Edgar Filing: IRIS INTERNATIONAL INC

Amendment No. 1 to Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

x	Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2008

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

Commission File No. 1-11181

IRIS INTERNATIONAL, INC.

(Exact name of Registrant as Specified In Its Charter)


Delaware		94-2579751
(State or other jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

9172 Eton Avenue, Chatsworth, California 91311

(Address of principal executive offices) (Zip Code)

(818) 709-1244

(Registrant’s telephone number, including area code)

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


Title of each class		Name of each exchange on which registered
Common Stock, par value $0.01 per share		NASDAQ Global Market

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x

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. ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer a non-accelerated filer or a smaller reporting company. See definitions of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ¨	Accelerated filer x	Non accelerated filer ¨	Smaller reporting company ¨
		(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes ¨ No x

The aggregate market value of the shares of common stock held by non-affiliates of the Registrant on June 30, 2008 was approximately $288 million based upon the closing price of $15.65 per share of its common stock as reported on the NASDAQ Global Market on such date.

The registrant had 17,791,967 shares of common stock outstanding on February 24, 2009.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission, or SEC, pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered on this Form 10-K are incorporated by reference into Part III, Items 10-14 of this Form 10-K.

EXPLANATORY NOTE

This Amendment No. 1 to Form 10-K on Form 10-K/A (this “Amendment”) is being filed for the purpose of amending and restating Part II, Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission (the “SEC”) on March 6, 2009 (the “Original Filing”). The Company is filing this Amendment solely to amend the Report of Independent Registered Public Accounting Firm that appears in Item 8 of the Original Filing in response to comments received from the SEC. Except as described above, no other changes have been made to the Original Filing. This Amendment continues to speak as of the date of the Original Filing, and the Company has not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the Original Filing. As a result of these amendments, we are also filing as exhibits to this Amendment the certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

IRIS INTERNATIONAL, INC.

AMENDMENT NO. 1 TO

ANNUAL REPORT ON FORM 10-K

Fiscal Year Ended December 31, 2008


		Page
PART II

Item 8. Financial Statements and Supplementary Data		1

PART IV

Item 15. Exhibits, Financial Statement Schedules		34

Signatures		35

PART II

Item 8.

Financial Statements and Supplementary Data.

Index to Financial Statements


		Page
Reports of Independent Registered Public Accounting Firm		2

Consolidated Balance Sheets at December 31, 2008 and 2007		4

Consolidated Statements of Operations for the three years ended December 31, 2008		5

Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2008		6

Consolidated Statements of Cash Flow for the three years ended December 31, 2008		8

Consolidated Statements of Comprehensive Income (loss) for the three years ended December 31, 2008		9

Notes to Consolidated Financial Statements		10

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

of IRIS International, Inc.

Chatsworth, California

We have audited the accompanying consolidated balance sheets of IRIS International, Inc. (the “Company”) as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders’ equity, cash flows and other comprehensive income for each of the three years in the period ended December 31, 2008. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of IRIS International, Inc. as of December 31, 2008 and 2007, and the results of its operations, cash flows and its other comprehensive income for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

As more fully described in Note 2 to the consolidated financial statements, effective January 1, 2007, the Company adopted the provisions of FASB interpretation No. 48, “Accounting for Uncertainty in Income taxes, an interpretation of FASB Statement No. 109.”

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), IRIS International, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 5, 2009, expressed an unqualified opinion thereon.

/s/ BDO SEIDMAN, LLP

Los Angeles, California

March 5, 2009

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

of IRIS International, Inc.

Chatsworth, California

We have audited IRIS International, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). IRIS International Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, including in the accompanying “Item 9A, Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, IRIS International, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of IRIS International, Inc. as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders’ equity, cash flows and other comprehensive income for each of the three years in the period ended December 31, 2008 and our report dated March 5, 2009 expressed an unqualified opinion thereon.

/s/ BDO SEIDMAN LLP

Los Angeles, California

March 5, 2009

IRIS INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)


	At December 31,
	2008			2007
Assets
Current assets:
Cash and cash equivalents	$	24,445		$	28,145
Short-term investments in marketable securities		2,157			300
Accounts receivable, net of allowance for doubtful accounts and sales returns of $445 and $436 at December 31, 2008 and 2007, respectively		20,261			16,075
Inventories		9,957			9,886
Prepaid expenses and other current assets		2,512			707
Investment in sales-type leases		3,204			2,660
Deferred tax asset		3,727			3,368

Total current assets		66,263			61,141
Property and equipment, net of accumulated depreciation of $8,923 and $7,306 at December 31, 2008 and 2007, respectively		9,678			8,661
Goodwill		2,450			2,450
Core Technology, net of accumulated amortization of $254 and $157 at December 31, 2008 and 2007, respectively		1,544			1,634
Software development costs, net of accumulated amortization of $2,322 and $1,729 at December 31, 2008 and 2007, respectively		2,291			1,764
Deferred tax asset		1,811			3,568
Investment in sales-type leases		5,957			6,613
Other assets		644			559

Total assets	$	90,638		$	86,390

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	6,299		$	4,289
Accrued expenses		6,475			5,713
Deferred service contract revenue		1,936			1,454

Total current liabilities		14,710			11,456
Deferred service contract revenue, long term		18			—

Total liabilities		14,728			11,456
Commitments and contingencies

Stockholders’ equity:
Common stock, $0.01 par value
Authorized: 50 million shares; Issued and outstanding: 18,036 shares and 18,601 shares at December 31, 2008 and 2007, respectively		180			186
Preferred Stock, $0.01 par value; Authorized 1.0 million shares:
Callable Series C shares issued and outstanding: none		—			—
Additional paid-in capital		83,646			84,289
Other comprehensive income		415			345
Accumulated deficit		(8,331	)		(9,886	)

Total stockholders’ equity		75,910			74,934

Total liabilities and stockholders’ equity	$	90,638		$	86,390

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

IRIS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)


	For the Years ended December 31,
	2008			2007			2006
Sales of IVD instruments	$	35,128		$	33,492		$	29,075
Sales of IVD consumables and service		46,643			38,533			31,755
Sales of sample processing instruments and supplies		13,731			12,281			11,237

Total revenues		95,502			84,306			72,067

Cost of goods – IVD instruments		19,674			17,962			15,614
Cost of goods – IVD consumables and service		20,137			17,903			15,824
Cost of goods – sample processing instruments and supplies		6,863			6,143			5,815

Total cost of goods sold		46,674			42,008			37,253

Gross profit		48,828			42,298			34,814

Marketing and selling		15,896			13,088			10,696
General and administrative		11,474			9,997			9,983
Research and development, net		10,491			10,260			13,086

Total operating expenses		37,861			33,345			33,765

Operating income		10,967			8,953			1,049
Other income (expense):
Interest income		1,180			1,498			1,068
Interest expense		(11	)		(10	)		(18	)
Manufacturing transition rights		1,232			—			—
Other income (expense)		8			(48	)		39

Income before provision for income taxes		13,376			10,393			2,138
Provision for income taxes		4,363			2,844			2,313

Net income (loss)	$	9,013		$	7,549		$	(175	)

Basic net income (loss) per share	$	0.49		$	0.42		$	(0.01	)

Diluted net income (loss) per share	$	0.48		$	0.40		$	(0.01	)

Weighted average number of common shares outstanding – basic		18,246			18,187			17,855

Weighted average number of common shares outstanding – diluted		18,728			18,749			17,855

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

IRIS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)


	Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Income		Accumulated Deficit			Total
	Common Stock
	Shares	Amount
Balance, January 1, 2006	17,352	$	173	$	70,309		$	—	$	(16,713	)	$	53,769
Common stock issued on exercise of options	301		3		1,380			—		—			1,383
Tax benefit from stock option exercises	—		—		866			—		—			866
Restricted stock grants to employees	105		1		(1	)		—		—			—
Common stock issued under employee stock purchase plan for cash	16		—		135			—		—			135
Stock issued in acquisition of business	272		3		4,997			—		—			5,000
Translation adjustment, net of tax	—		—		—			48		—			48
Stock based compensation expense	—		—		1,540			—		—			1,540
Net loss for year	—		—		—			—		(175	)		(175	)

Balance, December 31, 2006	18,046		180		79,226			48		(16,888	)		62,566
Adjustment to deferred tax benefits on tax credits (FIN 48 adjustment)	—		—		—			—		(547	)		(547	)
Common stock issued on exercise of options	437		4		2,068			—		—			2,072
Restricted stock grants to employees	64		1		(1	)		—		—			—
Stock issued in acquisition of business	52		1		—			—		—			1
Tax benefit from stock option exercises	—		—		1,496			—		—			1,496
Common stock issued under employee stock purchase plan	2		—		26			—		—			26
Translation adjustment, net of tax	—		—		—			297		—			297
Stock based compensation expense	—		—		1,474			—		—			1,474
Net income for year	—		—		—			—		7,549			7,549

Balance, December 31, 2007	18,601	$	186	$	84,289		$	345	$	(9,886	)	$	74,934

IRIS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

(In thousands)


	Common Stock						Additional Paid-In Capital			Accumulated Other Comprehensive Income		Accumulated Deficit			Total
	Shares			Amount			Additional Paid-In Capital			Accumulated Other Comprehensive Income		Accumulated Deficit			Total
Balance, December 31, 2007		18,601		$	186		$	84,289		$	345	$	(9,886	)	$	74,934
Common stock issued on exercise of options		369			4			1,808			—		—			1,812
Restricted stock grants to employees		119			1			(1	)		—		—			—
Tax benefit from stock option exercises		—			—			760			—		—			760
Translation adjustment, net of tax		—			—			—			70		—			70
Stock based compensation expense		—			—			2,467			—		—			2,467
Purchase of common stock for retirement		(1,053	)		(11	)		(5,677	)		—		(7,458	)		(13,146	)
Net income for year		—			—			—			—		9,013			9,013

Balance, December 31, 2008	$	18,036		$	180		$	83,646		$	415	$	(8,331	)	$	75,910

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

IRIS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	For the Year ended December 31,
	2008			2007			2006
Cash flows from operating activities:
Net income (loss)	$	9,013		$	7,549		$	(175	)
Adjustments to reconcile net income (loss) to net cash provided by operations:
Non-cash in-process research and development charge		—			—			5,180
Loss on disposal of fixed assets		185			—			—
Deferred taxes		2,158			2,394			1,853
Excess tax benefit from stock based payout arrangement		(760	)		(1,496	)		(866	)
Depreciation and amortization		3,127			2,621			2,142
Common stock and stock based compensation		2,467			2,440			1,540
Changes in operating assets and liabilities:
Accounts receivable		(4,186	)		(2,909	)		(1,292	)
Inventories		(71	)		(2,528	)		827
Prepaid expenses and other assets		(1,890	)		(241	)		519
Investment in sales-type leases		112			(400	)		(1,577	)
Accounts payable		2,010			493			(667	)
Accrued expenses		762			(701	)		2,226
Deferred service contract revenue		500			(86	)		32

Net cash provided by operating activities		13,427			7,136			9,742

Cash flows from investing activities:
Acquisition of businesses, net of cash acquired		—			—			(3,560	)
Acquisition of property and equipment		(3,588	)		(3,938	)		(4,044	)
Software development costs capitalized		(1,178	)		(970	)		(376	)
Purchase of short-term investments in marketable securities		(1,857	)		(300	)		—
Sale of short-term investments in marketable securities		—			132			15,844

Net cash (used in) provided by investing activities		(6,623	)		(5,076	)		7,864

Cash flows from financing activities:
Issuance of common stock and warrants for cash		1,812			1,133			1,518
Repurchase of common stock		(13,146	)		—			—
Tax benefit from stock option exercises		760			1,496			866
Borrowings under line of credit		—			—			3,000
Repayments of line of credit		—			—			(3,000	)

Net cash (used in) provided by financing activities		(10,574	)		2,629			2,384

Effect of exchange rate changes on cash and cash equivalents		70			297			—

Net (decrease) increase in cash and cash equivalents		(3,700	)		4,986			19,990
Cash and cash equivalents at beginning of year		28,145			23,159			3,169

Cash and cash equivalents at end of year	$	24,445		$	28,145		$	23,159

Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock and common stock warrants	$	—		$	—		$	1,553
Issuance of common stock and deferred stock units to acquire subsidiary	$	—		$	—		$	5,000
In September 2008, stock options for 130,000 shares of common stock were exercised pursuant to a net cashless exercise and therefore no cash was received, resulting in the issuance of 62,081 shares of common stock.
During the year ended December 31, 2008, the Company disposed of property and equipment with a cost and accumulated depreciation of $957,000 and $773,000, respectively.
During the year ended December 31, 2007, the Company disposed of property and equipment with a cost and accumulated depreciation of $2.3 million.
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	2,200		$	948		$	47
Cash paid for interest	$	11		$	10		$	18

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

IRIS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)


	For the Year ended December 31,
	2008		2007		2006
Net income (loss)	$	9,013	$	7,549	$	(175	)
Foreign currency translation, net of tax		70		297		48

Comprehensive income (loss)	$	9,083	$	7,846	$	(127	)

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

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Company History

IRIS International, Inc. was incorporated in California in 1979 and reincorporated during 1987 in Delaware. The Company designs, develops, manufactures and markets in vitro diagnostic (“IVD”) products, including IVD imaging systems based on patented and proprietary neural network-based Automated Particle Recognition (APR™) software to enable high-speed digital processing to classify and display images and describe the morphology of microscopic particles, urine chemistry analyzer and related chemistry test strips and accessories, molecular diagnostics assays based on our Nucleic Acid Detection Immuno-Assay (NADiA) technology, as well as special purpose centrifuges and other small instruments for automating microscopic procedures and DNA processing performed in clinical laboratories.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The significant estimates in the preparation of the consolidated financial statements relate to the assessment of the carrying allowance for doubtful accounts, inventory reserves, the useful lives, fair value and recoverability of carrying value of long-lived and intangible assets, including goodwill, unearned income on sales-type-leases, estimated provisions for warranty costs, laboratory information system implementations, currency hedges for foreign purchases and deferred tax assets. Actual results and outcomes may differ from management’s estimates and assumptions.

Principles of Consolidation

Our consolidated financial statements include the accounts of IRIS International, Inc. and its wholly-owned subsidiaries. Inter-company accounts and transactions have been eliminated in the consolidated financial statements.

Cash Equivalents

The Company considers highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents. These investments are carried at cost, which approximates fair value.

Investments in Marketable Securities

In 2008, we adopted SFAS No. 157, “Fair Value Measurement” (SFAS 157), for assets and liabilities measured at fair value on a recurring basis. SFAS 157, defines fair values as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

•

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

•

Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•

Level 3 inputs are unobservable inputs for the asset or liability

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company’s investments in marketable securities primarily include highly liquid government securities and an auction rate security. These securities are carried at cost which approximates fair value due to their highly liquid nature. Of the $2,157 carrying value of investments at December 31, 2008, and in accordance with the fair value hierarchy contained in SFAS 157, $1,857 was valued using quoted prices in active markets for identical assets or liabilities (Level 1) and approximately $300 was valued using significant unobservable inputs (Level 3) such as current results, trends and future prospects, capital market conditions, and other economic factors.

Investments in marketable securities are classified and accounted for as available-for-sale (AFS) at December 31, 2008 and 2007. AFS marketable securities are recorded at fair value for short-term investments. Management determines the appropriate classification of its investments in marketable securities at the time of purchase and reevaluates such determinations at each balance sheet date.

Investments include auction rate securities with maturity dates greater than three months when purchased, which have readily determined fair values, bonds, short-term commercial paper and certificates of deposits Auction rate securities are recorded at par value, which equals fair market value, as the rates on such securities reset generally every 7, 28, or 35 days.

Accounts Receivable

The Company sells predominantly to entities in the health care industry. The Company grants uncollateralized credit to customers, primarily hospitals, clinical and research laboratories, and distributors. The Company performs ongoing credit evaluations of customers’ financial conditions before granting uncollateralized credit. Although the Company generally does not require collateral, letters of credit may be required from its customers in certain circumstances. No single customer accounts for 10% or more of the Company’s consolidated revenues or 10% or more of the Company’s accounts receivable at the balance sheet date.

Accounts receivable are carried at original invoice amount less allowances made for sales markdowns, returns and doubtful accounts. Accounts receivables are customer obligations due under normal trade terms. Despite the Company’s stated trade terms, several customers are subject to reimbursement delays attributed to government and third party payer compliance and regulation issues. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Receivables are written off when deemed uncollectible.

Inventories

Inventories are carried at the lower of cost or market on a first in, first out basis. Provision for potentially obsolete or slow-moving inventory is made based on management’s analysis of inventory levels and future sales forecasts. Other inventory that is considered excess inventory is fully reserved.

Property and Equipment

Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation is generally computed using the straight-line method over three to seven 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.

Goodwill and Core Technology

The Company’s intangible assets consist of goodwill, which is not being amortized, and core technology, which is being amortized over its useful life of 20 years. All intangible assets are subject to impairment tests on an annual or periodic basis. Goodwill is evaluated in accordance with Statement of Financial Accounting

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Standards No. 142, Goodwill and Other Intangibles (SFAS No. 142), based on various analyses, including a comparison of the carrying value of the reporting unit to its estimated fair value, cash flow and profitability projections. The analysis necessarily involves significant management judgment to evaluate the capacity of an acquired business to perform within projections. Core technology is evaluated for impairment using the methodology set forth in SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). Recoverability of these assets is assessed only when events have occurred that may give rise to a potential impairment. When a potential impairment has been identified, forecasted undiscounted net cash flows of the operations to which the asset relates are compared to the current carrying value of the long-lived assets present in that operation. If such cash flows are less than such carrying amounts, long-lived assets, including such intangibles, are written down to their respective fair values.

As of December 31, 2008 and December 31, 2007, we had goodwill of approximately $2.5 million for both dates and core technology intangible assets of $1.5 million and $1.6 million, respectively. During the years ended December 31, 2008 and 2007, no goodwill or other intangible impairment was recorded.

Amortization expense of the core technology intangible asset totaled $90,000, $89,000 and $67,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

Software Development Costs

The Company capitalizes certain software development costs for new products and product enhancements once all planning, designing, coding and testing activities necessary to establish that the product can be produced to meet our design specifications are completed, and concludes capitalization when the product is ready for general release. Research and development costs relating to software development are expensed as incurred. Amortization of capitalized software development costs is provided on a product-by-product basis at the greater of the amount computed using (i) the ratio of current revenues for a product to the total of current and anticipated future revenues or (ii) the straight-line method over the remaining estimated economic life of the product up to five years.

Total software development costs capitalized totaled $1,178,000, $970,000 and $376,000 for the years ended December 31, 2008, 2007 and 2006, respectively. Amortization expense of software development costs totaled $651,000, $593,000 and $559,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

Impairment of Long-Lived Assets

The Company will identify and record impairment losses for long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There were no impairments of long-lived assets at December 31, 2008, 2007 and 2006.

Revenue recognition

For products, revenue is recognized when risk of loss transfers, when persuasive evidence of an arrangement exists, the price to the buyer is fixed and determinable and collectibility is reasonably assured. When a customer enters into an operating-type lease agreement, hardware revenue is recognized on a straight-line basis over the life of the lease, while the cost of the leased equipment is carried in customer leased equipment within property,

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

plant and equipment and amortized over its estimated useful life. Under a sales-type lease agreement, hardware revenue is generally recognized at the time of shipment based on the present value of the minimum lease payments with interest income recognized over the life of the lease using the interest method. Instrument costs under a sales-type lease agreement are recognized at the time of shipment. Service revenues on maintenance contracts are recognized ratably over the life of the service agreement or as service is performed, if not under a contract. For those instrument sales that include multiple deliverables, such as instruments, training, consumables and service, we allocate revenue based on the relative fair values of the individual component sold separately, as determined in accordance with Emerging Issues Task Force (EITF) Issue No. 00-21.

The Company’s accounting for leases involves specific determinations under SFAS No. 13 “Accounting for Leases” (SFAS 13), which often involve complex provisions and significant judgments. The four criteria of SFAS 13 that the Company uses in the determination of a sales-type lease or operating-type lease are: (i) a review of the lease term to determine if it is equal to or greater than 75 percent of the economic life of the equipment; (ii) a review of the minimum lease payments to determine if they are equal to or greater than 90 percent of the fair market value of the equipment; (iii) a determination of whether or not the lease transfers ownership to the lessee at the end of the lease term; and (iv) determination of whether or not the lease contains a bargain purchase option.

Additionally, before classifying a lease as a sales-type lease, the Company assesses whether collectability of the lease payments is reasonably assured and whether there are any significant uncertainties related to costs that we have yet to incur with respect to the lease. Generally, the Company’s leases that qualify as sales-type lease are non-cancelable leases with a term of 75 percent or more of the economic life of the equipment. Certain of the Company’s lease contracts are customized for larger customers and often result in complex terms and conditions that typically require significant judgment in applying the lease accounting criteria.

The economic life of the Company’s leased instrument and its fair value require significant accounting estimates and judgment. These estimates are based on the Company’s historical experience. The most objective measure of the economic life of the Company’s leased instrument is the original term of a lease, which is typically five years, since a majority of the instruments are returned by the lessee at or near the end of the lease term and there is not a significant after-market for our used instruments without substantial remanufacturing. The Company believes that this is representative of the period during which the instrument is expected to be economically usable, with normal service, for the purpose for which it is intended. The Company regularly evaluates the economic life of existing and new products for purposes of this determination.

The fair value of the Company’s leased instruments is determined by a range of cash selling prices which we deem to be verifiable objective evidence. The Company regularly evaluates available objective evidence of instrument fair values using historical data.

The Company has certain government contracts with cancellation clauses or renewal provisions that are generally required by law, such as: (i) those dependant on fiscal funding outside of a governmental unit’s control; (ii) those that can be cancelled if deemed in the tax payers’ best interest; or (iii) those that must be renewed each fiscal year, given limitations that may exist on multi-year contracts that are imposed by statute. Under these circumstances and in accordance with the relevant accounting literature, as well as considering the Company’s historical experience, a thorough evaluation of these contracts is performed to assess whether cancellation is remote or whether exercise of the renewal option is reasonably assured.

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

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Shipping and Handling Costs

The Company records shipping and handling costs billed to customers as a component of revenue. Costs to distribute products to customers, including inbound and outbound freight, and other shipping and handling activities are included in cost of goods sold in accordance with Emerging Issues Task Force (EITF) issue No. 00-10, Accounting for Shipping and Handling Fees and Cost.

Total shipping and handling costs included as a component of revenue for the years ended December 31, 2008, 2007 and 2006 amounted to approximately $964,000, $1,453,000 and $1,573,000, respectively. Total shipping and handling costs included as a component of cost of sales amounted to $2,343,000, $2,310,000 and $2,029,000 for years ended December 31, 2008, 2007 and 2006, respectively.

Warranties

The Company recognizes warranty expense, based on management’s estimate of expected cost, as an accrued liability at the time of sale. The Company regularly reevaluates its estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary. Warranty expense was approximately $921,000, $1,262,000 and $1,118,000 during the years ended December 31, 2008, 2007 and 2006, respectively.

Advertising Expenditures

Advertising costs are charged to expense as incurred. Advertising expense for the years ended December 31, 2008, 2007 and 2006 amounted to $234,000, $264,000 and $483,000, respectively.

Research and Development Expenditures

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

From time to time the Company receives grants from agencies of the U.S. Government. The Company does not recognize any revenue from such grants since they are cost reimbursement grants whereby the Company submits requests for reimbursement for certain costs incurred. There are no ongoing obligations or requirements with respect to the grants received, we retain ownership of any intellectual property that results from the research and development and the U.S. Government agency receives a right to use the results of the research for government projects. The Company received cost reimbursements of $164,000, $135,000 and $1,475,000 during the years ended December 31, 2008, 2007 and 2006, respectively.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 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.

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company accounts for uncertain tax positions in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (FIN 48), which was issued in July 2006. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on various related matters such as derecognition, interest, penalties and disclosures required. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

Foreign Currency Translation

The statement of operations of foreign operations are translated into U.S. dollars at rates of exchange in effect each month. The balance sheets of these operations are translated at period-end exchange rates, and the differences from historical exchange rates are reflected in stockholders’ equity as other comprehensive income (loss).

Fair Value of Financial Instruments

The carrying amounts of financial instruments including cash and cash equivalents, short term investments in marketable securities, accounts receivable, investment in sales-type leases, accounts payable, accrued expenses and deferred service contract revenues approximate fair value due to their short maturity. The carrying amount of our long-term liabilities also approximates fair value based on interest rates currently available to us for debt of similar terms and remaining maturities.

Earnings Per Share

The Company computes and presents earnings per share in accordance with SFAS No. 128, “Earnings per share.” Basic earnings per share are computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and common stock equivalents outstanding, calculated on the treasury stock method for options and warrants using the average market prices during the period. The weighted average number of outstanding antidilutive common stock options and warrants excluded from the computation of diluted net income per common share for the years ended December 31, 2008, 2007 and 2006 were 715,000, 419,000 and 2,047,000, respectively. A reconciliation of the shares used in the basic and diluted earnings per common share is as follows:


	Years ended December 31,
	2008	2007	2006
	(In thousands)
Basic weighted common shares outstanding	18,246	18,187	17,855
Effect of dilutive securities
Stock options	366	494	—
Restricted common shares	80	31	—
Warrants	36	37	—

Diluted weighted common shares outstanding	18,728	18,749	17,855

Stock Based Compensation

The Company accounts for stock based compensation under Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” which requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial statements based on fair value.

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Due to the adoption of SFAS No. 123R, the Company’s results for the years ended December 31, 2008, 2007 and 2006 include incremental share-based compensation expense totaling $2,464,000, $1,457,000 and $992,000, respectively. In addition the Company’s results include share-based compensation expense of $3,000, $17,000 and $548,000 relating to stock issuances under our Employee Stock Purchase Plan for the years ended December 31, 2008, 2007 and 2006, respectively. Accordingly, the Company’s total stock based compensation totaled $2,467,000, $1,474,000 and $1,540,000 for the years ended December 31, 2008, 2007 and 2006. The total income tax benefit recognized in the statement of operations for share-based compensation arrangements amounted to $987,000, $590,000 and $616,000 for the years ended December 31, 2008, 2007, and 2006 respectively.

Foreign Currency Hedge

The Company conducts business in certain foreign markets, primarily in the European Union and Asia. To mitigate the potential impact of adverse fluctuations in the U.S. Dollar exchange rate for these currencies, we periodically purchase foreign currency forward contracts. The Company does not speculate in these hedging instruments in order to profit from foreign currency exchanges; nor does it enter into trades for which there are no underlying exposures.

Under Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, the Company documents all relationships between hedging instruments and hedged items, as well as its risk management objective for undertaking these hedging transactions. This process includes relating the forward contracts that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged of the hedged items.

During the year ended December 31, 2008, we entered into such contracts for Euros and Japanese Yen totaling $404,000 and $7.6 million, respectively. As of December 31, 2008, the Company does not have any remaining foreign currency forward contracts in Japanese Yen or Euros. The contracts were to hedge purchases of product in those countries and the results of these forwards are included in cost of sales.

Segment Reporting

The Company determines and discloses industry segments in accordance with SFAS No. 131; “Disclosures about Segments of an Enterprise and Related Information,” which uses a “management” approach for determining business segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of our reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas, and major customers. See Note 19 – “Segment and Geographic Information”.

Certain Risks and Uncertainties

Financial instruments, which potentially expose the Company to concentration of credit risk, consist primarily of cash and cash equivalents, accounts receivable and investment in sales-type leases. Concentration of credit risk with respect to accounts receivable and investment in sales-type leases is mitigated by the Company’s performance of on-going credit evaluations of its customers and the Company maintains an allowance for doubtful accounts. Investments in sales-type leases are secured by the underlying instruments.

The Company’s cash balances on deposit with banks are guaranteed by the Federal Deposit Insurance Corporation up to $250,000. The Company may be exposed to risk for the amount of funds held in one bank in excess of the insurance limit. In assessing the risk, the Company’s policy is to maintain cash balances with high quality financial institutions.

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company derives most of our revenues from the sale of the urinalysis analyzers, and related supplies and services. Relatively modest declines in unit sales or gross margins could have a material adverse effect on our revenues and profits.

Certain of the Company’s components are obtained from outside vendors, and the loss or breakdown of our relationships with these outside vendors could subject us to substantial delays in the delivery of our products to our customers. Furthermore certain key components of the Company’s instruments and certain consumables are manufactured by only one supplier. For example, ARKRAY is the single source supplier for our line of urine chemistry analyzers and related consumable products and spare parts. Because this supplier is the only vendor with which we have a relationship for the particular components, the Company may be unable to sell products if this supplier becomes unwilling or unable to deliver components meeting our specifications. The Company’s inability to sell products to meet delivery schedules could have a material adverse effect on its reputation in the industry, as well as its financial condition and results of operation.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board issued SFAS No. 141 (revised 2007), “Business Combinations”, which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for us beginning July 1, 2009 and will apply prospectively to business combinations completed on or after that date.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” an amendment of ARB 51, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for us beginning July 1, 2009 and will apply prospectively, except for the presentation and disclosure requirements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No.133” (SFAS 161”). This statement changes the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires us to provide enhance disclosures about: (i) how and why we use derivative instruments; (ii) how derivative instruments and related hedged items are accounted for under SFAS 133, Accounting for Derivative Instruments and hedging Activities, and related interpretations; and (iii) how derivative instruments and related hedged items affect our financial position, financial performance, and cash flows. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS 161 did not have a material impact to the consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position No. SFAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142”). The intent of FSP SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

cash flows used to measure the fair value of the asset under SFAS 141 (R) and other applicable accounting literature. FSP SFAS 142-3 is effective for financial statements issued for fiscal years beginning December 15, 2008 and must be applied prospectively to intangible assets acquired after the effective date. The Company will evaluate the potential impact of FSP SFAS 142-3 on acquisitions on a prospective basis.

In May 2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement will be effective 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendment to AU Section 411, “The Meaning of present fairly in Conformity with Generally Accepted Accounting Principles.” Currently, there is no impact of the adoption of SFAS 162 on the Company’s consolidated financial position, results of operations and cash flows.

3. Acquisitions

On April 3, 2006 the Company acquired the stock of Leucadia Technologies, Inc., a development stage molecular diagnostics company. With this acquisition the Company acquired significant core technology for an ultra-sensitive immunoassay process and novel in-vitro separation and concentration process as well as in-process research and development for bacteria and cancer detection applications.

Pursuant to the acquisition agreement the Company paid $3.3 million of cash, 272,375 shares of its common stock, valued at $4.2 million, deferred stock units for 51,879 shares of IRIS common stock valued at $800,000 and $230,000 of transaction fees. The Company’s common stock and deferred stock units were valued based on the average closing market price of the Company’s common stock a few days before and a few days following the acquisition. In addition, we will issue up to 108,950 shares of the Company’s common stock and deferred stock units for 20,752 shares of the Company’s common stock as earn-out consideration if certain regulatory and sales milestones are achieved. As of December 31, 2008, the earn-out consideration were not yet achieved and will expire on December 31, 2009. The acquisition was accounted for as a purchase with the allocation, based on fair value, as follows:


	2006
	(In thousands)
Cash and cash equivalents	$	2
Fixed assets		21
Core Technology		1,790
Goodwill		2,231

Total assets acquired	$	4,044

Total liabilities – deferred tax liability	$	662

In-process research and development expense	$	5,180

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following unaudited condensed consolidated pro forma statement of operations data shows the results of the Company’s operations for the year ended December 31, 2006 as if the acquisition had occurred at the beginning of the period presented:


	2006
	(In thousands, except per share data)
Revenues	$	70,494
Income from operations		829
Net loss		(307	)
Net loss per share – diluted		(0.02	)

These unaudited condensed consolidated pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisitions taken place as of the beginning of the respective periods or the results of the Company’s future operations. Furthermore, the pro forma results do not give effect to all cost savings or incremental costs that may occur as a result of the integration and consolidation of the acquisitions.

4. Investments in Marketable Securities

•

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

•

Level 3 inputs are unobservable inputs for the asset or liability

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents the estimated fair value of the Company’s investment in marketable securities at December 31, 2008.


	Cost		Unrealized Gains		Unrealized Losses		Fair Value
	(In thousands)
Auction rate security	$	300	$	—	$	—	$	300
Government securities		1,857		—		—		1,857

	$	2,157	$	—	$	—	$	2,157

The following table presents the estimated fair value of the Company’s investment in marketable securities at December 31, 2007.


	Cost		Unrealized Gains		Unrealized Losses		Fair Value
	(In thousands)
Auction rate security	$	300	$	—	$	—	$	300

The Company’s investment in the auction rate security is tied to short-term interest rates that are periodically reset through an auction process. The auction process resets the applicable interest rates at prescribed calendar intervals and is intended to provide liquidity to the holders of auction rate securities by matching buyers and sellers in a market context, enabling the holders to gain immediate liquidity by selling such securities at par, or rolling over their investment. If there is an imbalance between buyers and sellers, there is a risk of a failed auction. Throughout 2008, auctions relating to those types of auction rate securities have failed. An auction failure is not a default. As of December 31, 2008, the Company’s investment was carried at par value as we believe the investment approximated full value based upon comparable and similar investments. In October 2008, JP Morgan Chase reached an agreement with state and federal regulators to buy back at par value all auction rate securities from its retail customers. Due to this settlement, the Company’s brokerage company announced that beginning on January 15, 2009 they will purchase auction rate security at par value. Currently, the Company does intend to liquidate this investment at fair value and no impairment charge is required. Nevertheless, as market conditions continue to evolve the Company may take an impairment charge in the future, which may be significant.

For the years end December 31, 2008 and 2007, there were no impairment losses on the Company’s available for sale marketable securities. Based on the Company’s assessment of the credit quality of the underlying collateral and credit support available to each of the securities in which it invested, we believe no other then temporary impairment has occurred as the Company has the ability to hold these investments long enough to avoid realizing any significant loss.

5. Inventories

Inventories consist of the following:


	At December 31,
	2008		2007
	(In thousands)
Finished goods	$	2,234	$	3,237
Work-in-process		270		324
Raw materials, parts and sub-assemblies		7,453		6,325

Inventories	$	9,957	$	9,886

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. Properties and Equipment

Property and equipment consist of the following:


	At December 31,
	2008			2007
	(In thousands)
Machinery and equipment	$	9,002		$	7,036
Leasehold improvements		6,003			5,810
Tooling, dies and molds		1,985			1,731
Furniture and fixtures		1,147			1,116
Rental units		459			274

		18,597			15,967
Less: accumulated depreciation and amortization		(8,918	)		(7,306	)

	$	9,678		$	8,661

Depreciation and amortization expense for the years ended December 31, 2008, 2007 and 2006 was $2.4 million, $1.9 million, and $1.6 million, respectively.

7. Sales-type Leases

The components of net investment in sales-type leases consist of the following:


	At December 31,
	2008			2007
	(In thousands)
Total minimum lease payments	$	10,380		$	10,627
Less: unearned income		(1,219	)		(1,354	)

Net investment in sales-type leases		9,161			9,273
Less: current portion		(3,204	)		(2,660	)

Net investment in sales-type leases, non-current portion	$	5,957		$	6,613

Future minimum lease payments due from customers under sales-type leases for each of the five succeeding years:


	(In thousands)
Year Ending December 31,
2009	$	3,204
2010		2,464
2011		1,750
2012		1,132
2013		602
Thereafter		9

	$	9,161

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8. Bank Loan Agreement

The Company has a credit facility with a commercial bank. The credit facility consists of a $6.5 million revolving line of credit for working capital and a $10.0 million line of credit for acquisitions and product opportunities. The credit facility has variable interest rates, which will change from time to time based on changes to either the LIBOR rate or the lender’s prime rate. Borrowings under the credit facility are secured by all of the Company’s assets and mature in June 2010 and June of 2015, respectively.

As of December 31, 2008 and 2007, there were no borrowings under the credit facility. However, the Company is subject to certain financial and non financial covenants under the credit facility with the bank and as of December 31, 2008, the Company was in compliance with such covenants.

9. Accrued Expenses

Accrued expenses consist of the following:


	At December 31,
	2008		2007
	(In thousands)
Accrued bonuses	$	1,460	$	988
Accrued commissions		490		498
Accrued payroll		1,034		972
Accrued vacation		1,080		961
Accrued professional fees		502		284
Accrued warranty		808		800
Accrued laboratory information system implementations		614		473
Accrued – other		487		737

	$	6,475	$	5,713

Changes in the accrued warranty were as follows:


	At December 31,
	2008			2007
	(In thousands)
Balance – beginning of year	$	800		$	1,039
Additions for provisions during year		921			1,262
Reductions during year		(913	)		(1,501	)

Balance – end of year	$	808		$	800

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. Income Taxes

The provision for income taxes from operations consists of the following:


	For the Year Ended December 31,
	2008			2007			2006
	(In thousands)
Current:
Federal	$	2,323		$	1,399		$	186
State		644			488			274

		2,967			1,887			460

Deferred:
Federal		1,182			1,514			3,090
Foreign		(55	)		(11	)		(79
State		269			(546	)		(1,158

		1,396			957			1,853

	$	4,363		$	2,844		$	2,313

Income taxes have been based on the following components of pre-tax income:


	For the Year Ended December 31,
	2008			2007			2006
	(In thousands)
Domestic	$	13,557		$	10,428		$	3,452
Foreign		(181	)		(35	)		(1,314	)

	$	13,376		$	10,393		$	2,138

The provision for income taxes differs from the amount obtained by applying the federal statutory income tax rate to income before provision for income taxes as follows:


	For the Year Ended December 31,
	2008			2007			2006
	(In thousands)
Tax provision computed at Federal statutory rate	$	4,549		$	3,533		$	727
State taxes, net of federal benefit		499			402			213
R&D tax credits		(507	)		(677	)		(583	)
In-process purchased R&D		—			—			1,959
Nondeductible expenses		(130	)		151			594
Change in valuation allowance		(259	)		(593	)		(271	)
Foreign branch losses		(55	)		(11	)		(512	)
Other		266			39			186

	$	4,363		$	2,844		$	2,313

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At December 31, 2008, the Company has tax effected foreign and federal net operating loss carry forwards of approximately $818,000 and $414,000, respectively. The Company also has tax credit carry forwards of $1.8 million for federal and $2.1 million for state, net of valuation allowances.

The primary components of temporary differences, which give rise to our net deferred tax asset at December 31, 2008 and 2007, are as follows:


	At December 31,
	2008			2007
	(In thousands)
Depreciation and amortization	$	(818	)	$	(279	)
Allowance for doubtful accounts		176			189
Accrued liabilities		1,278			2,059
Deferred revenue-service contracts		14			14
Net operating loss carry forward		1,232			1,054
Tax credits		3,931			4,695
Valuation allowance		(596	)		(856	)
Other		321			60

	$	5,538		$	6,936

Realization of deferred tax assets associated with net operating losses (“NOL”), foreign losses and tax credit carry forward is dependent upon our ability to generate sufficient taxable income prior to their expiration. Management believes it is more likely than not that the deferred tax assets will be realized through future taxable income or alternative tax strategies. However, the net deferred tax assets could be reduced in the near term if management’s estimates of taxable income during the carryforward period are not realized or are significantly reduced or alternative tax strategies are not available. However, the Company has established a valuation allowance for NOLs, capital loss carryforward and foreign losses based on its estimate of future utilization. The Company will continue to review estimates of taxable income and will adjust the valuation allowance, when necessary.

Also, should the Company undergo an ownership change as defined in Section 382 of the Internal Revenue Code, its NOLs generated prior to the ownership change would be subject to an annual limitation. If this occurs, a valuation allowance may be necessary.

The Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109 (“FIN 48”), on January 1, 2007, which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that we recognize the impact of a tax position in our financial statements if that position is more likely than not of being sustained upon audit, based on the technical merits of the position. The Company’s consolidated financial statements for 2007 reflect the impact of FIN 48, but the consolidated financial statements for 2006 have not been restated to reflect, and do not include, the impact of FIN 48.

As a result of the initial adoption of FIN 48, the Company recognized a $547,000 reduction in its deferred tax benefit relating to federal and California tax credits for which the Company could not conclude that it is more likely than not that such tax credits will be sustainable on audit by the respective taxing authorities. As a result the Company reduced the deferred tax asset by $547,000 and recorded a charge to retained earnings as of January 1, 2007, by a like amount.

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2008, the total amount of unrecognized tax benefits, including related interest and penalties, was $998,000. The unrecognized tax benefits primarily related to uncertainties from the deductibility of certain operating expenses in various jurisdictions.

The following changes occurred in the amount of unrecognized tax benefits (including related interest and penalties) during the year ended December 31, 2008 are as follows:


	(In thousands)
Balance at December 31, 2007	$	616
Additions for current year tax positions		382

Balance at December 31, 2008	$	998

The Company will recognize potential interest and penalties related to income tax positions as a component of the provision for income taxes on the consolidated statements of income in any future periods in which the Company must record a liability. Since the Company has not recorded a liability at December 31, 2008 and 2007, there was no impact to its effective tax rate.

11. Stock-Based Compensation

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” which requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial statements based on fair value. Share-based compensation expense for the years ended December 31, 2008 and 2007 includes incremental share-based compensation expense as follows:


	For the years ended December 31,
	2008			2007			2006
	(In thousands)
Cost of sales	$	341		$	273		$	245
Marketing and selling		398			162			236
General and administrative		1,210			628			778
Research and development		518			411			281

Stock-based compensation	$	2,467		$	1,474		$	1,540

Income tax benefit	$	(987	)	$	(590	)	$	(616	)

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock Options

As of December 31, 2008, the Company had stock option plans under which we may grant future non-qualified stock options, incentive stock options and stock appreciation rights. No stock appreciation rights have been granted under and stock option plans. On July 13, 2007, the Company’s stockholders approved the adoption of the IRIS International, Inc. 2007 Stock Incentive Plan, which authorizes the issuance of up to 1,750,000 shares of our common stock pursuant to equity awards granted under the plan.

The following schedule sets forth options authorized, exercised, outstanding and available for grant under our existing stock option plans as of December 31, 2008:


	Number of Option Shares
Plan	Authorized	Exercised	Outstanding	Available for Grant
	(In thousands)
1994 Plan	700	669	31	—
1998 Plan	4,100	2,509	1,294	511
2007 Plan	1,750	—	649	910

	6,550	3,178	1,974	961

In addition to the above, as of December 31, 2008 there were no stock options outstanding to purchase shares of common stock that were issued in 2003 under special inducement grants.

The following table sets forth certain information relative to stock options during the three years ended December 31, 2008.


	Shares		Weighted Average Exercise Price		Average Intrinsic Value
	(In thousands, except for per share)
Outstanding at January 1, 2006	1,717		$	6.89
Granted	569		$	16.55
Exercised	(301	)	$	4.59
Canceled or expired	(12	)	$	18.26

Outstanding at December 31, 2006	1,973		$	9.98
Granted	558		$	13.19
Exercised	(437	)	$	4.74
Canceled or expired	(233	)	$	14.12

Outstanding at December 31, 2007	1,861		$	11.62
Granted	502		$	13.03
Exercised	(369	)	$	4.90
Canceled or expired	(20	)	$	11.47

Outstanding at December 31, 2008 average remaining life – 3.3 years	1,974		$	13.24	$	5,310
Exercisable at December 31, 2008, average remaining life – 2.9 years	1,118		$	13.06	$	3,996

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The weighted average grant-date fair value of options granted during the years ended December 31, 2008, 2007 and 2006 was $4.48, $4.29, and $5.76, respectively. The intrinsic value of options exercised during the years ended December 31, 2008, 2007 and 2006 was $4,073,000, $4,994,000 and $3,555,000, respectively.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between our closing stock price on December 31, 2008 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders, had all option holders exercised their options on December 31, 2008. Total intrinsic value of options exercised for the year ended December 31, 2008 amounted to $4,073,000. As of December 31, 2008, total unrecognized stock-based compensation expense related to nonvested stock options was $2,870,000.

The Compensation Committee of the Company’s board of directors determines the exercise price of options. Payment of the exercise price may be made either in cash or with shares of common stock that have been held at least six months. The options generally vest over either three or four years and expire either five or ten years from the date of grant. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:


	For the Year Ended December 31,
	2008		2007		2006
	(In thousands)
Risk free interest rate	2.4	%	4.4	%	4.6	%
Expected lives (years)	3.0		3.0		3.0
Expected volatility	48	%	46	%	47	%
Expected dividend yield	—		—		—

The expected volatilities are based on the historical volatility of our stock. The observation is made on a weekly basis. The expected terms of the stock options are based on the average vesting period on a basis consistent with the historical experience for similar option grants. The risk-free rate is consistent with the expected terms of the stock options and based on the U.S. Treasury yield curve in effect at the time of grant. The Company estimates forfeitures rates based on historical data.

A summary of our non-vested stock options during the year ended December 31, 2008 is presented below:


	Shares		Weighted Average Grant Date Fair Value
	(In thousands)
Non-vested options at January 1, 2008	715		$	14.49
Granted	502		$	13.03
Vested	(346	)	$	14.90
Forfeited or expired	(15	)	$	14.26

Non-vested options at December 31, 2008	856		$	13.48

As of December 31, 2008, there was approximately $2,870,000 of accumulated unrecognized stock compensation based on fair value on the grant date related to non-vested options granted under the stock option plans. That cost is expected to be recognized during the weighted average service period of 2.8 years. The share-based compensation will be amortized based on the straight line method over the vesting period and the expense includes an estimate of the awards that will be forfeited. The total fair value of shares vested during the year ended December 31, 2008 was $339,000.

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Restricted Shares

The Company began awarding restricted shares of our common stock in 2006. Restricted shares currently vest 25% after one year and 6¹/4% quarterly thereafter. Unvested restricted shares are forfeited if the recipient’s employment terminates for any reason other than death, disability, or special circumstances as determined by the Compensation Committee of the Company’s board of directors. Restricted shares activity during the year ended December 31, 2008 is as follows:


	Shares		Weighted Average Grant Date Fair Value Per Share
	(In thousands, except for per share)
Unvested at January 1, 2008	136		$	14.64
Granted	130		$	13.15
Vested during period	(53	)	$	14.49
Cancelled during period	(11	)	$	12.95

Unvested at December 31, 2008	202		$	13.81

Fair value of our restricted shares is based on our closing stock price on the date of grant. As of December 31, 2008, total unrecognized stock-based compensation expense related to non vested restricted share grants was $2,102,000 which is expected to be recognized over the remaining weighted average period of approximately 2.7 years.

12. Capital Stock – Warrants

At December 31, 2008, there were warrants outstanding to purchase 74,300 shares of common stock at $7.80 per share. These warrants are exercisable and will expire April 23, 2009. During the years ended December 31, 2008, 2007 and 2006, no warrants were issued, exercised, cancelled or expired.

13. Common Stock Repurchase Plan

On March 3, 2008, the Company’s board of directors authorized a share repurchase and retirement plan of up to $15 million of the Company’s common stock over a 12-month period. Under this plan the Company repurchased 492,068 shares of our common stock for approximately $5,748,000. On July 25, 2008 the Company’s board of directors terminated the share repurchase and retirement plan.

On November 21, 2008, the Company’s board of directors authorized a share repurchase and retirement plan of up to $10 million of the Company’s common stock over a 12-month period. As of December 31, 2008, the Company repurchased 491,511 shares of common stock for approximately $6,160,000. Subsequent to December 31, 2008, the Company repurchased an additional 250,800 of common stock for approximately $2,500,000 under the plan.

On September 11, 2008, the Company’s Chief Executive Officer exercised a stock option to purchase an aggregate of 130,000 shares of common stock with an exercise price of $4.34 per share, on a net issue basis in a transaction approved by the compensation committee of the Company’s board of directors. The Company issued 62,081 shares of common stock to its Chief Executive Officer, and retained 67,919 shares of common stock with an aggregate market value of $1,219,000 based on the last closing price of the common stock immediately prior to exercise of $17.95 per share. The amount $564,000 was applied in payment of the aggregate exercise price of the stock options and $655,000 was applied in payment to payroll taxes arising from the option exercise. These options had a term expiring on November 18, 2008.

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

14. Employee Benefits

All employees are eligible to participate in a 401(k) Plan at the beginning of the first quarter following their employment start date. The Company’s contributions are discretionary. Effective January 1, 2006 we commenced matching $0.50 per $1 contributed by the employees up to 4% of the employee’ annual salary, prior to 2006 the Company’s practice was to match $0.25 per $1 contributed by the employees up to 4% of the employees’ annual salary. Employees vest in amounts contributed by the Company immediately. The Company contributed $312,000, $256,000 and $223,000 to the 401(k) Plan for the years ended December 31, 2008, 2007, and 2006, respectively.

15. Manufacturing Transition Rights

On December 30, 2008, the Company entered into a manufacturing, supply and transition agreement (“manufacturing transition rights”) with IDEXX Operations, Inc. Under this agreement, the Company sold its exclusive rights to manufacture and distribute rotors compatible with the drives of IDEXX machines to IDEXX. The Company received a nonrecurring $1.5 million payment, which was offset by $268,000 related to costs associated with the manufacturing transition rights. The $1.5 million payment was classified as other income and does not impact revenue from operations, as this payment is not contingent upon any significant action by the Company.

During the transition period, the Company will provide IDEXX with its know how related to the manufacturing of the rotors and will manufacture any rotors needed by IDEXX. Prices for these transition services and rotors are exclusive of the aforementioned nonrecurring payment. We expect this transition period to be completed by mid 2009.

In addition, IDEXX owns the rights to manufacture the rotors without any further involvement or commitment from the Company. Commencing in January 2014 and continuing through December 2020, if IDEXX uses this manufacturing technology, a royalty fee for each rotor unit sold will be assessed.

16. Shelf Registration

In November 2007, the Company filed a Form S-3 shelf registration statement (“$125 million shelf”) to provide for financial flexibility. The $125 million shelf allows the Company to issue common stock, preferred stock and debt securities of the Company. Under the $125 million shelf, all of the securities available for issuance may be offered from time to time with terms to be determined at the time of issuance. In December 2007, the Form S-3 registration statement was declared effective. As of December 31, 2008, no securities had been issued under the $125 million shelf.

17. Commitments and Contingencies

Leases

The Company leases real property, automobiles and equipment under operating lease agreements, which expire at various times through 2015. Certain leases contain renewal options and generally require us to pay utilities, insurance, taxes and other operating expenses.

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Future minimum rental payments required under operating lease agreements that have an initial term in excess of one year as of December 31, 2008, are as follows:


	Operating Leases
	(In thousands)
Year Ended December 31,
2009	$	1,803
2010		1,740
2011		1,019
2012		694
2013		644
Thereafter		782

	$	6,682

Consolidated rental expense under all operating leases during the years ended December 31, 2008, 2007 and 2006 was $1,787,000, $1,553,000 and $1,359,000, respectively.

Litigation

From time to time, the Company is party to certain litigation arising in the normal course of business. Management believes that the resolution of such matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Guarantees

The Company enters into indemnification provisions under (i) agreements with other companies in its ordinary course of business, typically with business partners, contractors, and customers, landlords and (ii) agreements with investors. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of its activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by the Company with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. In addition, in some cases, the Company has agreed to reimburse employees for certain expenses and to provide salary continuation during short-term disability. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company reviews its exposure under these agreements no less than annually, or more frequently when events indicate. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of December 31, 2008 and 2007.

18. Supplier Concentration

One supplier comprised greater that 10% of the Company’s consolidated purchases. Consolidated purchases from this supplier amounted to 15%, 16%, and 15% for the years end December 31, 2008, 2007, and 2006, respectively.

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

19. Segments and Geographic Information

The Company’s operations are organized on the basis of products and related services and under SFAS No. 131, we operate in two segments: (i) IVD and (ii) sample processing.

The IVD segment designs, develops, manufactures, markets and distributes in-vitro diagnostic systems based on patented and proprietary technology for automating microscopic and clinical chemistry procedures for urinalysis. The segment also provides ongoing sales of consumables and service necessary for the operation of installed urinalysis workstations. In the United States, these products are mostly sold through a direct sales and service force. Internationally, these products are sold and serviced through distributors, with the exception of France. The segment also includes the operations of the IMD Subsidiary.

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

The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies”. The Company evaluates the performance of its segments and allocates resources to them based on earnings before income taxes, excluding corporate charges.

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The tables below present information about reported segments for the three years ended December 31, 2008:


	IVD		Sample Processing		Unallocated Corporate Expenses			Total
	(In thousands)
For the Year Ended December 31, 2008
Revenues	$	81,771	$	13,731	$	—		$	95,502
Interest income		1,180		—		—			1,180
Interest expense		11		—		—			11
Depreciation and amortization		2,893		218		16			3,127
Other non-cash items		—		—		—			—
Segment pre-tax profit		12,223		5,113		(3,960	)		13,376
Segment assets		61,092		24,008		5,538			90,638
Investment in long-lived assets		25,349		419		—			25,768

For the Year Ended December 31, 2007
Revenues	$	72,025	$	12,281	$	—		$	84,306
Interest income		1,498		—		—			1,498
Interest expense		10		—		—			10
Depreciation and amortization		2,394		212		15			2, 621
Other non-cash items		—		—		—			—
Segment pre-tax profit		12,114		3,027		(4,748	)		10,393
Segment assets		60,446		19,008		6,936			86,390
Investment in long-lived assets		21,188		493		—			21,681

For the Year Ended December 31, 2006
Revenues		60,830	$	11,237	$	—		$	72,067
Interest income		1,062		6		—			1,068
Interest expense		18		—		—			18
Depreciation and amortization		1,908		221		13			2,142
Other non-cash items		—		—		—			—
Segment pre-tax profit		4,686		2,460		(5,008	)		2,138
Segment assets		49,845		16,018		8,454			74,317
Investment in long-lived assets		19,328		462		—			19,790

The Company ships products from two locations in the United States and one location in Germany. Substantially all long-lived assets are located in the United States. Sales to international customers amounted to approximately $31.6 million in 2008, $25.4 million in 2007 and $20.1 million in 2006. For the year ended December 31, 2008, two customers represented 21% and 10% of international sales. For the year ended December 31, 2007, two customers represented 22% and 11% of international sales. For the year ended December 31, 2006, two customers represented 16% and 13% of international sales.

Segment assets attributed to corporate unallocated expenses are deferred taxes. Long-lived assets include property and equipment, intangible assets, long-term portion of inventory and other long-term assets. Deferred income tax is excluded from long-lived assets.

IRIS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

20. Valuation and Qualifying Accounts


	Beginning Balance		Charged To Cost and Expenses		Additions Charged to Other Accounts	Deductions			Ending Balance
	(In thousands)
Year Ended December 31, 2008
Allowance for doubtful accounts	$	401	$	26	—	$	(17	)⁽¹⁾	$	410
Allowance for sales returns		35		0	—		(0	)⁽¹⁾		35
Reserve for inventory obsolescence		623		462	—		(239	)⁽¹⁾		846
Valuation of deferred tax assets		856		—	—		(260	)⁽²⁾		596

Year Ended December 31, 2007
Allowance for doubtful accounts	$	483	$	14	—	$	(96	)⁽¹⁾	$	401
Allowance for sales returns		205		6	—		(176	)⁽¹⁾		35
Reserve for inventory obsolescence		881		250	—		(508	)⁽¹⁾		623
Valuation of deferred tax assets		1,510		—	—		(654	)⁽²⁾		856

Year Ended December 31, 2006
Allowance for doubtful accounts	$	231	$	507	—	$	(255	)⁽¹⁾	$	483
Allowance for sales returns		57		148	—		—			205
Reserve for inventory obsolescence		889		—	—		(8	)⁽¹⁾		881
Valuation of deferred tax assets		1,781		—	—		(271	)⁽²⁾		1,510

(1)	Relates to the write-off of accounts receivable, return of merchandise, disposal of obsolete inventory or specific portion of the accounts receivable reserve or reserve for sales returns no longer needed.

(2)	Valuation adjustment relating to realization of deferred tax assets.

21. Selected Quarterly Data (Unaudited)

The following table summarizes certain financial information by quarter:


	2008 Quarter Ended
	March 31		June 30		September 30		December 31
	(In thousands, except per share)
Net revenues	$	21,607	$	23,783	$	23,424	$	26,688
Gross profit		11,604		12,339		11,802		13,083
Net income⁽¹⁾		1,821		2,205		1,618		3,369
Net income per share – basic		0.10		0.12		0.09		0.19
Net income per share – diluted		0.10		0.12		0.09		0.18


	2007 Quarter Ended
	March 31		June 30		September 30		December 31
	(In thousands, except per share)
Net revenues⁽²⁾	$	20,511	$	21,349	$	20,563	$	21,883
Gross profit		10,008		10,766		10,767		10,757
Net income		1,462		1,790		1,618		2,679
Net income per share – basic		0.08		0.10		0.09		0.15
Net income per share – diluted		0.08		0.10		0.09		0.14

(1)	2008 results include the one-time gain related to the $1.2 million net payment to IRIS as part of the manufacturing transition rights agreement signed with IDEXX Laboratories in December 2008.

(2)

The consolidated net revenues include reclassification of freight revenue from cost of goods and marketing and selling expenses in accordance with EITF 00-10. The reclassification in consolidated revenues amounted to $389,000, $372,000, $372,000 and $320,000 for the each quarters ended December 31, 2007.

PART IV

Item 15.

Exhibits, Financial Statement Schedules.

3. The following exhibits are included herein:


Exhibit Number		Description

23.1		Consent of BDO Seidman, LLP.

31.1		Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 By Chief Executive Officer.

31.2		Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 By Chief Financial Officer.

32.1		Statement Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 By Chief Executive Officer.

32.2		Statement Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 By Chief Financial Officer.

SIGNATURES

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized, in Chatsworth, California, on July 17, 2009.


IRIS INTERNATIONAL, INC.

By:		/s/ Cesar M. García
		Cesar M. García, President and Chief Executive Officer

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


Signature	Title	Date

/s/ Cesar M. Garcia Cesar M. Garcia	President, Chief Executive Officer and Chairman (Principal Executive Officer)	July 17, 2009

* Peter L. Donato	Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)	July 17, 2009

* Thomas H. Adams	Director	July 17, 2009

* Steven M. Besbeck	Director	July 17, 2009

Beth Y. Karlan	Director

* Michael D. Matte	Director	July 17, 2009

* Richard G. Nadeau	Director	July 17, 2009

* Edward F. Voboril	Director	July 17, 2009

* Stephen E. Wasserman	Director	July 17, 2009



* By:		/s/ Cesar M. Garcia
		As Attorney-In-Fact

EXHIBIT INDEX


Exhibit Number		Description

23.1		Consent of BDO Seidman, LLP.

31.1		Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 By Chief Executive Officer.

31.2		Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 By Chief Financial Officer.

32.1		Statement Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 By Chief Executive Officer.

32.2		Statement Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 By Chief Financial Officer.

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