Form 10-K for the year
ended December 31, 1994, Proxy Statement dated April 29, 1995 and Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995 (collectively, the
"IRIS SEC DOCUMENTS"). As of their respective filing dates, the IRIS SEC
Documents complied in all material respects with the requirements of the
Exchange Act and none of the IRIS SEC Documents contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances in which they were made, not misleading, except to the extent
corrected by a document subsequently filed with the SEC. The financial
statements of IRIS, including the notes thereto, included in the IRIS SEC
Documents (the "IRIS FINANCIAL STATEMENTS") comply as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto, have been prepared in
accordance with generally accepted accounting principles consistently applied
(except as may be indicated in the notes thereto or, in the case of unaudited
statements, as permitted by Form 10-Q of the SEC), fairly present the
consolidated financial position of IRIS at the dates thereof and of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal, recurring audit adjustments) and are complete
and correct in all material respects. There has been no change in IRIS
accounting principles except as described in the notes to the IRIS Financial
Statements. IRIS has no material obligations other than (i) those set forth in
the IRIS Financial Statements and (ii) those not required to be set forth in the
IRIS Financial Statements under generally accepted accounting principles.

3.6 NO MATERIAL CHANGES. Since September 30, 1995, there has not been
any Material Adverse Effect, or any occurrence or event which could reasonably
be expected to have a Material Adverse Effect, on IRIS which has not been
disclosed in the SEC Filings or the Offering Memorandum. The IRIS press release
dated November 15, 1995 announcing the development program with Poly U/A
Systems, Inc. and the completion of a related unit offering is true and correct
in all material respects.

3.7 DISCLOSURE. To the knowledge of IRIS, the written information
delivered or made available by IRIS or its representatives to StatSpin or its
representatives in connection with the Transactions, taken as a whole, does not
contain any untrue statement of a material fact, or omit to state any material
fact necessary in order to make the statements contained herein, in the light of
the circumstances under which it was made, not misleading, except where such
untrue statement or omission was corrected in subsequent information delivered
or made available by IRIS or its representatives to StatSpin or its
representatives.

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3.8 NO FINDER'S FEES. Neither IRIS nor any of its officers, directors,
agents or employees has incurred any liability to any broker, finder or agent
for any brokerage fees, finder's fees, commissions or similar amounts with
respect to the Transactions.

3.9 OPERATIONS OF MERGER SUB. Merger Sub will be a newly formed
Massachusetts corporation formed solely for the purpose of facilitating the
Merger and, except as otherwise described or contemplated in this Agreement,
will not have conducted any business operations prior to the Effective Time.

3.10 OFFERING MEMORANDUM. None of the information included by IRIS in
the Offering Memorandum will contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.

SECTION 4

COVENANTS OF STATSPIN

4.1 CONDUCT PRIOR TO EFFECTIVE TIME. StatSpin covenants that, between
the date of this Agreement and the Effective Time, unless IRIS shall otherwise
consent in writing in advance:

4.1.1 CAPITAL STOCK CHANGES; DIVIDENDS; REDEMPTIONS. Except for
the issuance of shares of StatSpin Common Stock upon the exercise of presently
outstanding StatSpin Warrants and StatSpin Options, StatSpin shall not issue or
sell any shares of its capital stock or other securities, acquire directly or
indirectly, by redemption or otherwise, any such capital stock, reclassify or
split-up any such capital stock, declare or pay any dividends thereon in cash,
securities or other property or make any other distribution with respect
thereto, or grant or enter into any options, warrants, calls or commitments of
any kind with respect thereto;

4.1.2 ORDINARY COURSE. StatSpin shall conduct its business only
in the ordinary and usual course consistent with past practice.

4.1.3 CERTAIN PERSONNEL. StatSpin shall use reasonable efforts
to prevent any change with respect to StatSpin's management, supervisory
personnel or sales personnel.

4.1.4 GOODWILL. StatSpin shall use reasonable efforts to
preserve the goodwill of customers, suppliers, distributors and others having
business relations with StatSpin.

4.1.5 INSURANCE. StatSpin shall use reasonable efforts to
maintain in full force and effect all policies of insurance with respect to
StatSpin now in effect (or secure

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comparable replacement policies in the event the insurer cancels or declines to
renew such policies) and shall give all notices and present all claims under all
such policies in a timely fashion.

4.1.6 SALE OR ACQUISITION OF ASSETS. StatSpin shall not Transfer
or acquire (whether through a purchase, merger or otherwise) any assets except
inventory sold in the ordinary course of business consistent with past practice
or capital assets acquired in accordance with Section 4.1.9.

4.1.7 INDEBTEDNESS. StatSpin shall not (i) borrow or agree to
borrow any funds or incur, assume, or guarantee, any obligation or liability
(absolute or contingent), which is not incurred in the ordinary course of
business; or (ii) pay, discharge or satisfy any claim, liability or obligation
(absolute, accrued, contingent or otherwise), other than the payment, discharge
or satisfaction in the ordinary course of business consistent with past practice
of liabilities or obligations reflected or reserved against in the StatSpin
Financial Statements or incurred after the dates thereof in the ordinary course
of business consistent with past practice.

4.1.8 RELATED PARTY TRANSACTIONS. StatSpin shall not effect any
transaction with any Related Party except as required under an existing
agreement or arrangement the terms of which have been previously disclosed to
IRIS, nor shall StatSpin enter into any new contract or arrangement with any
Related Party.

4.1.9 CAPITAL EXPENDITURES AND MATERIAL CONTRACTS. StatSpin
shall not (i) make any capital expenditures in excess of $10,000 individually or
$30,000 in the aggregate (other than the purchase of tooling as previously
discussed with IRIS which shall not be counted toward such dollar limits), (ii)
enter into, amend, terminate, renew or waive any provision of any Material
Contract or (iii) commit to any of the foregoing.

4.1.10 AMENDMENT OF CHARTER. StatSpin shall not amend its
Charter or By-laws except pursuant to the Articles of Merger or make any change
in its authorized or issued capital stock except pursuant to the exercise of the
outstanding StatSpin Warrants and StatSpin Options disclosed on SCHEDULE 2.4(a)
OR 2.4(b).

4.1.11 PRESERVATION OF ORGANIZATION. StatSpin shall use
reasonable efforts (i) to maintain at all times the status of StatSpin as a
corporation duly organized, validly existing, in good standing and duly
qualified and licensed to conduct its business as now being conducted in each of
the jurisdictions in which such business is now being conducted; (ii) to
maintain in effect all Permits and Licenses that are required for StatSpin to
carry on its business; and (iii) to preserve StatSpin's business organizations
intact.

4.1.12 STANDARD OF CONDUCT. StatSpin shall operate in compliance
with all applicable laws.

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4.1.13 PROHIBITED DISCUSSIONS. StatSpin shall not shall solicit,
encourage or respond to any inquiries from any person or entity, or provide
information to, or conduct negotiations with, any other person or entity
concerning a sale of all or any part of the assets of StatSpin (except a sale of
assets of immaterial value in the ordinary course of StatSpin's business as
previously conducted), sale of stock, merger, consolidation, or other form of
business acquisition or business combination transaction involving StatSpin or
its capital stock. StatSpin shall also use reasonable efforts to prevent any of
its stockholders or agents from engaging in any of the foregoing activities.
StatSpin shall immediately (i) communicate to IRIS the substance of any inquiry
or proposal concerning any such transaction which may be received by it or, to
its knowledge, any of its stockholders or agents and (ii) reject any such
inquiry or proposal.

4.2 TRANSFERS OF STATSPIN EQUITY SECURITIES. Between the date of this
Agreement and the Effective Time, StatSpin shall use reasonable efforts to
prevent the Transfer any StatSpin Common Stock or other StatSpin securities.

4.3 CONSENTS. As promptly as practicable after the date of this
Agreement, StatSpin shall effect all filings, registrations and requests for
consent with, and use reasonable efforts to obtain all consents, authorizations,
approvals and declarations from, all third parties and government agencies
required under laws applicable to StatSpin or under contracts to which StatSpin
is a party for StatSpin and to consummate the Transactions. StatSpin shall use
reasonable efforts to obtain consents required, if any, in order to enable
Surviving Corporation to retain after the Effective Time all rights under
existing real and personal property leases and other contracts, without
modification. IRIS shall use reasonable efforts to assist StatSpin as
reasonably requested with all matters described above in this Section 4.3.

4.4 ACCESS. From the date hereof through the earlier of the Closing
or termination of this Agreement, StatSpin shall (i) permit IRIS and its
authorized representatives to have full access during normal business hours and
under reasonable conditions to any and all premises, properties, files, books,
records, documents and other information of StatSpin, (ii) provide IRIS and its
authorized representatives with all information which such parties reasonably
request concerning the foregoing matters, including without limitation, the
financial condition and results of operation of StatSpin, (iii) otherwise
reasonably cooperate with and assist IRIS and its authorized representatives in
connection with their investigation, (iv) upon the request of IRIS, deliver to
IRIS true and correct copies of any documents requested, and (v) provide IRIS
with access to and copies as requested of the work papers of KPMG Peat Marwick
compiled in connection with reviewing the financial statements of StatSpin. All
of the foregoing information shall be deemed confidential information and shall
be subject to the confidentiality provisions of the Letter of Intent.

4.5 STATSPIN STOCKHOLDER APPROVAL. StatSpin shall use its reasonable
efforts to secure as soon as practicable the approval (at a meeting or by
written consent) of all of its stockholders to the Merger, this Agreement and
the Articles of Merger. In

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connection therewith, StatSpin shall deliver to each of its stockholders, and to
each holder of a StatSpin SAR, StatSpin Warrant or StatSpin Option, a copy of
the Offering Memorandum prepared by IRIS, and StatSpin shall supply for
inclusion therein or incorporation by reference thereby such information
regarding StatSpin and the Transactions as may be reasonably requested by IRIS.

4.6 AFFILIATE AGREEMENTS. StatSpin and IRIS shall each use reasonable
efforts to obtain prior to the Closing an executed Affiliate Agreement from each
their respective Affiliates with respect to the Transfer of shares of IRIS
Common Stock. As soon as practicable after the date hereof, StatSpin shall
deliver to IRIS a list of names of those persons who are, in StatSpin's
reasonable judgment after consultation with legal counsel, Affiliates of
StatSpin. StatSpin shall provide IRIS such information and documents as IRIS
shall reasonably request for purposes of reviewing such list. IRIS shall be
entitled to place legends on the certificates evidencing any IRIS Common Stock
to be issued to StatSpin's Affiliates pursuant to the terms of this Agreement
and the Articles of Merger, and to issue appropriate stop transfer instructions
to the transfer agent for IRIS Common Stock, consistent with the terms of such
Affiliate Agreements, whether or not such Affiliate Agreements are actually
delivered to IRIS.

4.7 POOLING ACCOUNTING. StatSpin agrees not to knowingly take any
action that would adversely affect the ability of IRIS to treat the Merger as a
pooling of interests, and StatSpin agrees to take such action as may be
reasonably required to negate the impact of any past actions which would
adversely impact the ability of IRIS to treat the Merger as a pooling of
interests.

4.8 REPRESENTATIONS AND WARRANTIES. StatSpin shall use reasonable
efforts to ensure that all of the representations and warranties of StatSpin
contained herein shall be true and correct from the date hereof through the
Effective Time.

4.9 LEGAL OPINION. StatSpin shall use its best efforts to cause
Goodwin, Procter & Hoar, counsel for StatSpin, to render an opinion at the
Closing, dated as of the Closing Date, in substantially the form attached hereto
as EXHIBIT A.

4.10 SUPPLEMENTAL INFORMATION. From the date hereof through the
Effective Time, StatSpin shall deliver to IRIS immediately upon StatSpin's
discovery or access thereto, any information (i) as may be reasonably required
to update the information set forth on the Schedules hereto or (ii) that
otherwise amends, updates or conflicts with any of the matters discussed in the
representations or warranties set forth in Section 2.

4.11 ANNOUNCEMENTS. StatSpin shall not (before or after the Effective
Time) make any news release or other public announcement pertaining to the
Merger or any related transaction without the prior written consent of IRIS.

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SECTION 5

COVENANTS OF IRIS

5.1 REPRESENTATIONS TRUE. Until the Effective Time, IRIS will use its
best efforts to prevent the occurrence of any event which would cause any of its
representations and warranties set forth in this Agreement not to be true and
correct in any material respect.

5.2 CONSENTS. As promptly as practicable after the date of this
Agreement, IRIS shall effect all filings, registrations and requests for consent
with, and use reasonable efforts to obtain all consents, authorizations,
approvals and declarations from, all third parties and government agencies
required under laws applicable to IRIS or under contracts to which IRIS is a
party for IRIS or Merger Sub to consummate the Transactions other than the
filing of a registration statement under the Securities Act or any similar
filing with any state agency under the securities or "blue sky" laws of any
state. StatSpin shall use reasonable efforts to assist IRIS as reasonably
requested with all matters described above in this Section 5.2.

5.3 OFFERING MEMORANDUM. As soon as practicable, IRIS shall prepare
and deliver to StatSpin an Offering Memorandum (the "OFFERING MEMORANDUM") in
form and substance satisfactory to StatSpin and IRIS describing IRIS, StatSpin
and the Transactions.

5.4 LEGAL OPINION. IRIS shall use reasonable efforts to cause Irell &
Manella, counsel for IRIS and Merger Sub, to render an opinion at the Closing,
dated as of the Closing Date, in substantially the form attached hereto as
EXHIBIT B.

5.5 BENEFIT PLANS. IRIS agrees to provide employees of StatSpin with
credit for all prior service with StatSpin for purposes of vesting and
eligibility under any employee benefit plan, program or arrangement of IRIS and
to enroll the Statspin employees in such employee benefit plans, programs and
arrangements (including, without limitation, enrolling qualified employees in
the IRIS Key Employee Stock Purchase Program) as soon as practicable after the
Effective Time; PROVIDED, HOWEVER, IRIS shall continue StatSpin's current
health plan absent a significant increase in the cost thereof. Commencing three
months after the Effective Date, the senior management of the StatSpin will be
eligible for consideration for stock option awards under the 1994 IRIS Stock
Option Plan consistent with the Compensation Committee's general practices and
policies.

5.6 INDEMNIFICATION OF STATSPIN DIRECTORS AND OFFICERS. The Articles
of Organization and Bylaws of the Surviving Corporation shall contain provisions
identical with respect to exculpation and indemnification to those set forth in
Article X of the Articles of Organization of StatSpin and Article V of the
Bylaws of StatSpin, respectively, which provisions shall not be amended,
repealed or otherwise modified for a period of six (6) years from the Effective
Time in any manner that would adversely

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affect the rights thereunder of the individuals who were directors or officers
of StatSpin at the Effective Time. The parties acknowledge that, in the event
of a merger of the Surviving Corporation with and into IRIS, the assumption by
IRIS of such indemnification obligations would not adversely affect the rights
of such directors and officers.

5.7 TAX COMPLIANCE, REPORTING AND OTHER ACTIONS. The parties
acknowledge that the Merger is intended to qualify as a reorganization within
the meaning of Section 368(a) of the Code. Accordingly, IRIS shall comply with,
and shall cause Merger Sub and the Surviving Corporation to comply with, the
reporting requirements set forth in Treasury Regulation Section 1.368-3
applicable to them with respect to the Merger Acquisition, and none of them
shall make any election or take any reporting or other position inconsistent
with the treatment of the Merger as a reorganization within the meaning of
Section 368(a) of the Code except as required by law. Further, IRIS, Merger Sub
and/or the Surviving Corporation shall not take any action, or fail to take any
action, which would disqualify the Merger as a tax free reorganization under
Section 368(a) of the Code. Without limiting the foregoing, IRIS shall cause
the Surviving Corporation to satisfy the "continuity of business enterprise"
requirement as provided in Section 1.368-(1)(d) of the Treasury Regulations, and
IRIS will not transfer the stock, and the Surviving Corporation will not
transfer the assets, of the Surviving Corporation in a manner which would
disqualify the Merger as a tax free reorganization under Section 368(a) of the
Code.

5.8 APPOINTMENT OF MR. KELLEY TO IRIS BOARD. Promptly upon
consummation of the Merger, IRIS shall appoint Thomas F. Kelley to the IRIS
Board of Directors as a Class 3 Director and thereafter nominate Mr. Kelley for
reelection at the 1996 Annual Meeting of the IRIS stockholders.

SECTION 6

CONDITIONS PRECEDENT

6.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF IRIS. The obligations of
IRIS to consummate the Closing and effect the Merger are subject to the
satisfaction or waiver, prior to or at the Closing, of each of the following
conditions precedent:

6.1.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of StatSpin contained in this Agreement or in any
certificate or document delivered to IRIS pursuant hereto shall be true and
correct on and as of the Closing Date as though made at and as of that date
(except where such representation and warranty is made as of a date specifically
set forth therein), and StatSpin shall have delivered to IRIS a certificate to
that effect.

6.1.2 COMPLIANCE WITH COVENANTS. StatSpin shall have in all
material respects performed and complied with all terms, agreements, covenants
and conditions of

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this Agreement to be performed or complied with by them at the Closing Date, and
StatSpin shall have delivered to IRIS certificates to that effect.

6.1.3 NONCOMPETITION AGREEMENT. Thomas F. Kelley, StatSpin's
largest stockholder, shall have executed and delivered to IRIS the
Noncompetition Agreement.

6.1.4 ESCROW AGREEMENT. Each holder of StatSpin Common Stock or
a StatSpin SAR shall have executed and delivered to IRIS the Escrow Agreement.

6.1.5 POOLING MATTERS. (i) Each Affiliate of StatSpin shall have
executed and delivered to IRIS an Affiliate Agreement; (ii) each Affiliate of
IRIS shall have executed and delivered to IRIS an Affiliate Agreement; (iii)
IRIS shall have been advised by Coopers & Lybrand, its independent auditors,
that the Merger will qualify as a "pooling of interests" under Opinion No. 16 of
the Accounting Principles Board; and (iv) Coopers & Lybrand shall have been
advised by KPMG, StatSpin's independent auditors, that StatSpin qualifies as a
"poolable entity" under Opinion No. 16 of the Accounting Principles Board.

6.1.6 REGISTRATION RIGHTS AGREEMENTS. Each holder of StatSpin
Common Stock, a StatSpin Warrant, a StatSpin Option or a StatSpin SAR shall have
executed and delivered to IRIS the Registration Rights Agreement.

6.1.7 SECURITYHOLDER REPRESENTATION LETTERS. Each holder of
StatSpin Common Stock, a StatSpin Warrant, a StatSpin Option or a StatSpin SAR
shall have executed and delivered to IRIS a Securityholder Representation
Letter.

6.1.8 CONSENTS OBTAINED; FILINGS. StatSpin shall have obtained
all consents and approvals from, and shall have completed all declarations,
filings and registrations with, government agencies and private third parties
that are required for the execution, delivery and performance of this Agreement
by StatSpin, except for such consents, approvals, declarations, filings, and
registrations the failure of which to have so obtained or made will not have a
Material Adverse Effect on StatSpin.

6.1.9 NO MATERIAL ADVERSE EFFECT. There shall have been no
Material Adverse Effect, or any occurrence or event which could reasonably be
expected to have a Material Adverse Effect, on StatSpin.

6.1.10 LEGAL ACTIONS OR PROCEEDINGS. No legal action or
proceeding shall have been instituted or overtly threatened by any governmental
agency seeking to restrain, prohibit, invalidate or otherwise affect the
consummation of the Transactions, and no legal action or proceeding shall have
been instituted or overtly threatened by any private party seeking material
monetary awards from IRIS or Merger Sub in connection with the Transactions, or
from StatSpin whether or not in connection with the Transactions.

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6.1.11 ALL PROCEEDINGS TO BE SATISFACTORY. All corporate and
other proceedings to be taken by StatSpin in connection with the Transactions
and all documents incident thereto shall be reasonably satisfactory in form and
substance to IRIS and its counsel, and IRIS and said counsel shall have received
all such certified or other copies of such documents as it may reasonably
request.

6.1.12 OPINION OF COUNSEL FOR STATSPIN. IRIS shall have received
the favorable opinion of Goodwin, Proctor & Hoar, counsel to StatSpin, dated the
Closing Date, in substantially the form attached as EXHIBIT A.

6.1.13 IRIS EMPLOYEE ACKNOWLEDGMENT FORM. Each person employed
by StatSpin immediately prior to the Effective Time shall have executed and
delivered to IRIS a copy of the Employee Acknowledgement Form currently used by
IRIS.

6.1.14 DISSENTING SHARES. The number of Dissenting Shares shall
not constitute more than two percent (2%) of the outstanding shares of StatSpin
Common Stock.

6.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF STATSPIN. The obligations
of StatSpin to consummate the Closing and effect the Merger are subject to the
satisfaction or waiver, prior to or at the Closing, of the following conditions
precedent:

6.2.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of IRIS contained in this Agreement or in any
certificate or document delivered to StatSpin pursuant hereto shall be true and
correct on and as of the Closing Date as though made at and as of that date
(except where such representation and warranty is made as of a date specifically
set forth therein), and IRIS shall have delivered to StatSpin a certificate to
such effect.

6.2.2 COMPLIANCE WITH COVENANTS. IRIS and Merger Sub shall in
all material respects have performed and complied with all terms, agreements,
covenants and conditions of this Agreement to be performed or complied with by
it at the Closing Date, and IRIS shall have delivered to StatSpin a certificate
to that effect.

6.2.3 CONSENTS OBTAINED; FILINGS. IRIS shall have obtained all
consents and approvals from, and shall have completed all declarations, filings
and registrations with, government agencies and private third parties that are
required for the execution, delivery and performance of this Agreement by IRIS
and Merger Sub, except for such consents, approvals, declarations, filings, and
registrations the failure of which to have so obtained or made will not have a
Material Adverse Effect on IRIS.

6.2.4 AMEX LISTING. The American Stock Exchange shall have
approved for listing, subject only to official notice of issuance, the shares of
IRIS Common Stock issuable upon consummation of the Merger.

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6.2.5 EMPLOYMENT AGREEMENT. Thomas F. Kelley and either IRIS or
the Surviving Corporation shall have entered into a mutually acceptable
employment agreement which shall supersede Mr. Kelley's current employment
agreement with StatSpin.

6.2.6 NO MATERIAL ADVERSE EFFECT. There shall have been no
Material Adverse Effect, and no occurrence or event which could reasonably be
expected to result in a Material Adverse Effect, on IRIS.

6.2.7 ALL PROCEEDINGS TO BE SATISFACTORY. All corporate and
other proceedings to be taken by IRIS or Merger Sub in connection with the
Transactions and all documents incident thereto shall be reasonably satisfactory
in form and substance to StatSpin and its counsel, and StatSpin and said counsel
shall have received all such certified or other copies of such documents as they
may reasonably request.

6.2.8 OPINION OF COUNSEL FOR IRIS. StatSpin shall have received
the favorable opinion of Irell & Manella, counsel for IRIS and Merger Sub, dated
the Closing Date, substantially in the form attached as EXHIBIT B.

6.2.9 LEGAL ACTIONS OR PROCEEDINGS. No legal action or
proceeding shall have been instituted or overtly threatened by any governmental
agency seeking to restrain, prohibit, invalidate or otherwise affect the
consummation of the Transactions, and no legal action or proceeding shall have
been instituted or overtly threatened by any private party seeking material
monetary awards from StatSpin or its stockholders in connection with the
Transactions.

6.2.10 REGISTRATION RIGHTS AGREEMENTS. IRIS shall have executed
and delivered the Registration Rights Agreement to the Stockholder
Representative.

6.2.11 MINIMUM IRIS STOCK PRICE. The IRIS Stock Price shall be
at least $6.50.

6.2.12 ESCROW AGREEMENT. IRIS shall have executed and delivered
the Escrow Agreement to the Stockholder Representative.

SECTION 7

INDEMNIFICATION

7.1 INDEMNIFICATION OF IRIS. StatSpin, prior to the Effective Time,
and the StatSpin Stockholders, after the Effective Time, shall indemnify and
hold harmless IRIS, Merger Sub, the Surviving Corporation and their respective
officers, directors, employees and agents from and against the full amount of
Losses arising out of or resulting from a breach of any representation, warranty
or covenant made by StatSpin in this Agreement; PROVIDED, HOWEVER, that the
StatSpin Stockholders shall be liable to IRIS

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under this Section 7.1 only if the Merger is consummated and only to the extent
of the Escrowed Shares held in escrow pursuant to the Escrow Agreement, and the
Escrowed Shares shall be IRIS sole and exclusive remedy under this Section 7.1
against the StatSpin Stockholders.

7.2 INDEMNIFICATION OF STATSPIN AND THE STATSPIN STOCKHOLDERS. IRIS
shall indemnify and hold harmless StatSpin and its officers, directors,
employees and agents, prior to the Effective Time, and the StatSpin
Stockholders, after the Effective Time, from and against the full amount of
Losses arising out of or resulting from a breach of any representation, warranty
or covenant made by IRIS in this Agreement; PROVIDED, HOWEVER, that IRIS
shall be liable to the StatSpin Stockholders under this Section 7.2 only if the
Merger is consummated.

7.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties in this Agreement shall survive until the first (1st) anniversary
of the Closing Date, and, subject to the provisions of the Escrow Agreement
relating to Contingent Claims (as defined therein), no party may seek indemnity
under this Section 7 or any other recovery or remedy for any Loss under this
Agreement at any time after such anniversary.

7.4 DEDUCTIBLE AMOUNT. Notwithstanding the foregoing, neither IRIS,
on the one hand, nor StatSpin and the StatSpin Stockholders, on the other hand,
shall be required to indemnify the other under the terms of this Agreement
unless and until the aggregate amount of the Losses of the other exceeds
$30,000, in which case such indemnification obligations shall apply to all
Losses in excess of such amount.

7.5 EFFECT OF DISCLOSURES. The representations and warranties in this
Agreement shall remain in full force and effect regardless of any disclosures
made to or investigations made by a party; PROVIDED, HOWEVER, that the
Indemnifying Party shall have no indemnification obligation hereunder with
respect to any breach of a representation or warranty to the extent that the
Indemnifying Party proves that it did not have knowledge of such breach but the
Indemnified Party did have knowledge of such breach prior to the date hereof.

7.6 PROCEDURES FOR INDEMNIFICATION. If any claim is asserted or any
action or proceeding is brought in respect of which indemnity may be sought, the
Indemnified Party will promptly notify the Indemnifying Party in writing of such
asserted claim or the institution of such action or proceeding; PROVIDED,
HOWEVER, that the Indemnified Party's failure to so notify the Indemnifying
Party will not relieve the Indemnifying Party from any liability it might
otherwise have on account of this indemnity, except to the extent that the
Indemnifying Party has been materially prejudiced by such failure to notify.
The Indemnifying Party shall undertake full responsibility for the defense of
any Third-Party Claim which, if successful, would result in an obligation of
indemnity under this Section 7. The Indemnifying Party may contest or settle
any such claim on such terms as the Indemnifying Party may choose, PROVIDED
that the Indemnifying Party will not have the right, without the Indemnified
Party's prior written consent, to settle any

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such claim if such settlement (i) arises from or is part of any criminal action,
suit or proceeding, (ii) contains a stipulation to, confession of judgement with
respect to, or admission or acknowledgement of, any liability or wrongdoing on
the part of the Indemnified Party, (iii) relates to any Tax matters, (iv)
provides for injunctive relief, or other relief or finding other than money
damages, which is binding on the Indemnified Party, or (v) does not contain an
unconditional release of the Indemnified Party. Such defense will be conducted
by reputable attorneys retained by the Indemnifying Party at the Indemnifying
Party's cost and expense, but the Indemnified Party will have the right to
participate in such proceedings and to be separately represented by attorneys of
its own choosing. The Indemnified Party will be responsible for the costs of
such separate representation unless the Indemnified Party will have reasonably
concluded that the interests of the Indemnified Party and the Indemnifying Party
in the action conflict in such a manner and to such an extent as to make
advisable, consistent with applicable standards of professional responsibility,
the retention of separate counsel for the Indemnified Party, in which case the
Indemnifying Party will pay for one (but not more than one) separate counsel
chosen by the Indemnified Party.

7.7 FAILURE TO ASSUME DEFENSE. In the event that the Indemnifying
Party, by the 30th day after receipt of notice of any asserted claim (or, if
earlier, by the tenth day preceding the day on which an answer or other pleading
must be served in order to prevent judgment by default in favor of the person
asserting such claim), fails to assume the defense of such claim, the
Indemnified Party will (upon further notice to the Indemnifying Party) have the
right to undertake the defense, compromise or settlement of such claim on behalf
of and for the account and risk of the Indemnifying Party, subject to the right
of the Indemnifying Party to assume the defense of such claim at any time prior
to settlement, compromise or final determination thereof. The result of any
such defense, compromise or settlement executed by the Indemnified Party in good
faith shall be binding upon the Indemnifying Party with respect to its
obligations of indemnity under this Section 7.

7.8 COOPERATION. The Indemnifying Party and the Indemnified Party
shall cooperate in determining the validity of any Third-Party Claim or Tax
claim for any Loss for which a claim of indemnification may be made hereunder.
Each party shall also use all reasonable efforts to minimize all Losses.

7.9 STOCKHOLDER REPRESENTATIVE. The Stockholder Representative is
hereby appointed as agent and representative on behalf of the StatSpin
Stockholders with respect to any indemnification claims made hereunder and shall
have full authority to accept all notices, and consent to all settlements, on
behalf of the StatSpin Stockholders with respect to such claims. IRIS shall, by
delivery of written notice to the Stockholder Representative but otherwise in
accordance with the applicable notice requirements, be deemed to have satisfied
any requirement to deliver notice hereunder or under the Escrow Agreement to the
StatSpin Stockholders or any subset thereof.

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SECTION 8

TERMINATION

This Agreement may be terminated at any time on or prior to the Closing:

8.1 INJUNCTION. By StatSpin or IRIS if any court of competent
jurisdiction in the United States shall have issued an order (other than a
temporary restraining order), decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the Transactions and such order,
decree, ruling or other action shall have become final and non-appealable.

8.2 MUTUAL AGREEMENT. By mutual agreement of StatSpin and IRIS.

8.3 TERMINATION DATE. By StatSpin or IRIS if the Closing shall not
have occurred on or before February 15, 1996, provided that the right to
terminate this Agreement pursuant to this Section 8.3 shall not be available to
a party who has materially breached any representation, warranty or covenant of
this Agreement.

8.4 MATERIAL BREACH. By StatSpin upon a material breach of any
representation, warranty or covenant of this Agreement by IRIS, and by IRIS upon
a material breach of any representation, warranty or covenant of this Agreement
by StatSpin, but only if such breach remains uncured for a period of ten (10)
days after receipt of written notice of such breach from the nonbreaching party.

8.5 EFFECTS OF TERMINATION. If this Agreement is terminated pursuant
to this Section 8, all obligations of the parties hereunder shall terminate
without liability of any party to any other party except the obligations of the
parties under Section 10.3 (Expenses), Section 10.10 (Governing Law;
Jurisdiction), Section 10.11 (Attorneys' Fees), Section 10.14 (Arbitration) and
the confidentiality provisions of the Letter of Intent (including, without
limitation, the confidentiality obligations thereunder). Nothing contained in
this Section 8.5 shall relieve any party of liability for any breach of this
Agreement which occurred prior to the date of termination of this Agreement.

8.6 RIGHTS TO PROCEED. Notwithstanding anything contained in this
Agreement to the contrary, if any of the conditions specified in Section 6.1
have not been satisfied, IRIS shall have the right to proceed with the
Transactions without waiving any of its rights hereunder arising out of the
breach of any representation, warranty or covenant herein; and if any of the
conditions specified in Section 6.2 not been satisfied, StatSpin shall have the
right to proceed with the Transactions without waiving any of its rights
hereunder.

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SECTION 9

DEFINITIONS

The following terms shall have the meanings set forth below:

"AFFILIATE" shall mean an "affiliate" within the meaning of Rule 145 of
the Rules and Regulations promulgated under the Securities Act and
requirements for a pooling of interests under Opinion No. 16 of the Accounting
Principles Board.

"ARTICLES OF MERGER" shall have the meaning set forth in Section 1.3.

"BENEFIT PLANS" shall have the meaning set forth in Section 2.19.

"CLAIMS" shall mean any and all liens, mortgages, charges, claims,
liabilities, options, debts, security interests, secured claims, and other
encumbrances of any kind or nature whatsoever, whether or not contingent,
liquidated, disputed or known.

"CLOSING" and "CLOSING DATE" shall have the respective meanings set
forth in Section 1.2.

"CODE" shall mean the Internal Revenue Code of 1986, as amended.

"DISSENTING SHARES" shall have the meaning set forth in Section 1.6.1.

"EFFECTIVE DATE" shall mean the date on which the Effective Time falls.

"EFFECTIVE TIME" shall have the meaning set forth in Section 1.3.

"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.

"ESCROW AGREEMENT" shall mean an Escrow Agreement, dated the Closing
Date, in substantially the form of EXHIBIT G.

"EXCHANGE RATIO" shall have the meaning set forth in Section 1.6.1.

"ESCROWED SHARES" shall have the meaning set forth in Section 1.9.

"FDA" shall have the meaning set forth in Section 2.8.

"HAZARDOUS MATERIAL" shall mean (i) any substance defined as "hazardous"
in the Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"); (ii) any substance or matter which results in liability to
any person or entity from discharge of or exposure to such substance or matter
under any statutory,

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regulatory or common law theory; (iii) any substance or matter which becomes
subject to a federal, state or local agency order or requirement for removal,
treatment or remediation; (iv) crude oil or any fraction thereof, and (v) any
material defined as "hazardous" under Massachusetts law.

"INDEMNIFIED PARTY" shall mean, with respect to any Loss or alleged
Loss, the party seeking indemnity hereunder.

"INDEMNIFYING PARTY" shall mean, with respect to any Loss or alleged
Loss, the party from whom indemnity is being sought hereunder.

"INTELLECTUAL PROPERTY" shall mean all patents, pending patents,
trademarks, service marks, trade names, trade secrets and registered copyrights
presently used by StatSpin in the conduct of its business.

"IRIS" shall mean International Remote Imaging Systems, Inc., a Delaware
Corporation.

"IRIS COMMON STOCK" shall mean the common stock, $.01 par value per
share, of IRIS.

"IRIS FINANCIAL STATEMENTS" shall have the meaning set forth in Section
3.5.

"IRIS SEC DOCUMENTS" shall have the meaning set forth in Section 3.5.

"IRIS STOCK PRICE" shall mean $7.58 per share of IRIS Common Stock,
which represents the average closing price of a share of IRIS Common Stock on
the American Stock Exchange for the 10-day period ending on the third business
day preceding the date of this Agreement.

"LETTER OF INTENT" shall mean the letter from IRIS to StatSpin dated
October 27, 1995 confirming their mutual intention that IRIS acquire all of the
outstanding capital stock of StatSpin.

"LOSSES" shall mean any and all costs and expenses (including, without
limitation, reasonable attorneys' fees and expenses and court costs incident to
any suit, action, investigation or other proceedings), damages and losses, net
of any insurance proceeds or tax benefits received with respect thereto.

"MASSACHUSETTS BUSINESS CORPORATION LAW" shall mean the Business
Corporation Law of the Commonwealth of Massachusetts, Chapter 156B of the
General Laws of Massachusetts, as amended.

"MATERIAL ADVERSE EFFECT" shall mean, with respect to any party hereto,
a material adverse effect on the financial condition, results of operations,
properties,

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assets, liabilities, business or, to the best of such party's knowledge,
prospects of such party and, in the case of StatSpin, the Surviving Corporation
after the Effective Time.

"MATERIAL CONTRACT" shall have the meaning set forth in Section 2.15.

"MERGER" shall have the meaning set forth in Section 1.1.

"MERGER SUB" shall mean Statspin Acquisition Corporation, a
Massachusetts corporation and wholly-owned subsidiary of IRIS.

"NONCOMPETITION AGREEMENT" shall mean a Noncompetition Agreement, dated
the Closing Date, in substantially the form of EXHIBIT C.

"OFFERING MEMORANDUM" shall have the meaning set forth in Section 5.3.

"PERMITS AND LICENSES" shall mean any and all federal, state and local
governmental permits, licenses, consents, approvals and authorizations, the loss
or violation of which would have a Material Adverse Effect on StatSpin,
including, without limitation, any required product marketing approvals and
manufacturing certifications from the FDA.

"PREMISES" shall have the meaning set forth in Section 2.9.

"REGISTRATION RIGHTS AGREEMENT" shall mean a Registration Rights
Agreements, dated the Closing Date, by and among IRIS and the holders of
StatSpin Common Stock, StatSpin Warrants, StatSpin Options and StatSpin SAR's in
substantially form of EXHIBIT E.

"RELATED PARTY" shall mean any stockholder, director or officer
StatSpin, any other person or entity that controls StatSpin, or any family
member of any of the foregoing.

"SAR CAP" shall mean, with respect to any StatSpin SAR held by certain
former employees of StatSpin, the fair market value per share of StatSpin Common
Stock on the date of such former employee's termination, determined in
accordance with the terms of such StatSpin SAR and set forth on SCHEDULE
2.4(b).

"SEC" shall mean the Securities and Exchange Commission.

"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.

"SECURITYHOLDER REPRESENTATION LETTER" shall mean a representation
letter, dated the Closing Date, in substantially the form attached at EXHIBIT F.

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"STATSPIN" shall mean Norfolk Scientific, Inc., a Massachusetts
corporation doing business as "StatSpin Technologies."

"STATSPIN COMMON STOCK" shall mean the common stock, $1.00 par value per
share, of StatSpin.

"STATSPIN FINANCIAL STATEMENTS" shall have the meaning set forth in
Section 2.5.

"STATSPIN OPTION" shall have the meaning set forth in Section 1.8.

"STATSPIN SAR" shall mean a stock appreciation right granted by StatSpin
to an employee of StatSpin.

"STATSPIN STOCKHOLDERS" shall mean the holders of record at the
Effective Time of StatSpin Common Stock and the holders of record at the
Effective Time of StatSpin SAR's.

"STATSPIN STOCK PRICE" shall mean the value of a share of StatSpin
Common Stock determined on a fully-diluted basis, which the parties agree is
$31.04 per share of StatSpin Common Stock based upon the capitalization set
forth in SCHEDULES 2.4(a) AND 2.4(b).

"STATSPIN WARRANT" shall have the meaning set forth in Section 1.8.

"STOCKHOLDER REPRESENTATIVE" shall mean Thomas F. Kelley, the individual
appointed as agent and representative pursuant to the Escrow Agreement for the
holders of record at the Effective Time of StatSpin Common Stock and StatSpin
SAR's.

"SURVIVING CORPORATION" shall have the meaning set forth in Section 1.1.

"TAX OR TAXES" shall mean any and all federal, state, local, foreign and
other net income, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, license, lease, service, service use, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
windfall profits, customs, duties or other taxes, fees, assessments or charges
of any kind whatever, together with any interest and any penalties, additions to
tax or additional amounts with respect thereto.

"THIRD-PARTY CLAIM" shall mean a claim brought by a third party for
which indemnification is sought pursuant to Section 7.

"TRANSACTIONS" shall mean the transactions contemplated by this
Agreement.

"TRANSFER" shall mean any sale, transfer, assignment, hypothecation,
encumbrance or other disposition, whether voluntary or involuntary or whether by
gift, bequest or otherwise.

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SECTION 10

MISCELLANEOUS

10.1 ENTIRE AGREEMENT; MODIFICATIONS. This Agreement and any documents
referred to herein or executed contemporaneously herewith constitute the
parties' entire agreement with respect to the subject matter hereof and
supersede all agreements, representations, warranties, statements, promises and
understandings, whether oral or written, with respect to the subject matter
hereof; PROVIDED, HOWEVER, that the paragraphs of the Letter of Intent which
are expressly designated as binding shall remain in full force and effect. This
Agreement may not be amended, altered or modified except by a writing signed by
the parties.

10.2 MEANING OF "KNOWLEDGE". Whenever a representation or warranty is
stated to be based on the "KNOWLEDGE" of a party, such phrase refers to
whether any director or senior officer (i.e. an officer with a title at least
equal to vice president) of such party has actual knowledge of the matter
involved. The phrase "BEST KNOWLEDGE" shall refer to the "knowledge" of such
directors or officers after reasonable inquiry to the extent prudent under the
circumstances.

10.3 EXPENSES. Except as set forth in Section 8.5, whether or not the
Transactions are consummated, none of the parties hereto shall have any
obligation to pay any of the fees and expenses of any other party incident to
the negotiation, preparation and execution of this Agreement or any related
agreements, including the fees and expenses of counsel, accountants, investment
bankers and other experts.

10.4 WAIVERS. StatSpin may by written notice to IRIS, or IRIS may, by
written notice to the StatSpin, (a) extend the time for the performance of any
of the obligations or other actions of the other parties under this Agreement;
(b) waive any inaccuracies in the representations or warranties of the other
parties contained in this Agreement or in any document delivered pursuant to
this Agreement; (c) waive compliance with any of the conditions or covenants of
the other parties contained in this Agreement; or (d) waive performance of any
of the obligations of the other parties under this Agreement. With regard to
any power, remedy or right provided herein or otherwise available to any party
hereunder, (i) no waiver or extension of time will be effective unless expressly
contained in a writing signed by the waiving party or its representative, and
(ii) no alteration, modification or impairment will be implied by reason of any
previous waiver, extension of time, delay or omission in exercise or other
indulgence.

10.5 COOPERATION. Each party hereto agrees, both before and after the
Effective Time, to execute any and all further documents and writings and to
perform such other actions which may be or become necessary or expedient to
effectuate and carry out this Agreement.

10.6 THIRD-PARTY BENEFITS. None of the provisions of this Agreement
will be for the benefit of, or enforceable by, any third-party beneficiary;
PROVIDED, HOWEVER that

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(i) the holders of StatSpin Common Stock shall be third-party beneficiaries of
Sections 1.6.4 (Exchange of Certificates), 3 (Representations and Warranties of
IRIS), 5.7 (Tax Compliance and Reporting) and 7.2 (Indemnification of StatSpin
and StatSpin Stockholders), (ii) the holders of StatSpin Warrants shall be
third-party beneficiaries of Sections 1.8 (Assumption of Warrants and Stock
Options) and 3 (Representations and Warranties of IRIS), (iii) the holders of
StatSpin Options shall be third-party beneficiaries of Sections 1.8 (Assumption
of Warrants and Stock Options) and 3 (Representations and Warranties of IRIS),
(iv) the holders of StatSpin SAR's shall be third-party beneficiaries of
Sections 1.7.3 (Exchange of StatSpin SAR Agreements) and 3 (Representations and
Warranties of IRIS), (v) the directors and officers of StatSpin at the Effective
Time shall be third-party beneficiaries of the provisions of Section 5.6
(Indemnification of Directors and Officers) and (vi) the employees of StatSpin
shall be third-party beneficiaries of Section 5.5 (Benefit Plans).

10.7 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the parties hereto and their respective successors and
permitted assigns. None of the parties may assign any of his or its rights
under this Agreement without the prior written consent of the others.

10.8 REMEDIES NOT EXCLUSIVE. Subject to Section 10.14
("Arbitration"), no remedy conferred by any of the specific provisions of this
Agreement is intended to be exclusive of any other remedy, and each and every
remedy will be cumulative and will be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise. The election of any one or more remedies will not constitute a
waiver of the right to pursue other available remedies.

10.9 NOTICES. All notices under this Agreement will be in writing and
will be delivered by personal service or facsimile or certified mail (or, if
certified mail is not available, then by first class mail), postage prepaid, to
such address as may be designated from time to time by the relevant party, and
which will initially be as set forth below. Any notice sent by certified mail
will be deemed to have been given three (3) days after the date on which it is
mailed. All other notices will be deemed given when received. No objection may
be made to the manner of delivery of any notice actually received in writing by
an authorized agent of a party. Notices will be addressed as follows or to such
other address as the party to whom the same is directed will have specified in
conformity with the foregoing:

(a) If to IRIS:

International Remote Imaging Systems, Inc.
9162 Eton Avenue
Chatsworth, California 91311
Attn: Fred H. Deindoerfer
Chairman of the Board and President
Telephone: (818) 709-1244
Facsimile: (818) 700-9661

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<PAGE>

With a copy to:

Irell & Manella
1800 Avenue of the Stars, Suite 900
Los Angeles, CA 90067
Attn: Theodore E. Guth, Esq.
Telephone: (310) 277-1010
Facsimile: (310) 204-7199

(b) If to StatSpin:

Norfolk Scientific, Inc.
c/o StatSpin Technologies
85 Morse Street
Norwood, Massachusetts 02062
Attn: Thomas F. Kelley, Ph.D.
Chairman of the Board and President
Telephone: (617) 551-0100
Facsimile: (617) 551-0036

With a copy to:

Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
Attn: John R. LeClaire, Esq.
Telephone: (617) 570-1144
Facsimile: (617) 523-1231

10.10 GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement has been
negotiated and entered into in the State of California, and all questions with
respect to the Agreement and the rights and liabilities of the parties under
this Agreement shall be governed by, and construed and enforced in accordance
with, the laws of the State of California without regard to the conflict of laws
rules of the State of California or any other jurisdiction. Subject to Section
10.14 ("Arbitration"), any litigation between the parties that arises from or
relates to this Agreement shall be conducted exclusively in Los Angeles,
California. Each party (i) irrevocably consents to the exclusive jurisdiction
of the Los Angeles Superior Court and the Federal District Court for the Central
District of California (or their successor courts) for all purposes in
connection with any litigation that arises from or relates to this Agreement,
(ii) agrees that any litigation arising from or relating to this Agreement shall
be instituted and prosecuted only in the such courts, (iii) waives any rights it
may have to personal service of summons, complaint, or other process in
connection therewith, and (iv) agrees that service may be made by registered or
certified mail addressed to such party sent to the addresses designated from
time to time in accordance with Section 10.9.

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<PAGE>

10.11 ATTORNEYS' FEES. Should any litigation or arbitration be
commenced (including any proceedings in a bankruptcy court) between the parties
hereto or their representatives concerning any provision of this Agreement or
the rights and duties of any person or entity hereunder, the party or parties
prevailing in such proceeding shall be entitled, in addition to such other
relief as may be granted, to the attorneys' fees and court costs incurred by
reason of such litigation or arbitration.

10.12 HEADINGS. The Section headings in this Agreement are inserted
only as a matter of convenience, and in no way define, limit, or extend or
interpret the scope of this Agreement or of any particular Section.

10.13 SEVERABILITY. The validity, legality or enforceability of the
remainder of this Agreement shall not be affected even if one or more of the
provisions of this Agreement shall be held to be invalid, illegal or
unenforceable in any respect. To the extent permitted by applicable law, the
parties hereby waive any provision of law that would render any provision hereof
prohibited or unenforceable in any respect.

10.14 ARBITRATION AS EXCLUSIVE REMEDY. Subject to the proviso in
Section 7.1 (Indemnification of IRIS) and except for actions seeking injunctive
relief, which may be brought before any court having jurisdiction, any claim
arising out of or relating to (i) this Agreement, including, but not limited to,
its validity, interpretation, enforceability or breach, or (ii) the relationship
between the parties (including its commencement and termination) which are not
settled by agreement between the parties, shall be settled by arbitration
conducted exclusively in Los Angeles, California before a board of three
arbitrators, one selected by each party, and the third by the two persons so
selected, all in accordance with the Commercial Arbitration Rules of the
American Arbitration Association ("AAA") then in effect. The notice of intent
to arbitrate shall name one arbitrator, and the party(ies) receiving the notice
shall name the second arbitrator within 15 days or the moving party may select
the second arbitrator from a list supplied by the AAA. In the event that these
two arbitrators cannot agree upon a third arbitrator within 15 days, then the
third arbitrator shall be selected from the list provided by the AAA with the
parties striking names in order with the party striking first to be determined
by the flip of a coin. The parties hereby consent to the in personam
jurisdiction of the Superior Court of the State of California for purposes of
confirming any such award and entering judgment thereon. In any arbitration
proceedings hereunder, (a) all testimony of witnesses shall be taken under oath;
(b) discovery will be allowed under the provisions of Section 1283.05 of the
California Code of Civil Procedure, as presently in force, which are
incorporated herein; (c) upon conclusion of any arbitration, the arbitrators
shall render findings of fact and conclusions of law in a written opinion
setting forth the basis and reasons for any decision reached and deliver such
documents to each party to this Agreement along with a signed copy of the award
in accordance with Section 1283.6 of the California Code of Civil Procedure; and
(d) the rules of evidence as then applicable to civil actions under California
law shall be applied in the arbitration. Each party agrees that the arbitration
provisions of this Agreement are its exclusive remedy and expressly waives any
right to seek redress in another forum. Each party shall bear the fees of the
arbitrator appointed by it, and the fees of

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<PAGE>

the neutral arbitrators shall be borne equally by each party during the
arbitration, but the fees of all arbitrators shall be borne by the losing party.

10.15 AGREEMENT NEGOTIATED. The parties hereto are sophisticated and
have consulted legal counsel with respect to this transaction. As a
consequence, the parties do not believe that the presumptions of California
Civil Code Section 1654 relating to the interpretation of contracts against the
drafter of any particular clause should be applied in this case and therefore
waive its effects.

10.16 COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.

*** [NEXT PAGE IS SIGNATURE PAGE] ***

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<PAGE>

SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.

"IRIS"

INTERNATIONAL REMOTE IMAGING
SYSTEMS, INC.

By: /S/ FRED H. DEINDOERFER
-----------------------

Name: FRED H. DEINDOERFER
------------------------
Title:Chairman of the Board
and President
------------------------

"MERGER SUB"

STATSPIN ACQUISITION CORPORATION

By: /s/ FRED H. DEINDOERFER
-----------------------

Name: FRED H. DEINDOERFER
------------------------
Title:Chairman of the Board
And President
-----------------------

"STATSPIN"

NORFOLK SCIENTIFIC, INC.

By: /s/ THOMAS F. KELLEY
--------------------

Name: THOMAS F. KELLEY
--------------------
Title: President
--------------------

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<PAGE>

INDEX OF SCHEDULES AND EXHIBITS

EXHIBITS

EXHIBIT A Form of Opinion of Goodwin, Proctor & Hoar, counsel to
StatSpin

EXHIBIT B Form of Opinion of Irell and Manella, counsel to IRIS

EXHIBIT C Form of Noncompetition Agreement

EXHIBIT D Form of Affiliate Agreement

EXHIBIT E Form of Registration Rights Agreement

EXHIBIT F Form of Securityholder Representation Letter

EXHIBIT G Form of Escrow Agreement

SCHEDULES

SCHEDULE 2.4(a) Capitalization

SCHEDULE 2.4(b) Stock Appreciation Rights

SCHEDULE 2.7 Undisclosed Liabilities

SCHEDULE 2.8 Contingencies

SCHEDULE 2.11 Restrictive Agreements

SCHEDULE 2.12 Intellectual Property

SCHEDULE 2.14 Insurance

SCHEDULE 2.15 Material Contracts

SCHEDULE 2.19 Benefit Plans

SCHEDULE 2.20 Environmental Matters

SCHEDULE 2.22 Permits and Licenses

SCHEDULE 2.24 Taxes

<PAGE>

REGISTRATION RIGHTS AGREEMENT

This Agreement (the "AGREEMENT") is made and entered into as of January 31,
1996, by and among INTERNATIONAL REMOTE IMAGING SYSTEMS, INC., a Delaware
corporation ("IRIS"), and the other parties listed on the signature page to this
Agreement (as hereinafter defined, the "SHAREHOLDERS"), with reference to the
following facts:

A. Pursuant to the terms and conditions of an Agreement and Plan of
Merger dated as of January 31, 1996 by and among IRIS, Norfolk Scientific, Inc.,
a Massachusetts corporation doing business as "StatSpin Technologies"
("STATSPIN"), and StatSpin Acquisition Corporation, a Massachusetts corporation
and wholly-owned subsidiary of IRIS ("MERGER SUB"), IRIS and StatSpin are
effecting a combination of their respective businesses through a merger of
StatSpin and Merger Sub (the "MERGER").

B. As consideration for the Merger, IRIS desires to issue shares of IRIS
Common Stock, and the Shareholders are willing to accept shares IRIS Common
Stock provided that such shares include the registration rights granted
hereunder.

NOW, THEREFORE, based on the above premises and in consideration of the
mutual covenants and agreements contained herein, the parties agree as follows:

1. CERTAIN DEFINITIONS. The following terms shall have the respective
meanings set forth below:

1.1 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.

1.2 "IRIS COMMON STOCK" shall mean the common stock, $.01 par value
per share, of IRIS, and any securities issued in exchange therefore or in
replacement thereof in connection with any reorganization, restructuring,
merger, consolidation or similar transaction.

<PAGE>

1.3 "REGISTRABLE SECURITIES" shall mean those shares of IRIS Common
Stock issued (i) in the Merger upon the conversion of outstanding shares of
StatSpin Common Stock and outstanding StatSpin SAR's, (ii) upon the exercise of
StatSpin Options or StatSpin Warrants expressly assumed by IRIS in the Merger,
(iii) as a dividend or other distribution with respect to, or in exchange or
replacement of, such shares of IRIS Common Stock, but excluding any of the
foregoing shares which may be resold to the public without registration pursuant
to Rule 144 or another comparable rule under the Securities Act.

1.4 "REGISTRATION PERIOD" shall mean the period of time beginning on
the closing date of the Merger and ending on (and including) the second (2nd)
anniversary of such date; provided, however, that the Registration Period shall
be extended as required under the last sentence of Section 8 (exception as to
timing) if IRIS elects to exercise its right to postpone a demand registration.

1.5 "REGISTRATION STATEMENT" shall mean any registration statement or
comparable document under the Securities Act through which a public sale or
disposition of the IRIS Common Stock may be registered or exempted from
registration (except a form exclusively for the sale or distribution of
securities by IRIS or to employees of IRIS or its subsidiaries or for use
exclusively in connection with a business combination).

1.6 "SELLING SHAREHOLDER" shall mean, with respect to any
Registration Statement, any Shareholder whose securities are included therein.

1.7 "SELLERS' UNDERWRITER" shall mean, with respect to any
Registration Statement, the underwriter, if any, designated in writing by the
Selling Shareholders as underwriting the Registrable Securities involved.

1.8 "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.

1.9 "SHAREHOLDER" shall mean any person who at a given time is the
holder of record of any Registrable Securities and has agreed in writing to be
bound by the provisions of the Agreement.

1.10 "SIGNIFICANT SHAREHOLDERS" shall mean, at any time, Shareholders
together holding more than twenty percent (20%) of the then outstanding
Registrable Securities held by the Shareholders.

1.11 "STATSPIN COMMON STOCK" shall mean the common stock, $1.00 par
value per share, of StatSpin.

1.12 "STATSPIN OPTION" shall mean an option, whether vested or
unvested, to purchase shares of StatSpin Common Stock.

<PAGE>

1.13 "STATSPIN SAR" shall mean a stock appreciation right granted by
StatSpin to its employees.

1.14 "STATSPIN WARRANT" shall mean an warrant, whether vested or
unvested, to purchase shares of StatSpin Common Stock.

2. DEMAND REGISTRATION.

2.1 NOTICE OF DEMAND. The Significant Shareholders may at any time
during the Registration Period by written notice request that IRIS register
Registrable Securities under the Securities Act. The Significant Shareholders
shall be entitled to demand only one (1) Registration Statement, and IRIS shall
use its best efforts to keep such Registration Statement continuously effective
for two (2) years; PROVIDED, HOWEVER, that IRIS may, at any time on or after
June 1, 1996, temporarily suspend the effectiveness of the Registration
Statement in accordance with the provisions of Section 8. During such
suspension, the Selling Shareholders shall discontinue sales or other
dispositions of Registrable Securities pursuant to the Registration Statement.
The notice of demand shall set forth (i) the number of shares to be included;
(ii) the names of the Selling Shareholders and the amounts to be sold by each;
and (iii) the proposed manner of sale. Within 10 days after receipt of such
notice, IRIS shall notify all other Shareholders and offer to them the
opportunity to include their Registrable Securities in such registration. Each
of the other Shareholders shall have twenty (20) days from the mailing of such
notice to notify IRIS of the number of Registrable Securities such Shareholder
desires be included in the Registration Statement, but IRIS shall have no
obligation to include the Registrable Securities of any such Shareholder in the
Registration Statement if IRIS does not receive the required notice within such
20-day period.

2.2 SHAREHOLDER AND REGISTRATION. Promptly, but in any event within
30 days, after receipt of any demand pursuant to Section 2.1, IRIS shall prepare
and file with the Securities and Exchange Commission (the "SEC"), a Registration
Statement on any applicable form, with respect to all the Registrable Securities
specified in all notices received in a timely manner pursuant to Section 2.1,
and use its best efforts to cause such Registration Statement to become
effective. Each of the Selling Shareholders shall accept a reduction (including
a total elimination) in the number of securities to be included in such
registration on a pro rata basis (based on the number of Registrable Securities
held by each) if the Sellers' Underwriter, if any, reasonably deems that without
such reduction (or elimination) the Selling Shareholders might be substantially
hindered in the terms or number of securities which they could sell in such
registration.

2.3 LISTING OF SHARES. Promptly, but in any event within 30 days,
after receipt of any demand pursuant to Section 2.1, IRIS shall prepare and file
with the principal securities exchange on which the IRIS Common Stock is then
traded an additional listing application with respect to all the Registrable
Securities specified in all notices received in a timely manner pursuant to
Section 2.1, and use its best efforts to

<PAGE>

cause such Registrable Securities to be approved for listing on such exchange
upon official notice of issuance.

2.4 SURRENDER OF EXISTING REGISTRATION RIGHTS. The Shareholders
acknowledge that the registration rights granted hereunder are intended to
supersede and replace any registration rights previously granted to any of the
Shareholders by StatSpin. Accordingly, each Shareholder hereby waives the right
to exercise any such previously granted registration rights and agrees that such
previously granted registration rights are hereby terminated and shall be of no
further force or effect.

3. REGISTRATION PROCEDURES. Whenever IRIS shall register any securities
pursuant to this Agreement, the parties agree as follows:

3.1 SELLING SHAREHOLDER INFORMATION. The Selling Shareholders shall
provide IRIS with such information about such Shareholder and its intended
manner of distributing the Registrable Securities, and shall otherwise cooperate
with IRIS and any underwriter(s) selected by the Selling Shareholders as may be
needed or helpful in the reasonable opinion of IRIS to complete any obligation
of IRIS hereunder. Failure to comply with this requirement shall excuse IRIS
from any further obligation to a Selling Shareholder to include its shares in
that Registration Statement;

3.2 CONSULTATION. IRIS shall supply copies of any Registration
Statement, any amendment thereto and any communications with the SEC related
thereto to each Selling Shareholder and to the Sellers' Underwriter prior to
filing such document with the SEC, and shall reasonably consult with such
persons and their counsel with respect to the form and content of such filing.
IRIS will immediately amend such Registration Statement to include such
reasonable changes as the Selling Shareholders and the Sellers' Underwriter
reasonably agree should be included therein. Any Selling Shareholder requesting
a change refused by IRIS may withdraw his or her shares from the Registration
Statement;

3.3 PROVISION OF PROSPECTUSES. IRIS shall furnish to each Selling
Shareholder and any Sellers' Underwriter such number of copies of a summary
prospectus or other prospectus (including any amendments and supplements thereto
and a preliminary prospectus in conformity with the requirements of the
Securities Act) and such other documents as such Selling Shareholder may
reasonably request in order to facilitate the public sale or other disposition
of such securities;

3.4 BLUE SKY COMPLIANCE. IRIS shall use its best efforts to register
or qualify the securities covered by such Registration Statement under the
securities or "blue sky" laws of such jurisdictions as any Selling Shareholder
shall reasonably request (PROVIDED, HOWEVER, that IRIS shall not be required (i)
to consent to, or take any action which would subject it to, general service of
process for all purposes or (ii) to qualify to do business in any jurisdiction
where it is not then subject or qualified) and do any and all other acts or
things which may be reasonably necessary or advisable to enable the

<PAGE>

Selling Shareholders to consummate the public sale or other disposition of such
securities in such jurisdictions;

3.5 AMENDMENTS. IRIS shall use its best efforts to prepare and file
promptly with the SEC such amendments and supplements to the Registration
Statement filed with the SEC in connection with such registration, and the
prospectus used in connection therewith, as may be necessary to keep such
Registration Statement continuously effective and in compliance with the
Securities Act for two (2) years, or until all Registrable Securities registered
in that Registration Statement are sold, whichever is earlier;

3.6 PROSPECTUS DELIVERY. At any time when a sale or other public
disposition pursuant to a Registration Statement is subject to a prospectus
delivery requirement, IRIS shall immediately notify each Selling Shareholder and
the Seller's Underwriter, if any, of the occurrence of any event as a result of
which the prospectus included in such Registration Statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing, and IRIS shall
thereafter diligently proceed to amend the prospectus as necessary to correct
such untrue statement or omission of a material fact and provide updates
thereto. Upon receipt of such a notice, each Selling Shareholder shall
immediately discontinue sales or other dispositions of Registrable Securities
pursuant to the Registration Statement. The Selling Shareholders may resume
sales only upon receipt of amended prospectuses or after such Shareholders have
been advised by IRIS that the use of the previous prospectus may be legally
resumed;

3.7 OPINIONS. At the request of any Selling Shareholder, IRIS shall
use its best efforts to furnish on the date that the Registrable Securities are
delivered to the Seller's Underwriter for sale in connection with a registration
pursuant to this Agreement (i) an opinion of the counsel representing IRIS for
the purposes of such registration, and (ii) a letter from the independent
certified public accountants of IRIS, each dated such date and in form and
substance as is customarily given by counsel and independent certified public
accountants to underwriters in an underwritten public offering, addressed to the
Seller's Underwriter and to the requesting Selling Shareholders;

3.8 STOP-ORDERS. IRIS agrees to immediately notify each Selling
Shareholder (i) of the issuance by the SEC of any stop order or order suspending
the effectiveness of any Registration Statement or the initiation of any
proceedings for that purpose, or (ii) of the receipt by IRIS of any notification
with respect to the suspension of the qualification of the Registrable
Securities for sale in any jurisdiction, or the initiation of any proceedings
for such purpose. IRIS, with the reasonable cooperation of the Selling
Shareholders, shall make every reasonable effort to contest any such proceedings
and to obtain the withdrawal of any such order at the earliest possible moment;

<PAGE>

3.9 REVIEW OF RECORDS. IRIS shall make available all financial and
other records, pertinent corporate documents and properties of IRIS for
inspection by any Selling Shareholder, Seller's Underwriter, and their counsel
and accountants, and shall cause IRIS's officers, directors and employees to
supply all information reasonably requested by any such person in connection
with any Registration Statement filed or to be filed hereunder so long as such
person agrees to keep confidential any records, information or documents
designated by IRIS in writing as confidential;

3.10 EARNINGS STATEMENTS. IRIS shall, upon request, make earning
statements satisfying the provisions of Section 11(a) of the Securities Act and
Rule 158 thereunder generally available to its security holders as soon as
reasonably practicable, but in no event later than 45 days, after the end of any
12-month period commencing at the end of any fiscal quarter in which Registrable
Securities are sold; and

3.11 COMPLIANCE WITH LAWS. In all actions taken under this Agreement,
IRIS and each Selling Shareholder agree to use their best efforts to comply with
all provisions of the Securities Act, the Exchange Act and any other law
applicable to them.

4. FILING OF OTHER REGISTRATION STATEMENTS. IRIS agrees not to file a
Registration Statement for the sale by IRIS of shares of IRIS Common Stock
during the period from April 1, 1996 to May 31, 1996 except with the consent of
Shareholders holding a majority of the Registrable Securities. IRIS represents
and warrants that it has not granted any other holder of its securities any
registration or other rights which would require IRIS to include any shares of
IRIS Common Stock held by such holder in any Registration Statement demanded by
the Shareholders under this Agreement; PROVIDED, HOWEVER, that the Shareholders
acknowledge and understand that IRIS has granted demand registration rights with
respect to shares of IRIS Common Stock to other holders of its securities which
could be exercised concurrently with an exercise of the Shareholders' rights
hereunder (including, without limitation, during the period from April 1, 1996
to May 31, 1996).

5. DELAY OF REGISTRATION. No Shareholder shall have any right to take
any action to restrain, enjoin or otherwise delay the filing or effectiveness of
any Registration Statement on the basis of any controversy which might arise
with respect to the interpretation or implementation of this Agreement.

6. INDEMNIFICATION AND CONTRIBUTION.

6.1 IRIS INDEMNITY. IRIS agrees that it will indemnify each Selling
Shareholder and Sellers' Underwriter (and any of its officers, directors and
persons who control such Shareholder or Underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) against all
claims, losses, damages, liabilities and expenses (including those relating to
settlements approved by IRIS, which consent shall not be unreasonably withheld)
resulting from any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement (or in any other document incident
to that registration) or from any omission or alleged

<PAGE>

omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as the
same may have been based upon (i) information furnished in writing to IRIS by
such Shareholder, an underwriter, or another Selling Shareholder, expressly for
use therein, or (ii) the circumstances set forth in Section 6.2(y) below.

6.2 THE SHAREHOLDER'S INDEMNITY. Each Selling Shareholder will
indemnify IRIS, any underwriter, and any other person selling under the
applicable Registration Statement (and any of the officers and directors and
persons who control any of the foregoing within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) against all claims, losses,
damages, liabilities and expenses (including those relating to settlements
approved by the Selling Shareholder, which consent shall not be unreasonably
withheld) resulting from (x) any untrue statement or alleged untrue statement of
a material fact contained in any registration statement (or in any other
document incident to that registration) or from any omission or alleged omission
to state a material fact required to be stated or necessary to make the
information therein not misleading, but only to the extent based upon or arising
from any information furnished in writing to IRIS by that Selling Shareholder
expressly for inclusion in that Registration Statement (or such other document
incidental to that registration), or (y) any untrue statement or alleged untrue
statement of a material fact contained in, or any omission or alleged omission
of a material fact from, a prospectus if (i) a later prospectus which corrected
the untrue statement or alleged untrue statement, or omission or alleged
omission was provided to the Selling Shareholder, (ii) the Selling Shareholder
had received written notice from IRIS of the later prospectus prior to
confirmation of the sale to the aggrieved purchaser, and (iii) there would have
been no such liability but for the failure of the Selling Shareholder to deliver
such later prospectus to such purchaser.

6.3 CONTRIBUTION. If the indemnification provided for in this
Section 6 from the indemnifying party is unavailable to an indemnified party
hereunder in respect of any losses, claims, damages, liabilities or expenses
referred to therein as a result of a judicial determination that such
indemnification may not be enforced in such case notwithstanding this Agreement,
the indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses in such proportion as
is appropriate to reflect the relative fault of the indemnifying party and
indemnified parties in connection with the actions which resulted in such
losses, claims, damages, liabilities or expense, as well as any other relevant
equitable considerations. The relative fault of such indemnifying party and
indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, such indemnifying party or
indemnified parties, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the

<PAGE>

Securities Act) shall be entitled to contribution from any person who was not
guilty or such fraudulent misrepresentation.

7. EXPENSES OF REGISTRATION. IRIS shall bear all expenses (other than
the Selling Shareholders' pro rata share of any brokerage or underwriting fees,
expenses or commissions) incurred in connection with any Registration Statement,
including, without limitation, all registration and filing fees (including all
expenses incident to filing with the National Association of Securities Dealers,
Inc.), fees and expenses of complying with securities and blue sky laws,
printing expenses and fees and disbursements of the independent certified public
accountants and counsel to IRIS. Each Selling Shareholder shall bear its pro
rata share of any brokerage or underwriting fees, expenses or commissions and
the cost of any lawyers, accountants, experts and other consultants retained by
it.

8. EXCEPTION AS TO TIMING. Notwithstanding any other section of this
Agreement, IRIS may, at any time on or after June 1, 1996, postpone or suspend
for a reasonable period of time (not to exceed 180 days) the filing or
effectiveness of any Registration Statement demanded under Section 2, if, at the
time it receives the demand for, or during the effectiveness of, such
registration, (a) IRIS is conducting or is about to conduct a primary offering
of other securities of IRIS and is advised by its investment banker in writing
that such offering would be materially adversely affected by such demanded
registration or (b) the board of directors of IRIS shall in good faith determine
that such demand registration would materially adversely affect any financing,
merger, sale of assets, acquisition, recapitalization or other material
transaction involving IRIS, which, in each case, is either pending or under
active and continuing negotiation. The length of the Registration Period (as
defined in Section 1.4) shall be increased by the length of any postponement
taken by IRIS hereunder. If IRIS suspends the effectiveness of a Registration
Statement, Selling Shareholders shall immediately discontinue sales or other
dispositions of Registrable Securities pursuant to the Registration Statement
during the period of such postponement, and the length of time IRIS is required
to keep such Registration Statement effective under Section 2.1 shall be
increased by the length of the postponement. IRIS may suspend the effectiveness
of a Registration Statement by giving written notice of the suspension to the
Selling Shareholders and shall not be required to make any filings with the
Securities Exchange Agreement relating to such suspension other than those
required by law.

9. REPORTS UNDER THE SECURITIES AND EXCHANGE ACT. With a view to make
the benefits of Rule 144 under the Exchange Act available to the Shareholders,
IRIS agrees to use its best efforts until March 31, 1999 to timely file with the
SEC all reports and other documents required under the Securities Act and the
Exchange Act and the rules and regulations promulgated thereunder.

10. TERMINATION. The Shareholders shall have no further rights under
Section 2 at any time after such time as no further Registrable Securities
remain outstanding.

<PAGE>

11. MISCELLANEOUS.

11.1 ENTIRE AGREEMENT; MODIFICATIONS. This Agreement and any
documents referred to herein or executed contemporaneously herewith constitute
the parties' entire agreement with respect to the subject matter hereof and
supersede all agreements, representations, warranties, statements, promises and
understandings, whether oral or written, with respect to the subject matter
hereof. This Agreement may not be amended, altered or modified except by a
writing signed by IRIS and the Shareholders holding a majority of the
Registrable Securities; PROVIDED, HOWEVER, that unanimous approval shall be
required for any amendment, alteration or modification that does not treat all
of the Shareholders equally in proportion to the number of Registrable
Securities held by each.

11.2 WAIVERS. Shareholders holding a majority of the Registrable
Securities may by written notice to IRIS, or IRIS may by written notice to the
Shareholders, (a) extend the time for the performance of any of the obligations
or other actions of the other parties under this Agreement; (b) waive any
inaccuracies in the representations or warranties of the other parties contained
in this Agreement or in any document delivered pursuant to this Agreement; (c)
waive compliance with any of the conditions or covenants of the other parties
contained in this Agreement; or (d) waive performance of any of the obligations
of the other parties under this Agreement. With regard to any power, remedy or
right provided herein or otherwise available to any party hereunder, (i) no
waiver or extension of time will be effective unless expressly contained in a
writing signed by the waiving party or its representative, and (ii) no
alteration, modification or impairment will be implied by reason of any previous
waiver, extension of time, delay or omission in exercise or other indulgence.

11.3 COOPERATION. Each party hereto agrees to execute any and all
further documents and writings and to perform such other actions which may be or
become necessary or expedient to effectuate and carry out this Agreement.

11.4 SUCCESSORS AND ASSIGNS. The Agreement shall inure to the benefit
of and be binding upon the parties hereto and their respective successors and
permitted assigns. None of the parties may assign any of his or its rights
under the Agreement except to subsequent Shareholders of Registrable Securities.

11.5 NOTICES. All notices under the Agreement will be in writing and
will be delivered by personal service or facsimile or certified mail (or, if
certified mail is not available, then by first class mail), postage prepaid. Any
notice sent by certified mail will be deemed to have been given three (3) days
after the date on which it is mailed. All other notices will be deemed given
when received. No objection may be made to the manner of delivery of any notice
actually received in writing by an authorized agent of a party. Notices to IRIS
will be addressed to its principal office and to all other parties at the last
address shown on the books of IRIS.

<PAGE>

11.6 GOVERNING LAW. All questions with respect to this Agreement and
the rights and liabilities of the parties under this Agreement shall be governed
by the laws of the Commonwealth of Massachusetts, regardless of the choice of
laws provisions of Massachusetts or any other jurisdiction. Any litigation or
arbitration between the parties under this Agreement shall be conducted
exclusively in Boston, Massachusetts.

11.7 SPECIFIC PERFORMANCE. The parties acknowledge that the remedy at
law for any breach, or threatened breach, of any of the provisions of this
Agreement will be inadequate. Therefore, each party to this Agreement shall be
entitled to seek specific performance as a remedy for any breach of this
Agreement. Such remedy shall not be deemed to be the exclusive remedy of a
party hereto for the breach of this Agreement by the other party hereto or its
representatives, but shall be in addition to all other remedies available at law
or in equity to the party suffering such breach.

11.8 ATTORNEYS' FEES. Should any litigation or arbitration be
commenced (including any proceedings in a bankruptcy court) between the parties
hereto or their representatives concerning any provision of the Agreement or the
rights and duties of any person or entity hereunder, the party or parties
prevailing in such proceeding shall be entitled, in addition to such other
relief as may be granted, to the attorneys' fees and court costs incurred by
reason of such litigation or arbitration.

11.9 HEADINGS. The Section headings in the Agreement are inserted
only as a matter of convenience, and in no way define, limit, or extend or
interpret the scope of the Agreement or of any particular Section.

11.10 SEVERABILITY. The validity, legality or enforceability of the
remainder of the Agreement shall not be affected even if one or more of the
provisions of the Agreement shall be held to be invalid, illegal or
unenforceable in any respect. To the extent permitted by applicable law, the
parties hereby waive any provision of law that would render any provision hereof
prohibited or unenforceable in any respect.

11.11 AGREEMENT NEGOTIATED. The parties hereto have consulted legal
counsel with respect to this Agreement. As a consequence, the parties do not
believe that the presumptions of California Civil Code Section 1654 relating to
the interpretation of contracts against the drafter of any particular clause
should be applied in this case and therefore waive its effects.

11.12 COUNTERPARTS. The Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.

*** [NEXT PAGE IS SIGNATURE PAGE] ***

<PAGE>

SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT

IN WITNESS WHEREOF, the parties hereto have caused the Agreement to be duly
executed, as of the day and year first above written.

"IRIS"

INTERNATIONAL REMOTE IMAGING
SYSTEMS,INC.

By: /s/ Fred H. Deindoerfer
------------------------------------
Name: Fred H. Deindoerfer
---------------------------------
Title: Chairman of the Board
and President
---------------------------------

"SHAREHOLDERS"

/s/ Thomas F. Kelley
----------------------------------------
Thomas F. Kelley

/s/ Robert L. Scott
----------------------------------------
Robert L. Scott

ALLEN & COMPANY INCORPORATED

By: /s/ William F. (illegible)
------------------------------------
Its: Vice President
-----------------------------------

CORNING, INC.

By: /s/ James B. (illegible)
-----------------------------------
Its: Vice President
-----------------------------------

S-1

<PAGE>

SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT

/s/ William R. Newhouse
----------------------------------------
William R. Newhouse

/s/ Beverly Newhouse
----------------------------------------
Beverly Newhouse

/s/ Reuben Wisotsky
----------------------------------------
Reuben Wisotzky

/s/ James McKenney
----------------------------------------
James McKenney

/s/ Mary K. McKenney
----------------------------------------
Mary McKenney

/s/ Michael Epstein
----------------------------------------
Michael Epstein

BIONOSTICS, INC.

By: /s/ Kelly A. Winn
-----------------------------------
Its: Treasurer
-----------------------------------

/s/ Arnold M. Zais
----------------------------------------
Arnold M. Zais

S-2

<PAGE>

SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT

/s/ Michael Cronin
----------------------------------------
Michael Cronin

/s/ Thalia V. Crookes
----------------------------------------
Thalia V. Crookes

/s/ Gustav H. Dreier
----------------------------------------
Gustav Dreier

/s/ Alan W. Eilertson
----------------------------------------
Alan W. Eilertson

/s/ Donald H. Eilertson
----------------------------------------
Donald H. Eilertson

/s/ Donald Husmann
----------------------------------------
Donald Husmann

/s/ Ann Husmann
----------------------------------------
Ann Husmann

/s/ Rosemary Kelley
----------------------------------------
Rosemary Kelly

S-3

<PAGE>

SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT

/s/ Sid Shuman, Jr.
----------------------------------------
Sid Shuman, Jr.

/s/ Arnold Cattani
----------------------------------------
Arnold Cattani

/s/ S. Cattani
----------------------------------------
S. Cattani

/s/ K. Cattani
----------------------------------------
K. Cattani

/s/ L. Cattani
----------------------------------------
L. Cattani

/s/ M. Cattani
----------------------------------------
M. Cattani

/s/ Joseph Whittier
----------------------------------------
Joseph Whittier

/s/ Francis Lau
----------------------------------------
Francis Lau

/s/ Julio Rotondi
----------------------------------------
Julio Rotondi

S-4

<PAGE>

SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT

/s/ Kathleen Gaumond
----------------------------------------
Kathleen Gaumond

/s/ Steve Bois
----------------------------------------
Steven Bois

/s/ Gail Magrath
----------------------------------------
Gail Magrath

/s/ Judith Gallego
----------------------------------------
Judith Gallego

/s/ Larry Shephard
----------------------------------------
Larry Shephard

/s/ James Laugharn
----------------------------------------
James Laugharn

/s/ Victor Jones
----------------------------------------
Victor Jones

S-5

<PAGE>

EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT (the "AGREEMENT") is made and entered into as of
January 30, 1996 by and between International Remote Imaging Systems, a
California corporation ("COMPANY"), and Thomas F. Kelley, an individual
("EMPLOYEE").

NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:

1. TERM OF EMPLOYMENT. The Company hereby agrees to employ Employee, and
Employee hereby accepts employment with the Company, on the terms set forth in
this Agreement for a period commencing as of January 30, 1996 (the "Effective
Date") and terminating on January 30, 1999 unless terminated sooner in
accordance with the provisions of Section 8 (Termination).

2. TITLE AND DUTIES. Employee shall be a Vice President of the Company and
the general manager of the Company's StatSpin subsidiary and shall report to the
Chairman of the Board. Subject to the supervisory powers of the Chairman of the
Board, Employee shall be responsible for the general supervision, direction and
control of the subsidiary's business and its employees in accordance with the
policies of the Company and perform such other duties as the Chairman of the
Board may determine from time to time. Employee will devote his full working
time to the performance of his duties, primarily located in the Boston area.

3. BASE SALARY. The Company will pay Employee a base salary to be determined
annually by the Compensation Committee of the Board of Directors, and in no
event less than $85,000 with annual increases not less than 4 percent.

4. BONUSES. The Employee shall participate in the Management Incentive Bonus
program as administered by the Compensation Committee, at full participation
(100% pro rata salary basis).

5. STOCK OPTIONS. The Employee shall be eligible to participate in Company's
1994 Stock Option Plan, and will receive an initial grant of 10,000 shares at
the Company's first Board of Directors meeting after the Effective Date at then
fair market value, with 33 1/3 percent vesting in annual increments over three
years.

6. STOCK PURCHASES. The Employee shall be eligible to participate in the
Company's Employee Stock Purchase Plan.

7. BENEFITS. The Company will continue to provide Employee with:

<PAGE>

(a) The current insurance benefits he is receiving from StatSpin
Technologies;

(b) Participation in the Company's 401 (k) retirement plan;

(d) Paid vacation in accordance with the Company's policies, with
credit for Employee's period of employment with StatSpin Technologies;

(e) Paid holidays and sick leave in accordance with the Company's
policies;

(f) Such other benefits as may generally be provided to officers of
the Company.

8. TERMINATION. The Company and Employee acknowledge that the employment
relationship created by this Agreement is "at-will" and may be terminated at any
time by either party without cause. In the event of such termination, the
Company shall pay employee (i) a pro rata portion of any cash bonus for the year
(payable in the ordinary course when such bonus is otherwise due) and (ii) a
lump sum cash amount for all accrued and unused vacation time. If the Company
terminates Employee's employment without cause on or before third anniversary of
the Effective Date, the Company shall also continue to pay Employee his base
salary and all benefits for the remainder of the term of this Agreement. For
purposes of this Agreement, the Company shall be deemed to have terminated
Employee "with cause" if such termination is based primarily upon any of the
following:

(a) Employee's continued failure to follow the reasonable
instructions of the Chairman of the Board;

(b) Employee's breach of any material provision of this Agreement (or
the Employee Acknowledgment, Invention and Secrecy Agreement referred to in
Section 9) after written notice and a reasonable opportunity to cure;

(d) Any criminal theft from the Company.

The Company shall not have any obligation to make any payment or provide
any benefit under this Section 8 unless and until Employee executes a written
agreement, in form and substance reasonably satisfactory to the Company,
releasing Company (and its officers, directors, employees, agents,

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<PAGE>

affiliates, successors and assigns) from any and all liability and claims in
connection with the termination of Employee's employment.

9. CONFIDENTIALITY, INVENTIONS AND RELATED MATTERS. Employee will sign
and deliver to the Company a copy of the Company's standard form "Employee
Acknowledgment, Invention and Secrecy Agreement".

10. GENERAL.

10.1 COMPLETE AGREEMENT. This Agreement and any agreements referred
to herein or executed contemporaneously herewith (including the non-competition
agreement between the Company, its StatSpin subsidiary and Employee dated as of
even date herewith) constitute the entire agreement and understanding between
the parties to this Agreement and supersede all prior and contemporaneous
negotiations and understandings between the parties, whether oral or written.
In the event of any inconsistency between this Agreement and the Employee
Acknowledgment, Invention and Secrecy Agreement referred to in Section 9, this
Agreement shall control.

10.2 AMENDMENTS, WAIVERS, ETC. This Agreement may be amended,
modified, superseded, canceled, renewed or extended, and the terms, conditions
or covenants hereof may be waived, only by a written instrument executed by both
parties to this Agreement, or in the case of a waiver, by the party waiving
compliance. The failure of a party at any time or times to require performance
of any provision hereof will in no manner affect its right at a later time to
enforce the same. No waiver by a party of the breach of any term or covenant
contained in the Agreement, whether by conduct or otherwise, in any one or more
instances, will be deemed to be, or construed as, a further or continuing waiver
of any such breach, or a waiver of the breach of any other term or covenant
contained in the Agreement.

10.3 NOTICES. Unless otherwise specifically permitted by this
Agreement, all notices under this Agreement shall be in writing and shall be
delivered by personal service, facsimile, telegram, or certified mail (or, if
certified mail is not available, then by first class mail), postage prepaid, to
such address as may be designated from time to time by the relevant party, and
shall initially be:

(i) To the Company:

International Remote Imaging Systems, Inc.
9162 Eton Avenue
Chatsworth, CA 91311
Attn: F.H. Deindoerfer, Chairman

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<PAGE>

(ii) To the Employee:

StatSpin Technologies
85 Morse Street
Norwood, MA 02062
Attn: T.F. Kelley, General Manager

Any notice sent by certified mail shall be deemed to have been given
three (3) days after the date on which it is mailed. All other notices shall be
deemed given when received. No objection may be made to the manner of delivery
of any notice actually received in writing by an authorized agent of a party.

10.4 ASSIGNMENT; SUCCESSORS AND ASSIGNS. Employee may not assign any
of his rights or obligations under this Agreement. The Company may not assign
any of its rights or obligations under this Agreement EXCEPT in connection with
any sale, transfer or other disposition of all or substantially all of its or
StatSpin's business and assets, whether by merger, purchase of stock or assets
or otherwise. This Agreement will be binding upon, and will inure to the
benefit of, the respective successors and permitted assigns of the parties.

10.5 SEVERABILITY. In the event that any provision of this Agreement
should be held to be void, voidable, unlawful or for any reason unenforceable,
the remaining provisions or portions of the Agreement will remain in full force
and effect.

10.6 ADDITIONAL DOCUMENTS AND ACTIONS. Employee and Company agree to
execute any and all further documents and writings and to perform such other
actions which may be or become necessary or expedient to effectuate and carry
out the intent of this Agreement.

10.7 HEADINGS. The headings in this Agreement are included solely
for convenience of reference and are not intended to affect or control the
meaning or interpretation of any of the provisions of the Agreement.

10.8 ARBITRATION AS EXCLUSIVE REMEDY. Any dispute or controversy
arising out of or relating to this Agreement or the employment relationship
between the parties shall be settled by arbitration in Boston, Massachusetts,
but otherwise in accordance with the provisions of the Employee Acknowledgment,
Invention and Secrecy Agreement referred to in Section 9.

-4-

<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.

"The Company"

By:/s/ Fred H. Deindoerfer
-------------------------

"Employee"

By:/s/ Thomas F. Kelley
-------------------------

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<PAGE>

COMMERCIAL LEASE

1. PARTIES

JOHN E. REARDON and PAUL D. REARDON of 981 Providence Highway, Norwood,
Massachusetts, hereinafter called, LESSORS, which shall include their
heirs, executors, successors and assigns where context so admits, do hereby
lease to NOFFOLK SCIENTIFIC INC, d/b/a/ STATSPIN TECHNOLOGIES hereinafter
called, LESSEE, which expression shall include their successors and assigns
where the context so admits.

2. PREMISES

The LESSORS hereby leases to LESSEE the following described premises: The
easterly half of the building (the "Building") at 85 Morse Street, Norwood,
Massachusetts containing 10,851 square feet. The LESSEE shall have as
appurtenant to the Leased Premises the exclusive use of certain parking
spaces and loading areas and the non-exclusive right to use the driveways
and any adjacent sidewalks. See attached Exhibit A and Article 25 for
description.

3. TERM

The term of this lease shall be for five years commencing on April 1, 1990
and ending on March 31, 1995. See Paragraph 22 for extensions.

4. RENT

The LESSEE shall pay to the LESSORS rent payable in advance in monthly
installments on the first day of each month according to the following
schedule of payments:

April 1, 1990 to March 31, 1991 $62,232.00 per year
$ 5,186.00 per month
April 1, 1991 to March 31, 1992 $75,804.00 per year
$ 6,317.00 per month
April 1, 1992 to March 31, 1993 $82,584.00 per year
$ 6,882.00 per month

The Rent for the period of April 1, 1993 to March 31, 1995 will be
$82,584.00 per year - $ 6,882.00 per month plus additional provisions as
to rent as described in Paragraph 20. See Paragraph 21 for payment of real
estate taxes.

<PAGE>

5. UTILITIES

LESSEE shall pay for all LESSEE'S utility charges which are separately
metered to the LESSEE. The charge for the water and sewer use will be
determined from the water and sewer bill as issued by the Town Norwood on a
square foot basis for each tenant according to normal Office/ Warehouse
use. If LESSORS reasonably determine that LESSEE'S water and sewer use is
higher than normal use a second water meter will be installed at the
LESSEE'S expense to record the higher use. Any additional cost for higher
than normal use will be paid by the LESSEE.

6. USE OF LEASED PREMISES

The LESSEE shall use the Leased Premises only for such purposes as are
permitted by the municipal zoning ordinances or any other law ordinance or
requirement applicable to the Leased Premises. The LESSEE shall have the
right to store material and/or equipment in the leased premises prior to
the beginning of the lease term provided such storage does not interfere
with the construction and alterations for the preparation of the leased
premises and provided such storage does not conflict with the Building Code
Law of the Town of Norwood and the Commonwealth of Massachusetts.

7. COMPLIANCE WITH LAWS

The LESSEE acknowledges that no trade or occupation shall be conducted in
the leased premises or use made thereof which will be unlawful, improper,
noisy or offensive, or contrary to any law or municipal by-law or ordinance
in force in the Town of Norwood.

8. FIRE INSURANCE

The LESSEE shall not permit any use of the leased premises which will make
voidable any insurance on the property of which the leased premises are a
part, or on the contents of said property or which shall be contrary to any
law or regulation from time to time established by the New England Fire
Insurance Rating Association or any similar body succeeding to its powers.
The LESSEE shall reimburse the LESSORS, and all other tenants for all extra
insurance premiums caused by the LESSEE'S use of the premises over normal
hazards.

9. MAINTENANCE OF PREMISES

The LESSEE agrees to maintain the leased premises in the same condition as
they are at the commencement of the term or as they may be put in during
the term of this

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<PAGE>

lease, reasonable wear and tear, damage by fire and other casualty only
excepted, and whenever necessary, to replace plate glass and other glass
therein, acknowledging that the leased premises will be in good order and
the glass whole. The LESSEE shall not permit the leased premises to be
overloaded, damaged, stripped, or defaced, nor suffer any waste. The
LESSEE shall obtain written consent of LESSORS before erecting any sign on
the premises. LESSEE agrees to be responsible for all minor repairs, and
keep the areas of the building appurtenant to the Leased Premises in a neat
and clean condition. The plowing of the snow from all access ways and
parking and loading areas shall be the sole responsibility of the LESSOR.
The control of snow and ice on all steps, walkways and loading platforms
which are under the exclusive control of the LESSEE including the spreading
of sand shall be the sole responsibility of the LESSEE.

10. ALTERATIONS-ADDITIONS

The LESSEE shall not make structural alterations or additions to the leased
premises, without the written consent of the LESSORS, which consent shall
not be unreasonably withheld or delayed. All such permanent alterations
shall be at LESSEE'S expense and shall be in quality at least equal to the
present construction. LESSEE shall not permit any mechanics' liens, or
similar liens, to remain upon the leased premises for labor and materials
furnished to LESSEE in connection with work of any character performed or
claimed to have been performed at the direction of LESSEE and shall cause
any such lien to be released of record forthwith without cost to LESSORS.
Any alterations or improvements made by the LESSEE shall become the
property of the LESSORS at the termination of occupancy as provided herein.

11. ASSIGNMENT-SUBLEASING

The LESSEE shall not assign or sublet the whole or any part of the leased
premises without the written permission of LESSORS which permission shall
not be unreasonably withheld or delayed. Such permission will not be
required for any successors or affiliates of the LESSEE.

12. SUBORDINATION

This lease shall be subject and subordinate to any and all mortgages, deeds
of trust and other instruments in the nature of a mortgage, now or at any
time hereafter, which constitutes a lien an the property of which the
leased premises are part. The LESSEE shall, when requested, promptly
execute and deliver such written

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<PAGE>

instruments as shall be necessary to show the subordination of this lease
to said mortgages, deed or trust or other such instruments in the nature of
a mortgage. The LESSEE'S rights to the quiet enjoyment of the leased
premises will not be affected by any interaction between the LESSORS and
their lender.

13. LESSOR'S ACCESS

The LESSOR'S or agents of the LESSOR may, at reasonable times, enter to
view the leased premises and may remove placards and signs not approved and
affixed as herein provided, and make any repairs and alterations as LESSORS
should elect to do and may show the leased premises to others at any time
within three (3) months before the expiration of the term and may affix to
any suitable part of the leased premises a notice for letting or selling
the leased premises, or property of which the leased premises are a part
and keep the same so affixed without hindrance or molestation.

14. INDEMNIFICATION AND LIABILITY

The LESSEE shall save the LESSOR harmless from all losses and damage
occasioned by the escape of water or by the bursting of pipes resulting
from LESSEE'S use of the leased premises as well as from any claim or
damage resulting from neglect in not removing snow and ice from the roof of
the building or from the sidewalks, paved areas and parking lot upon the
premises so leased, or by any nuisance made or suffered an the leased
premises, unless such loss is caused by the neglect of the LESSORS.

The LESSEE further shall hold harmless the LESSORS from any liability which
LESSORS may incur as a result of the LESSEE using or discharging any
chemicals, caustic soda, or other waste or hazardous materials into the
sewer system or drain system of the premises and any connecting sewer or
drain lines to said systems. All permits required for the use or discharge
of excess water, chemicals, caustic soda or other waste or hazardous
material into the sewer system or drain system as required by local, state
or national agencies shall be the responsibility of the LESSEE. All
blockages to sewer and drain systems if caused by the neglect or misuse of
the LESSEE shall be corrected at the expense of the LESSEE.

15. LESSEE'S LIABILITY INSURANCE

The LESSEE shall maintain with respect to the leased premises and the
property, of which the leased premises are a part, a comprehensive general
liability insurance policy, naming the LESSORS as additional named insured

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<PAGE>

with a limit of at least One Million Dollars ($1,000,000.00) combined
single limit. The LESSEE shall deposit with the LESSORS certificates far
such insurance. No insurance policy shall be cancelled without at least
ten (10) days prior written notice to the LESSORS.

16. FIRE, CASUALTY-EMINENT DOMAIN

Should a substantial portion of the leased premises, or of the property of
which they are a part, be substantially damaged by fire or other casualty,
or be taken by eminent domain, the LESSEE may elect to terminate this lease
if: (a) The LESSOR fails to give written notice within thirty (30) days of
intention to restore the leased premises, or (b) The LESSOR fails to
restore the leased premises to a condition substantially suitable for their
intended use within ninety (90) days of said fire, or taking. The LESSOR
will provide a pro rata abatement of rent for any such occurrence or event.
The LESSOR reserves and the LESSEE grants to the LESSOR, all rights which
the LESSEE may have for damages or injury to the leased premises for any
taking by eminent domain, except for damages to the LESSEE'S fixtures,
property, equipment or business interruption.

17. DEFAULT AND BANKRUPTCY

In the event that:

(a) The LESSEE shall default in the payment of any installment of rent or
other sum herein specified and such default shall continue for (10) days
after written notice thereof; or

(b) The LESSEE shall default in the observance or performance of any other
of the LESSEE'S covenants, agreements, or obligations hereunder and such
default shall not be corrected within thirty (30) days after written notice
thereof; or

(c) The LESSEE shall be declared bankrupt or insolvent according to law,
or, if any assignment shall be made of LESSEE'S property for the benefit of
creditors, then the LESSOR shall have the right thereafter, while such
default continues, to re-enter and take complete possession of the leased
premises to declare the term of this lease ended, and remove the LESSEE'S
effects, without prejudice to any remedies which might be otherwise used
for arrears of rent or other default. The LESSEE shall indemnify the
LESSORS against all loss of rent and other payments which the LESSORS may
incur by reason of such termination during the residue of the term.

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<PAGE>

18. NOTICE

Any notice from the LESSORS to the LESSEE relating to the leased premises
or the occupancy thereof, shall be deemed duly served, if delivered to an
officer of the LESSEE addressed to the LESSEE, or, if mailed to the leased
premises, registered or certified mail, return receipt requested, postage
prepaid, addressed to the LESSEE. Any notice from the LESSEE to the
LESSORS relating to the leased premises or the occupancy thereof, shall be
deemed duly served, if mailed to the LESSORS by registered or certified
mail, return receipt requested, postage prepaid, addressed to the LESSORS
at such address as the LESSORS may from time to time advise in writing.
All rent and notice shall be paid and sent to the LESSORS, Reardon &
Reardon, P.0. Box 587, Norwood, Massachusetts 02062.

19. SURRENDER

The LESSEE shall at the expiration or other termination of this lease
remove all LESSEE'S goods and effects from the leased premises, (including,
without hereby limiting the generality of the foregoing, all signs and
lettering affixed or painted by the LESSEE, either inside or outside the
leased premises and return all areas where fasteners or hanging devices
were attached to their original condition.) LESSEE shall deliver to the
LESSORS the leased premises and all keys, locks thereto, and other fixtures
connected therewith and all alterations and additions made to or upon the
leased premises, in the same condition as they were at the commencement of
the term, or as they were put in during the term hereof, reasonable wear
and tear and damage by fire or other casualty only excepted. In the event
of the LESSEE'S failure to remove any of the LESSEE'S property from the
premises, LESSORS are hereby authorized without liability to LESSEE for
loss or damage thereto, and at the sole risk of the LESSEE, to remove and
store any of the property at the LESSEE'S expense or to retain same under
the LESSORS control or to sell at public private sale, without notice any
or all of the property not so removed and to apply the net proceeds of such
sale to the payment of any sum due hereafter, or to destroy such property.

20. ADDITIONAL RENT

The LESSEE shall pay additional rent as follows:

In each odd numbered year beginning April 1, 1993 in which the Consumer
Price Index for All Urban Consumers (CPI-U), Boston, MA for the month of
March 1993 and each succeeding odd year, published by the U.S. Bureau of
Labor Statistics, shows a rise in the cost of living

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<PAGE>

index from March 1990, ("Index Increase") the LESSEE shall pay to the
LESSORS as additional rent 100% of the percentage rise in the aforesaid
index increase times the rent immediately due before such adjustment -
($82,584.00 per year as of April 1, 1993). All such Additional Rent
payable hereunder shall be due and payable within thirty (30) days after
the LESSORS shall have given notice to the LESSEE of the level of the Index
Increase and the amount of the Additional Rent payable. The LESSEE will
pay that adjusted rent monthly on the first day of each month. No
adjustment shall reduce the rent as previously. payable in accordance with
this Paragraph or the schedule of payments as shown in Paragraph 4.

21. PAYMENT OF TAXES

LESSEE will be responsible for the payment of all taxes which are
separately assessed to the leased premises including but not limited to
real estate taxes, personal property taxes and sales taxes. The LESSEE
also agrees to pay any increase in said taxes previously mentioned. The
LESSEE will pay to LESSORS its pro rata share of the real estate taxes due
an the premises located at 85 Morse Street, Norwood, MA. LESSEE'S prop
rata share shall equal Fifty 50 per cent. LESSEE shall make payments due
under this Paragraph after receipt from the LESSORS of a statement
indicating the amount due from the LESSEE, together with a copy of the
current tax bill, but in - no event shall LESSEE be required to make any
payment to the LESSORS more than Fifteen (15) days prior to the date the
applicable installment of the real estate taxes are due to the Town of
Norwood.

22. OPTION TO EXTEND

The LESSEE shall have the option to extend this lease as follows:

If the LESSEE wishes to extend this lease at the end of the Original term
of this lease, it must no later then Ninety (90) days prior to the
termination of the original term of this lease, give written notice to
LESSORS of its intention to extend the lease. LESSEE shall have the right
to extend the term of the lease for an additional one five (5) year period
providing written notice of said extension period is given to LESSORS no
later than Ninety (90) days prior to the termination of the then current
term. The rent for the extended term commencing on April 1, 1995 shall be
$82,584.00 plus the Additional Rent as provided in Paragraph 4 and
Paragraph 20.

23. The heating, ventilating and air conditioning equipment will be placed an
maintenance contract with a qualified

-7-

<PAGE>

firm approved by the LESSORS and at the cost and expense of same to be paid
by the LESSEE.

24. In the event that there is a change in any laws, regulations, statutes or
codes as to the use, maintenance or upkeep of the building and real
property which is subject of this lease, then LESSEE agrees to be
responsible for One Hundred Percent (100%) of the cost of said compliance
with said laws, regulations, statutes or codes and shall comply with said
laws, regulations, statutes or codes within Thirty (30) days of the notice
of said need for compliance; provided, however, LESSEE shall not be
required to make or be financially responsible for any structural
alterations to the leased premises, make any alterations to any mechanical
systems, to take any actions with regard to the removal or remediation of
oil, or hazardous materials not caused by or not responsibility of the
LESSEE or to make any alterations or repairs to any area or item which
LESSEE is not required to repair or maintain as provided in this lease. In
the event the LESSEE does not comply within said Thirty (30) days, then
LESSORS may take such action which is necessary to make the premises
conform and the cost of same shall be charged to the LESSEE as additional
rent to be paid forthwith by the LESSEE.

25. PARKING

In connection with its use of the leased premises, the LESSEE shall be
entitled, at no extra charge or fee, the exclusive use of forty (40 )
parking spaces in the front, side and rear of the building in which the
leased premises are situated and One (1) Overhead ground level loading area
as set forth and indicated an the Site Plan attached hereto as Exhibit A.
In no case shall access to the leased premises, or to the property of which
the leased premises are a part, be prevented or restricted by the LESSEE.

26. PREPARATION OF THE LEASED PREMISES

Prior to the commencement of this Lease, the LESSOR shall cause certain
improvements to be made to the Leased Premises and to the property of which
they are a part, all as set forth on the Scheduled attached hereto as
Exhibit B. The leased premises shall be deemed ready for occupancy on the
first day (the "Substantial Completion Date") as of which the improvements
listed on Exhibit 13 have been completed and are adequate for their
intended purposes. The LESSORS will obtain a Certificate of Occupancy for
the leased premises from the Town of Norwood and will complete all items of
work as soon as conditions permit and with all due diligence.

-8-

<PAGE>

27. SIGNS

The LESSEE shall obtain written consent of LESSORS before erecting any sign
on the premises which consent shall not be unreasonably withheld. Each
tenant shall have a user identification sign over the main entrance not
exceeding 4'-0" long by 2'-0" high which may be illuminated at tenant's
option plus one similar sign on Pleasant Street elevation plus sign not
exceeding 2'-0" long by 1'0" high over shipping and receiving door. All
signs must conform to the Signage By-Laws of the Town of Norwood.

28. FIRE ALARM

The LESSORS agree to maintain the fire alarm pull box presently mounted an
the outside of the building in good working order.

IN WITNESS WHEREOF, the LESSORS and the LESSEE have caused this Lease to be duly
executed, under seal, and by persons hereunto duly authorized, in multiple
copies, each to be considered an original hereof, this 15th day of February
1990.

LESSORS: REARDON & REARDON

By: s/s John E. Reardon
-------------------------------
John E. Reardon - Partner

By: s/s Paul D. Reardon
-------------------------------
Paul D. Reardon - Partner

LESSEE: NORFOLK SCIENTIFIC, INC.
d/b/a/ STATSPIN TECHNOLOGIES

By: /s/ T.F. Kelley
-------------------------------

-9-

<PAGE>

TABLE OF CONTENTS
-----------------

PAGE
----
1. PARTIES . . . . . . . . . . . . . . . . . . . 1

2. PREMISES. . . . . . . . . . . . . . . . . . . 1

3. TERM. . . . . . . . . . . . . . . . . . . . . 1

4. RENT. . . . . . . . . . . . . . . . . . . . . 1

5. UTILITIES . . . . . . . . . . . . . . . . . . 2

6. USE OF LEASED PREMISES. . . . . . . . . . . . 2

7. COMPLIANCE WITH LAWS. . . . . . . . . . . . . 2

8. FIRE INSURANCE. . . . . . . . . . . . . . . . 2

9. MAINTENANCE OF PREMISES . . . . . . . . . . . 2

10. ALTERATIONS-ADDITIONS . . . . . . . . . . . . 3

11. ASSIGNMENT-SUBLEASING . . . . . . . . . . . . 3

12. SUBORDINATION . . . . . . . . . . . . . . . . 3

13. LESSOR'S ACCESS . . . . . . . . . . . . . . . 4

14. INDEMNIFICATION AND LIABILITY . . . . . . . . 4

15. LESSEE'S LIABILITY INSURANCE. . . . . . . . . 4

16. FIRE, CASUALTY-EMINENT DOMAIN . . . . . . . . 5

17. DEFAULT AND BANKRUPTCY. . . . . . . . . . . . 5

18. NOTICE. . . . . . . . . . . . . . . . . . . . 6

19. SURRENDER . . . . . . . . . . . . . . . . . . 6

20. ADDITIONAL RENT . . . . . . . . . . . . . . . 6

21. PAYMENT OF TAXES. . . . . . . . . . . . . . . 7

22. OPTION TO EXTEND. . . . . . . . . . . . . . . 7

25. PARKING . . . . . . . . . . . . . . . . . . . 8

-i-

<PAGE>

26. PREPARATION OF THE LEASED PREMISES. . . . . . 8

27. SIGNS . . . . . . . . . . . . . . . . . . . . 9

28. FIRE ALARM. . . . . . . . . . . . . . . . . . 9

-ii-

<PAGE>

FIRST AMENDMENT TO AGREEMENT OF LEASE

THIS FIRST AMENDMENT TO LEASE is made as of this first day of April, 1995 by and
between JOHN E. REARDON and PAUL D. REARDON ("Lessors"), and NORFOLK SCIENTIFIC
INC, d/b/a STATSPIN TECHNOLOGIES ("Lessee").

WHEREAS, Lessors and Lessee entered into an Agreement of Lease dated
February 15, 1990 ("Lease").

WHEREAS, Lessors and Lessee desire to extend the Lease for the easterly half of
the building at 85 Morse Street, Norwood, Massachusetts containing 10,851 square
feet ("Premises").

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, Lessor and Lessee hereby agree to amend the
Lease as follows:

1. Extension Term

The term of this Lease shall be extended for a period of five (5) years
commencing on April 1, 1995 and terminating on March 31, 2000 ("Extension
Term").

2. Rent

The LESSEE shall pay to the LESSORS rent payable on advance in monthly
installments of the first day of each month according to the following
schedule of payments:

April 1, 1995 to March 31, 1996 - $7,161.00/month.
April 1, 1996 to March 31, 1997 - $7.161.00/month.
April 1, 1997 to March 31, 1998 - $7,161.00/month.

The rent for the period of April 1, 1998 to March 31, 2000 shall be
$7,161.00 per month plus 100% of the rise in the Consumer Price Index for
all Urban Consumers (CPI-U) from April 1, 1995 to March 31, 1998.

3. Lessor and Lessee represent and warrant to each other that they have the
full right, power, and authority to enter into this First Agreement to
lease without the consent or approval of any other entity or person and
make these representations knowing that the other party will rely thereon.
The signatory on behalf of Lessor and Lessee further represent and warrant
that they have full right, power and authority to act for and on behalf of
Lessor and Lessee in entering into this First Amendment.

4. The provisions of this First Amendment to Lease shall constitute the entire
agreement between the parties relating to the First Amendment to Lease
superseding all prior oral and written communications, quotations,

<PAGE>

agreements or understandings of the parties with respect to the subject
matter of the First Amendment.

5. Except as herein modified, the terms and conditions of the Lease, which by
this reference are incorporated herein, shall remain in full force and
effect with regard to the premises.

6. The Lessee shall notify in writing no later than December 31, 1999 if an
additional renewal term beyond March 31, 2000 is desired or if Lessee
intends to vacate the premises on March 31, 2000.

IN WITNESS WHEREOF, Lessors and Lessee have caused this First Amendment to
Agreement of Lease to be duly executed by persons hereunto duly authorized, in
multiple copies, each to be considered an original hereof, this first day of
April 1995.

LESSORS: JOHN E. REARDON
PAUL D. REARDON

By: /s/ John E. Reardon
------------------------------
John E. Reardon - Partner

By:
------------------------------
Paul D. Reardon - Partner

LESSEE: NORFOLK SCIENTIFIC, INC.
d/b/a/STATSPIN TECHNOLOGIES

By: T.F. Kelley - 3/22/95
------------------------------
Thomas F. Kelley - President

-2-

<PAGE>
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<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,144,356
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